When the Financial Services Authority (FSA) launched its retail distribution review in 2006, it promised to make sure charges for advice were transparent and fair. As a result, the FSA banned charging by commission but allowed pension plans to take consultancy charges from individuals’ pension pots as long as they did not reduce their pension contributions below the auto-enrolment minimum.
In the meantime, a series of stories about extortionate consultancy charges appeared in the press. Under political pressure to get tough on pension charges, the pensions minister said recently that consultancy charges would be banned.
The minister is right to be concerned about excessive charges. He should also be concerned about consultancy charging that has no benefit for savers. There is a problem if members pay, through a consultancy charge or some other charge, for advice to employers on complying with their auto-enrolment duties.
But as lots of smaller employers start to auto-enrol their workforce, there will be a squeeze on the advice market. This uncertainty around how to fund advice is unhelpful, and a ban could make it harder for employers to set up good auto-enrolment schemes.
Sometimes savers can benefit from the advice that comes with these charges. Their pension plans might be governed better or have stronger communications as a result. Again, a total ban could make it harder to set up a good pension.
The government needs to find a way of keeping the benefits that can come with consultancy charging, while getting rid of the practices that have brought it into disrepute. Greater transparency would be a good start.
Gary Moore is policy adviser at the National Association of Pension Funds
