Since the Financial Services Authority (FSA) declared that corporate advice charges must not reduce pension contributions under the auto-enrolment statutory minimum of 8% of qualifying earnings, providers have fought tooth and nail against it.
Consultancy charging takes money from contributions before they have been paid into a pension pot, directing them to the corporate adviser who helped to set up and administer the scheme.
Opposition to FSA principle
The FSA has said consultancy charges may reduce contributions but only down to a minimum of 8%. All the signs are that it will stick to this, despite lobbying from the Association of British Insurers, whose members must now work out how to facilitate these charges without breaking the principle.
‘We don’t understand the FSA’s position,’ says Legal & General pensions strategy director Adrian Boulding.
‘We are still working with the FSA to try to get it to explain what it means. Is it saying we have to have two different pots, one for the statutory minimum and another pot for consultancy charges? We have just got over doing this with contracted out pensions (they must have a protected rights pot) and that doubled our workload for the last 24 years.’
Resistance to consultancy charges
Richard Grover, corporate pensions and protection adviser at Wingate Benefit Solutions, says his firm will only take a consultancy charge as a last resort.
‘We find that having a more explicit, more transparent system works better for everyone: a pounds-and-pence figure instead of a percentage charge,’ he says. ‘Typically, the employer wants consultancy charging to offset the cost of advice because it cannot afford to pay for advice outright.’
Why not draw a line? If employers cannot afford the fee, they cannot afford advice.
That’s why the National Employment Savings Trust (Nest) was established, says Grover. Nest and other off-the-shelf schemes exist so those who cannot afford advice can be put into (supposedly) low-cost default funds because they cannot make an informed choice about their investments.
‘For its fee, Wingate provides an annual review of whether charges are still competitive, fund performance and basic advice to scheme members,’ he says.
The FSA clearly thinks consultancy charges are too much like commission. The inconvenience to providers will not worry many, but any adviser taking charges in this way must be even clearer about the value of their service to members.