Workplace pensions targeted by advisers before commission ban

Business Correspondent/Personal Finance Editor

Saturday 12 May 2012

Workplace pension schemes are the target of increased activity by advisers and providers ahead of the ban on commissions next year.

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SIMON BAIN

However, it could mean employees being moved into schemes with costs which will affect their pension savings.

This week, Labour leader Ed Miliband in his alternative Queens' Speech said he would give the Financial Conduct Authority powers to stop "rip-off surcharges" by banks and pension companies. Earlier this year he said pension charges should be capped.

According to Tom McPhail, pensions expert at Hargreaves Lansdown, a typical workplace pension scheme will have an annual charge of between 0.3% and 0.8% of the funds under management, so charges are already effectively capped.He accused Mr Miliband of "ill-informed populist campaigning".Edinburgh-based advisers Robson Macintosh, however, say many older schemes "may still have a bid/offer spread on contributions, initial and capital unit allocation rates, or policy fees", inflating charges and reducing returns.The firm says many advisers approach companies with the "incentive" of moving a pension scheme from one provider to another, generating healthy commissions along the way."There are good reasons to review existing schemes and move them on to a new basis – but often this can be accommodated without switching provider," says Robson Macintosh adviser Jeff Lewis. "Existing providers may also be looking for new business, therefore the new terms on offer can be considerably less than the old structure."Another option is to explore salary exchange, Mr Lewis says. "Move the scheme on to this basis and use the National Insurance contributions saved by both employee and employer to boost contributions."On a scheme with a 6% contribution rate (employee paying 3%) an employee earning £20,000 would have their contribution increased from £1200 to £1403 a year, a 17% increase, while their take-home pay would remain unchanged. "It is essential employers consider this as it benefits their employees with no extra cost to themselves."Mr Lewis adds: "Advice given to members of older schemes meant that the old default managed fund received the bulk of members' contributions. "Newer arrangements might offer a 'lifestyle' choice where the mix of assets, equities, bonds, property and cash gradually move members' holdings away from risk as they near their normal retirement date."Chris Donald, at Edinburgh-based Innovate Financial Services, says the new supposedly fee-based regime will prompt some commission-based advisers to devise new ways to maintain their income."My fear is that charges will start to come out of the premiums that the employee is paying and that his pension will be damaged. We charge our corporate clients fees, but most companies don't want to pay fees."His firm offers a standalone audit service to companies on their employee benefits package, which has unearthed companies where the adviser "is charging twice as much as the company is getting out in benefits", and there has been "no review meeting for five years", Mr Donald says.He adds: "They could halve the pension scheme charge, every employee would be 0.5% better off, and they would have a death in service benefit from day one."Jamie Jenkins, head of group schemes at Standard Life, says industry charges have continued to come down, with Standard's below 1% or for larger schemes below 0.5%. But where providers still pay commissions, the costs can have a bigger impact, he admits.The role of employers in taking more responsibility for workers' savings is under the spotlight, with next year's commission ban prompting high street banks to withdraw from giving financial advice. Mr Donald says: "You don't have to be rich to need advice."Stuart Falloon, consultant at advisers Mercer, says firms have traditionally set up group personal pension schemes, then forgotten about them, leaving all responsibility to the individual.He says: "It is hard to knock on the door of an employer and tell him he has a responsibility to look at the investment choices employees are getting, and the charges."But the employer in the future is going to have to help his employees, because the financial adviser at the end of the street just isn't going to be there. Employers are going to have to engage with their staff about saving in an appropriate manner."Meanwhile, companies such as Standard Life and investment giant Fidelity are leading the way in offering their employees workplace Isas as well as pensions.Both offer discounts on annual Isa charges, and Standard has called for companies to be allowed to go further and contribute to employee Isas as well as to pensions.

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Workplace pensions targeted by advisers before commission ban

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