The reality is that the financial services sector is only now beginning the process whereby consumers saving into pensions are considered to be buying a ‘value-for-money’ product. This is the same product that in various guises has been available for more than 50 years. But it wasn’t self-regulation that brought this about; rather it took a Pensions Commission to identify the detriment to the consumer of the ‘old way’ and point government towards “enabling everyone to save their own and their employer’s contributions in a highly cost-efficient fashion” (Source: second report of the Pensions Commission, November 2005). Notably, but 10 years later, as a part of its 2015–16 business plan, the Financial Conduct Authority (FCA) has announced the asset management industry is to be subject to a market study, examining issues that will include the charges paid by investors.
Although there is still some way to go in achieving the efficiency goal for pension investors, considerable progress has been made with the headline issue of sales commission being removed entirely by April 2016. But what of the impact? What were consumers receiving in return for this commission, and what services and benefits were employers deriving?
In truth, I suspect the answer is a mixed bag, dependent in part upon the skills and capabilities of the financial adviser or benefits consultant involved in advising the employer. Services for the employer and its employees could range from providing very little of any worth, to the more valuable provision of one-to-one advice, regular presentations and updates, scheme booklets and education, a governance service and perhaps, for the larger schemes, a technology platform providing communication and flexible benefits. The direct correlation was that in return for a commission payment, services to the employee would be provided that would help the employee understand their role and responsibilities in managing their planning for retirement. However, market forces and lack of any compulsory requirement to do so meant that quite a number of employers and employees did not receive any of these services, and yet continued to pay commission to a third party. But that’s all now gone, so what next? What are employees to receive? How will they become knowledgeable as regards retirement planning? Where should an employer source such services?
It is expected, although not yet proven, that the new employer duties introduced in October 2012 along with auto-enrolment will have flushed out any poor practices that may have existed within the management of a company pension scheme. However, although annual fund management fees have been capped at 0.75 per cent, commission continues to be paid to advisers, with — let us hope — the full knowledge of the employer. While this continues, some services may remain active, effectively paid for via the commission. But what will happen come April 2016? When commission ceases, will the annual fund management charge fall? After all, there’s no commission and no services being provided.
The banning of commission is considered by many to be a positive step. I include myself in this group. Too often decisions made were influenced by the payment of commission. This cannot be considered as being in the best interests of savers. A variety of services may have been provided, but did all employees benefit? A one-to-one service was provided, but did all employees use it? Technology might have been deployed, but did all employees have access? Commission meant a higher annual management charge and this affected all employees. Under the new regime of nil commission, it is in the interests of the HR community to ensure that they have reviewed their pension scheme. HR should confirm commission has been fully expunged and, most importantly, that the annual management charge has been reset, acknowledging that without a commission payment, the new benchmark is a fee-based annual management charge, which is typically at 0.25 per cent.
It is to be hoped that the FCA’s market study of the asset management industry will realise further benefits for consumers, although it may take a decade to achieve. In the meantime, employers have it in their gift to provide an immediate benefit, and reduce the employee-paid annual fund management charge by as much as 66 per cent. This is the legacy of the Pensions Commission. It should be applauded and delivered.
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