Way back in 1988, the then conservative government liberalised the pension market place. For the first time, employees could elect to set up their own personal pension instead of joining an employer’s pension scheme. Shortly after some bright spark in the marketing department of an insurer came up with the concept of a group personal pension (GPP), a collection of individual personal pensions sold en masse to the employees of an employer.
The upside for the employer, a single simple pension scheme; the upside for the employee; economy of scale and their own pension, the upside for the insurer; more sales at a lower cost, the upside for the financial advisor intermediating the sale; access to the corporate market and the potentially significant commission payments that came with that access.
GPPs flew off the shelf and, as at 2014, TPR estimated they accounted for £113bn of assets.
Like them or loathe them, IFAs played a pivotal role in extended workplace pension coverage over the period from then until now.
But there is now, potentially, a problem: the introduction of Independent Governance Committees (or IGCs - see http://blog.ptluk.com/independent-governance-committees for more info).
IGCs are charged with assessing the value for money that GPPs (now renamed Workplace Personal Pensions or WPPs) provide. They have to consider all the charges deducted and contrast them to the services provided. Where they conclude the VFM (value for money) is insufficient, they must recommend the changes needed to improve it. They have the power to escalate to the FCA, employers and members. In addition, they have an obligation to publish their conclusions.
This creates two dilemmas for IFAs.
Firstly, the commission paid to IFAs usually had an implicit impact on the charges paid by the members. Some commission structure, particularly those where the payment was made up front, significantly increased the charges. If an IGC concludes that the charge made do not represent value for money (perhaps because the advice was given to the employer, not the employee, some years ago), they may recommend switching off the commission in order to reduce charges. This won’t go down well with the IFA.
Secondly, IFAs had to give “best advice” to their clients – this test applying at the individual level even if the IFA advised the employer. Suppose the IGC concludes that in an absolute or particularly relative sense the WPP is not VFM: what will this say about the advice given by the IFA? Why would a member in such a scheme not want to question their IFA about the quality of their advice?
IGCs are new and untested. In their role they will open many a can of worms. Commission payments to and the quality of advice given by IFAs will be just one of these.
If you would like further information on any of the topics raised in this blog please contact us