Your IndustryJul 7 2016

Advising in a low-margin, low-contribution world

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Advising in a low-margin, low-contribution world

Cost has always been a consideration, whether from an employer worried about the bottom line, an employee wondering how to make ends meet or an adviser spending hours of work for little return.

Employers are always looking to cut costs. Kate Smith, head of pensions for Aegon, comments: “It all comes down to affordability.”

For the employer, however, cost should not be the primary factor, as Dale Critchley, policy manager for Aviva, explains.

“There are a range of auto-enrolment (AE) providers to choose from, some costing more than others, some delivering greater benefits than others.

“Employers may be tempted to adopt a least-cost option but that could be a false economy if it provides a benefit that is not valued because the employee experience is poor.”

Chris Daems, director of Cervello Financial Planning, explains: “It’s fair to say many smaller businesses are unwilling to pay for a consultative advice lead solution.

“Smaller businesses will use more streamlined technology-driven solutions, but we have found there is still a market for consultative support.”

For employees, the benefits of having a contributory scheme in which the employer matches or exceeds the initial investment, plus the tax-efficient boost to the money, should outweigh the expense considerations.

If an adviser can articulate and monetise the value they add to a business, employers will be more likely to agree fees Dale Critchley

But for advisers, the situation is a little more complicated.

Costs and considerations

Throughout the roll-out of AE, there has been significant political pressure to push down the cost of advice, as well as the cost of managing the underlying funds within a workplace pension.

In April 2015, the Department for Work & Pensions issued the document: The charge cap: guidance for trustees and managers of occupational schemes.

This outlined the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which took effect on 6 April 2015.

From that date, the default arrangement within certain pension schemes used by employers to meet their AE duties will be subject to a cap on the charges which may be borne by scheme members.

The charge cap is 0.75 per cent of funds under management within the default arrangement, or an equivalent combination charge. The cap applies to all scheme and investment administration charges, excluding transaction costs and a small number of other specified costs and charges

Only three types of charging structure may be used in the default arrangements of qualifying schemes. These are subject to different but broadly equivalent charge limits:

1) A single percentage charge – capped at 0.75 per cent of funds under management

2) A combination of a contribution charge plus a percentage of funds under management charge. Permissible combinations are shown in the table:

Contribution percentage charge rate %Percentage of funds under management rate %
1 or lower 0.6
Higher than 1 but no higher than 20.5
Higher than 2 but no higher than 2.50.4

3) A combination of a flat fee plus a percentage of funds under management charges. Permissible combinations are below:

Flat fee charge (£ per year)

Percentage of funds under management rate (%)

10 or less0.6
More than 10 but no more than 200.5
More than 20 but no more than 250.4

These charge limits apply at member level. Each relevant member must not be subject to a charge in excess of the limits above.

Consequences

Advisers believe such a cap could cause unintended consequences. Firstly, many investment management firms could find themselves unable to compete on price, especially as advisers and pension providers also need to be paid from within that lower 0.75 per cent charge.

This could mean pension savers are only able to access a limited choice of lower-cost underlying investments, such as portfolios of passive funds, instead of being able to choose more appropriate funds.

However, even if there is downward pressure on costs, Mike Morrison, head of platform technical for AJBell, believes advisers can still make money through communicating to employers a focus on the value, rather than the cost of advice.

He says: “They can also focus on how benefit provision can be a useful employment tool.”

Aviva’s Dale Critchley expands on this point: “Advisers may be able to introduce cost reductions or improved benefits into a business, leading to a better return on investment as employers retain their best people and reduce recruitment costs.

“If an adviser can articulate and monetise the value they add to a business, employers will be more likely to agree fees.”

Mr Daems agrees: “Support is typically in demand in firms where it’s important to attract, recruit and retain high quality employees and where competition for these employees is high.”

“Moreover”, adds Mr Critchley, “there are opportunities to deliver advice to employees as part of a workplace benefit package and, again, if an adviser can demonstrate the potential upside of advice, then conversations around fees or adviser charges will be easier.”

Alternative remuneration streams

Advisers can also transform from just corporate pension advisers to corporate benefit providers, looking at group income protection plans and other workplace benefits and ensure a holistic package of benefits.

Andy Kirby, managing director of The Pensions Portal, says: “Operating in this space opens all kinds of other opportunities at a corporate level and to work with individuals on their personal financial planning issues.

The ability of computers to help customers make decisions through guidance or to make a specific recommendation through advice is growing all the time Peter Glancy

“Because the adviser is generally dealing with the decision-makers in the business and building up strong relations and trust with them, it can open the door to other corporate business, such as key man/shareholder/partnership protection and other group schemes.”

Henry Tapper, founder of The Pensions Playpen, comments: “There is a huge auto-enrolment opportunity going begging for want of patience and vision.”

Many formerly pension-focused corporate advisers have made the transition to advising on life and other benefits.

This can work out cost-efficient for the employer - particularly those facing higher bills as a result of pension contributions - as well as adding another element of remuneration to an adviser’s corporate work.

According to Derek Robertson, managing director of Scottish advisory firm Central Investment: “We have had some employers enquire about reducing or stopping for a period their company pension contributions.

“However, following the pension reform regulations and the introduction of auto-enrolment, there are statutory minimums that need to be considered.

“There is however greater flexibility available in reviewing the insured death, incapacity and medical benefits an employer provides. Sometimes these schemes and their costs have not been reviewed for a number of years.”

But this is not going to be plain sailing, as Aegon’s Kate Smith adds: “Small employers will only put in holistic benefits packages and pay for advice if they can afford to do so.

“Realistically, many of the UK’s smallest employers will only offer the minimum employer contribution, currently 1 per cent of a band of earnings, as they can’t afford more than this.”

Thinking widely

While there may be opportunities to make money out of corporate pensions and protection advice, the challenges of a cost-strapped client and a low-charge world remain. To this end, technology and broader professional partnerships can help.

In terms of technology, Peter Glancy, head of industry development at Scottish Widows, says: “Tech holds the key. Robo-advice is not fully and consistently defined but the ability of computers to help customers make their own decisions through guidance or to make a specific recommendation through advice is growing all the time.”

“We recognise the importance of understanding how people are saving for their futures”, says Gavin Perera-Betts, executive director of product and marketing for the National Employment Savings Trust (Nest).

“We recently launched the Nest Insight Unit to look at the needs of the defined contribution generation of savers and ran an ‘appathon’ over the course of the launch event.

“Developers and would-be developers worked together to design apps which motivated consumers to think about how they save.”

Working together with professional colleagues might also help advisers, says the Pensions Portal’s Mr Kirby: “In the process of putting workplace pensions in place, an adviser will often have to deal with other professional advisers, for example accountants and lawyers, which gives the opportunity to develop new relationships.”