The Financial Services Authority (FSA) has proposed that providers of group personal pensions (GPP),stakeholder pensions and self-invested personal pensions (Sipps) should not be able to pay commission to firms that advise employers in setting up pensions schemes.
This proposal, outlined in the FSA’s consultation paper, Delivering the retail distribution review, would bring an end to advisers and employee benefits consultants being remunerated by commission paid by pension scheme providers. Instead the employer would pay a fee to their consultant or corporate adviser, ensuring they will be able to agree up-front how much investment advice will cost them and how they will pay for it.
Employers may forgo professional advice
There are fears that if the proposals, planned for 2012, come into fruition employers which cannot afford to pay fixed fees for consultants and advisers will forgo getting professional guidance on their pension arrangements.
Helen Dowsey, a principal at Aon Consulting, said: “Employers that have not been used to paying fees are going to have a bit of a culture shock where, if they want any advice from a consultant or IFA, then they are going to have to pay for it.
“Alternatively, an employer might decide they are going to pay to set the pension arrangement up but will not pay anything on an ongoing basis, so they will not have any ongoing advice. That is the most dangerous route to take because by not retaining the adviser they will not be able to do any meaningful governance.”
Trust-based pensions exempt
Dowsey also said that to get rid of commission on GPPs, Sipps and stakeholder pensions could drive employers to move away from these types of contract-based scheme to trust-based pensions, which would not be affected by the changes.
She said: “[The measure] does not impact trust-based DC arrangements. If an employer is adamant that they do not want to pay fees, and they do want the advice to be paid via commission then there is always the option of setting up a trust-based arrangement.”
Fee and commission-based pay structures also have an impact on annual management charges. “From a member’s perspective stripping out commission is a good thing because it will have an impact on the annual management charge, which might be tiny, but if you compound it over 20 or 30 year period it clearly will have an impact on their final fund when they reach retirement”, said Dowsey.
The FSA is inviting responses to its proposals by 16 March 2010.
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