Financial Education: Effects of the Retail Distribution Review

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• Commission on pensions and investments will be banned from 31 December 2012, when the Retail Distribution Review is implemented.

• This will pose challenges for employers when it comes to funding financial education for employees around pension provision.

• The move could prompt smaller employers or those that are short of cash to move away from providing an occupational pension scheme and instead enrol employees into the national employment savings trust (Nest).

• Without financial education around pensions, employees risk opting for inappropriate investment funds or selecting over-ambitious retirement dates.

Case study: Barbon boosts engagement through benefits

Insurance brokerage and services provider Barbon, which has 750 employees, emerged as a successful standalone business after its parent, a property company, collapsed in 2008. At the time of its parent’s demise, no benefits were offered to staff and turnover was high.

Retaining talent became a key objective for the new management team, which introduced a comprehensive package of group personal pension, life assurance, a flexible benefits plan, health cash plan, bikes for work, childcare vouchers and payroll giving. But participation rates remained stubbornly low, with barely a quarter of staff in the pension scheme and the cash plan under-utilised.

In 2010, Barbon initiated a big engagement push to increase participation rates in benefits, which included a‘pension wheel’ desk drop, a concertina leaflet for pensions and a new benefits booklet. The HR team also arranged for representatives from the Financial Services Authority’s free Moneymadeclear service to give presentations to staff at several company locations.

As a result, pension participation increased by 31% in a year, with health cash plan utilisation up 45%. Absence rates have also fallen from between 5% and 6% across various company locations to about 3%. In January, Barbon was accredited with one-to-watch status in the Sunday Times’ 100 Best companies to work for.

Richard Walden, HR director at Barbon (pictured), explains: “We think that everything is about employee engagement. It means better results for the company and, ultimately, better returns for shareholders.

“It is not just a nice thing to do for people, but is a way of building a better business.”

The Retail Distribution Review’s ban on commission for pensions and other investments could lead to less financial advice on offer, says John Greenwood

For decades, much of the financial advice, information and education employers have relied on to communicate benefits to staff has been paid for out of commission received by advisers for setting up contract-based defined contribution pension schemes.

While larger employers have tended to pay fees for financial consultancy services, many organisations with 1,000 employees or fewer have relied on commission deals to pay for advice on choosing a pension scheme and communicating its benefits to members.

But new rules to be introduced 20 months from now will make commission on pensions and investments illegal, prompting some experts to predict a decline in the amount of face-to-face financial advice, group presentations and other financial guidance delivered to employees.

Commission on pensions and other investments will be outlawed from 31 December 2012, when the Financial Services Authority (FSA) implements the Retail Distribution Review (RDR), an initiative that aims to raise standards of professionalism in the financial advisory community and will require advisers to be more transparent about the charges they make.

But experts fear an unintended consequence of the RDR will be a reduction in the availability of financial advice, as employers balk at the prospect of signing a cheque for services they have seemingly received for free for years.

The reality is that this financial advice never was free, but paid for out of the annual management charges (AMCs) of pension scheme members. Some pension providers have been paying commission of up to 35% of employees’ first-year contributions, even though they have been recouping an AMC of only between 1% and 1.5% each year.

A similar scheme set up on a fee basis would typically deduct a lower AMC from members’ funds, commonly between 0.3% and 1% a year. Under the commission model, the insurer then recoups the money it has paid out in commission through the higher AMC deducted from the employee’s pot over the decades of his or her saving lifetime.

These upfront commissions have, in many cases, been used to fund financial advice, education and communication programmes implemented by advisers.

Will employers want to pay?

Charles Cotton, head of reward at the Chartered Institute of Personnel and Development (CIPD), says: “This begs the question how employers are going to react when the Retail Distribution Review abolishes commission on pensions. Will they step up to the plate and pay a cheque for financial advice, believing it to be money well spent? Some organisations that are more strapped for cash may end up not doing so.”

That view is backed up by Thomsons Online Benefits’ 2011 Employee Rewards Watch Survey, which found that 46% of respondents would not pay a fee to an adviser for setting up a group personal pension (GPP), while 58% were unaware they could face paying a fee for setting up a new scheme from 2013.
Michael Whitfield, chief executive of Thomsons Online Benefits, says: “When the RDR comes in, you will end up with the haves and the have-nots because those with low budgets for internal communications will balk at having to pay a fee for them.”

That is precisely the dilemma that would face Rachel Scott, finance director of William Martin Property Consultants, if, after 2012, she wanted to repeat the benefits package relaunch the company has just carried out, with the assistance of consultancy Lorica. This used a combination of commission and savings from implementing salary sacrifice arrangements to pay for the new programme. Take-up of William Martin’s GPP scheme has been boosted from about 20% to 90% following a comprehensive programme of group sessions and face-to-face meetings with every member of staff.

“Staff now feel valued and are more engaged with the business,” says Scott. “I genuinely believe people need to be aware of the financial challenges they will face later in life. But we would have struggled to do this on a fee basis.”

The FSA is completely getting rid of the idea of the cost of setting up pensions coming out of contributions. Apart from the option of paying a fee, employers will be able to choose a new way of paying, called consultancy charging, when the RDR comes into effect.

Under consultancy charging, the employer agrees the level of charges with the adviser. The adviser’s charges still come out of the employee’s pension pot, but do so much more quickly because the pension provider, usually an insurance company, is not subsidising the transaction.

This means employees will be charged considerably more than the current stakeholder AMC cap of 1.5% in the early years of their pension saving under consultancy charging, in some cases paying as much as £200 or 20% of the first year’s premiums. For employees who stay with that employer until they retire, this can work out as cheap or even cheaper than stakeholder-style charges. But for those who change job regularly, consultancy charging could work out considerably more expensive.

Clive Grimley, partner at Barnett Waddingham, says: “If an employee joins a scheme but never actually hears anything from the employer’s advisers, they may be upset to realise they have been charged for that when they see the deduction from their pension fund.”

Tim Gillingham, a director of benefits consultancy Citrus4Benefits, believes consultancy charges will be a fixed fee per employee, which would hit lower earners harder in terms of the proportion of contributions consumed by charges.

One-off cost to get into scheme

Gillingham explains: “We anticipate consultancy charging will be set at around £200 or £250 per member as a one-off cost for getting them into the scheme, and this could be deducted from contributions in year one. This is less than advisers have been getting on commission.”

With the choice of paying a fee for advice or putting in place a scheme where employees could effectively end up with nothing in their pension after the first year, some fear employers will end up doing nothing at all, leaving staff with no financial advice or guidance at all.

Some smaller employers that are very short of cash could end up switching to the new national employment savings trust (Nest). Nest, which goes live later this year, has been set up as a low-cost default option to receive contributions from employees whose employers do not elect to take out a private sector company pension scheme when automatic enrolment duties kick in.

Under auto-enrolment, which starts from 2012 with larger employers and rolls out to the smallest companies by 2016, every single employer in the land will be required to automatically enrol every member of staff into a company pension scheme or Nest.

The implications of employees not receiving financial advice on their pension are wide-ranging. Full face-to-face advice, or more limited financial guidance in group sessions drives up take-up rates, although take-up will be less of an issue when auto-enrolment is mandatory.

But a whole host of other problems can arise, with employees running the risk of opting for investment funds that are not suitable for them or choosing unsuitable, over-ambitious retirement dates.

The CIPD’s Cotton says: “Financial advice and education communicates the value of the proposition offered by the employer, helps staff facing the shift from defined benefit to defined contribution [pension scheme] and can reduce their money worries. Previously, most calls to EAPs [employee assistance programmes] around money were in January and February; now it is all year round.”

Money worries likely to increase

With most economists predicting austerity for years to come, money worries look like becoming an increasingly significant issue for staff, and employers seem to see this as an opportunity for engagement.

Standard Life’s Insights into Financial Responsibility research showed that eight out of 10 employers feel responsible for their employees’ financial security, with 22% of employers feeling primarily responsible.

Several pension providers and employee benefits consultants that see technology as at least part of the answer to the problem of employees’ lack of financial advice. Collectively, they have spent millions developing new web-based portals and corporate wraps, offering employees a range of savings wrappers as well as online tools and information.

Richard Morgan, director of consultancy services at Vebnet, says: “Employers will see a shift in the way information is provided to them, from the traditional way through the intermediary, more towards what is offered through providers.”

Not everyone is convinced that corporate wrap is the complete answer to employees’ need for financial advice, or employers’ need for member communication strategies. But for those employers that do find their options constrained when commission finally disappears, Cotton advises getting what they can for free.

Workplace initiatives to spread the word

“The FSA and NAPF [National Association of Pension Funds] both have workplace initiatives and will send people out to speak to employees,” he says. “Or employers can get their local IFA to come in and give a talk. They will often offer generic information on the basis that those who want more information make an appointment to see them directly.”

Employees can also be directed to the helplines and websites of the FSA or the Pension Advisory Service, an independent organisation that helps with consumer pension queries.

In this age of austerity, thrift is becoming an essential part of life. It may well be that the RDR brings that sense of economy to the field of workplace financial advice.

The RDR’s impact

• When the Retail Distribution Review (RDR) comes into effect, financial advice, education and guidance from independent financial advisers (IFAs) and benefits consultancies will be charged on a fee basis agreed upfront between the adviser and the employer.

• Previously, some financial advice was paid for out of annual management charges (AMCs) for pension scheme members.

• Some employers may balk at paying advisers’ fees, leaving employees with less access to financial advice.

• Consultancy charging, a new way of charging for advice on pensions, will be introduced, with advisers’ charges deducted from employees’ contributions.

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