Adviser > Your business > RDR > December 2009 Update > Corporate pensions
Corporate pensions
The FSA proposes to ban indemnified commission on GPPs and introduce an alternative remuneration model called Consultancy Charging. Find out how the proposals impact on your business.
Scottish Life's view
As strong supporters of Factory Gate Pricing, we welcome the direction the FSA has moved in. We agree that there are distortions in the group pensions market which have been created by commission.
Although there has been some negativity in the press around the ability to implement Consultancy Charging (CC) for schemes, we believe the problems are over-stated. Scottish Life has set up over 1,000 schemes on a Financial Adviser's Fee basis, similar to CC (but with charges spread over 12 months). We've learnt that clear communication to customers is key.
We also welcome the FSA's willingness to close off loopholes. A reverse of the recent trend of switches from occupational to contract based schemes had been looking increasingly likely. This threat still remains given the regulatory disparity between what an employer can claim as refund of contributions but that is a problem beyond the RDR's scope.
We do feel that a limited form of factoring, such as spreading the advice charge over 5 years with either clawback or exit charges on a standard industry basis would have eased concerns without re-introducing bias.
Also a surprise was that CC isn't limited to the employer's contribution: given the employee is not agreeing the remuneration, allowing them to have less allocated to their pension plan than was deducted from their pay seems an obvious area for problems.
The FSA has indicated it will closely monitor the market between now and the end of 2012. While some commentators have suggested there may be an increase in scheme switching ahead of the RDR deadline, any firm (provider or adviser) getting involved in that would clearly be running a serious risk of FSA intervention. If firms do not prepare for transacting business on an RDR-compliant model, they will be poorly equipped for success in the RDR world.
At a practical level, the apparent financial attractions of writing "switch" business ahead of RDR implementation also need to be considered carefully. Will the commission levels be maintained for future entrants after it becomes impossible to switch to a new commission scheme? The FSA is keen to demonstrate that they are monitoring Active Member Discounts particularly when the increase in charges are "sometimes significantly so". We've maintained that AMDs can work but only in a transparent nil commission/Consultancy Charging world.
A large part of the RDR debate in recent months has centred around the extent to which the RDR will affect GPP business (defined by the FSA as group SIPP, group PP and group stakeholder).
In CP09/31, the FSA have made it clear that they see significant problems in the GPP market and intend to extend commission restrictions similar to those planned for the individual retail investment market to GPPs.
Proposals for indemnified commission
Commission shapes such as initial, level, renewal and single premium commission will not be allowed. Indemnified commission will be banned, which will affect a large part of the existing GPP market. AMC-based commission shapes such as initial, level, renewal and single premium commission will not be allowed.
The FSA's rationale for this is that providers have different terms on which they will indemnify and they can compete with each other on these terms rather than on services to the customer.
The FSA stated that:
- GPP new business is concentrated on the providers offering most initial commission.
- Those that reduced or stopped offering commission experienced corresponding declines in their market shares.
The wording was unambiguous: "the [GPP] market is not sufficiently competitive or functioning properly".
The FSA will monitor advice given
GPPs set up before the RDR deadline on a commission basis will be able to continue on that basis for future members of that scheme. The FSA warned that they will monitor schemes being written before 2012 where the switch advice is "not justified and is being given to achieve further commission".
Consultancy Charging (CC)
The alternative to the traditional forms of commission will be Consultancy Charging (CC) - previously termed Arranger Charging. CC will be similar to Adviser Charging on individual retail investment products.
How CC will work
CC would be
- charged to the employer as a fee or through the product.
- charged on a matched basis: £1 adviser remuneration would be matched by a £1 charge through the product, both in amount and timing.
No 'factoring' or indemnification will be allowed at all. Remuneration does not need to be expressed in monetary terms so fund based renewal commission is likely to still be available.
How CC differs from Adviser Charging
The key difference from Adviser Charging will be in the responsibility for confirming the adviser's level of remuneration:
- For Adviser Charging, the adviser will explain to the end customer the remuneration they will be taking.
- For CC, the employer will be responsible for agreeing the level of the adviser's remuneration. However, if individual advice to a member is offered, the adviser could agree remuneration with individuals on a member by member basis.
Active Member Discounts
Active Member Discounts (AMDs) were mentioned more than once in the paper. Though receiving no direct criticism, it was suggested that these extra charges which often resulted from the use of AMDs meant that employees were now bearing the brunt of the cost arising from unnecessary scheme switching.
Closing off loopholes
Finally, the FSA has moved to close some of the obvious workarounds that could have propped up the commission market. These include banning commission on:
- Group Stakeholder, including where sold on a Basic Advice model
- investment products linked to occupational pension schemes which appears to effectively extend Consultancy Charging to trust-based arrangements including Master Trusts.
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