Advisers and providers have backed the government’s plans to ban consultancy charging, welcoming the transparency it will bring employees, but warned that it could reduce the availability of workplace advice.
Consultancy charging allowed employers to use employees’ pension contributions to pay advisers for setting up pension schemes and advising employers.
Earlier this month the Department for Work and Pensions (DWP) said it planned to ban such charging in auto-enrolment schemes, arguing that the system meant employees ended up paying for something from which they did not benefit.
The proposed ban has been broadly welcomed by workplace advisers, providers and pension experts, but some have warned it could restrict the availability of workplace advice. They said employers would be put off by high costs, which can no longer be shared by their workforce, and employees would no longer receive face-to-face advice as advisers reduced their services in line with their charges.
Danger to demand for advice
Alan Fergusson, employee benefits director at Kudos Financial Services, said some employers would be put off getting advice, which would benefit providers of low-cost, large-scale auto-enrolment propositions, such as the National Employment Savings Trust and those who offered master trusts.
‘The ban will drive certain employers out of the market for advice, no doubt about it,’ he said. ‘There are certain employers who will never get used to paying a fee for this sort of thing, and therefore will drift towards one of the master trusts where they won’t be charged,’ he said.
Tony Larkins (pictured below), managing director at Cambridgeshire-based Beacon Wealth Management, agreed with Fergusson. ‘There are going to be a lot of companies and individuals who will no longer get advice. The ban is going to be a bad thing,’ he said.
‘People will end up going through [specialised] auto-enrolment [schemes] because of a lack of access to alternative advice. [The government] has restricted people’s options and help, unless they want to pay.
‘Workplace advice will basically evolve into guidance, not advice. Employee benefit consultants won’t be going into the market in the same way, the Money Advice Service will pick up the slack but it’s not the same because it’s not active.’
Potential for employer damage
Steven Cameron (pictured above), Aegon regulatory strategy director, said the ban could have a damaging impact on firms that were setting up a scheme for the first time due to auto-enrolment.
‘A ban on consultancy charging may discourage employers from seeking advice, and that would be a very bad outcome, because advisers would be central for making auto-enrolment work, and also for delivering good member outcomes within workplace pensions,’ he said.
Cameron’s view echoes those of the Association of British Insurers (ABI).
Steve Gay, director of life, savings and protection at the ABI, said: ‘The government’s decision to ban consultancy charging in automatic enrolment schemes creates a different risk to the success of pension reform in that it will reduce the availability to employers of advice and support to ensure they make the right pensions decision for their employees.’
Confident in advice boom
However, Glynn Jones (pictured above), divisional director of group savings and investments at LEBC, said auto-enrolment, which began in October 2012 for companies with 120,000 or more employees, would mean employers demand for advice would be higher than ever, despite an increased cost.
‘Adviser incomes won’t be affected at all because demand will be so great, but I think what it means is the cost is being dumped back on the employer,’ he said.
‘[Employers] either take advice and reduce the risk of getting it wrong and do the right thing for employees, or don’t take advice and increase the risk back on [themselves] and there’s a chance [they will] have a worse proposition for [their] employees,’ said Jones.
Fergusson said advisers would not necessarily suffer, as those with good offerings would still get business. ‘Ultimately, the ban puts all advisers on a level playing field,’ he said. ‘If you have a complete proposition and are confident in your proposition the shrinking market should make little difference to you as an adviser.’
Tony Laverick, director at Surbiton-based Anders Bayley Scott, said the ban could lead to charges coming down as consultants found cheaper ways to deliver their services.
He said traditionally costs had been high to cover face-to-face advice given to employees and work that could have been done by a computer.
Jargonfree Benefits chief executive Steve Bee agreed. He said advisers could reduce their costs by using technology.
Fairer on employees
Laverick also argued that many employees had not been receiving advice despite paying for it under the consultancy charging model.
‘The trouble with consultancy charging is it can cover everything from advice to members of the scheme to just advice to the company. Really you’ve got to look at it and say who’s paying for what service,’ he said.
Martin Bamford (pictured below), managing director of Guildford-based Informed Choice, agreed that consultancy charging resulted in employees paying for advice they often never received.
‘The ban would be a good thing as a lot of employee benefits consultants have this practice of giving advice to the employer and not the employees, and simply charging [employees] for the these tasks, so that through their contributions they are paying for someone else’s administration tasks, for forms to be completed. They’re not paying for individual advice; they’re being put into default funds and given generic advice,’ he said.
‘As consultancy charging’s being banned and that’s no longer happening, that’s a positive outcome.’
John Lawson, corporate benefits head of policy at Aviva, said consultancy charging did not guarantee that employers, let alone employees, received good advice as consultants could be swayed by generous terms from providers.
He welcomed the transparency a ban would bring.
‘The new model makes advisers’ charges absolutely explicit, making advice dependent on how much an employer is prepared to pay.’