Financial education: Likely effects of the retail distribution review

The retail distribution review planned by the Financial Services Authority could have major repercussions for financial education, says Georgina Fuller

The days of benefits consultants and advisers having commission remunerated by pensions providers will come to an end if the Financial Services Authority’s proposals for the retail distribution review (RDR) are implemented in 2012. Instead, employers will pay a fee to their consultant or corporate adviser, agreeing up-front how much investment advice will cost them and how they will pay for it. This change could affect the provision of financial education for staff.

Currently an employer can, with the help of a corporate independent financial adviser (IFA), establish a benefits scheme with a range of optional extras, including support to payroll and HR (for example around new joiners, leavers and retirees), implement a pensions programme and offer comprehensive advice on retirement and redundancy, all with the support of the IFA, which is funded by means of commission.

But under the FSA’s proposals, employers would have to employ additional staff to run their pensions and benefits schemes with no add-ons such as financial advice for staff, says David Hix, associate director at consultancy Jelf Group. Employers would also have to take full responsibility for the administration and communication of their benefits, pay initial and ongoing fees to a suitable IFA and potentially agree pension contracts where initial charges are made on the contract to pay the necessary commissions. “We could see a move back to bid-offer spreads, early surrender penalties and perhaps even initial and accumulation units,” says Hix.

Impact on advisers and consultants

As a result, employers could end up paying less into pension funds to subsidise the extra costs, stop allowing staff access to independent advice, and place an additional administrative burden on HR and payroll. Hix says this will have an impact on advisers and consultants. “At a time when there is a shortage of quality advice in the corporate pensions field, it seems likely that a fair percentage will move to pastures greener.”

Darren Laverty, director of Secondsight, agrees the proposals could cause problems. “It is another nail in the coffin for pension funds,” he says. “Employer contributions are too low and in six years’ time, the government will probably have to scrap it all and look at another system. The FSA is trying to make pensions and benefits transparent, but lots of advisers are going to have to retrain and reinvent themselves when the act comes in. Many of them are already in their 50s and may decide it is not worth it.”

At the moment, all the risks and costs associated with retirement planning are with pensions providers, but under the new act, all the risk will be transferred to employers, says Laverty. Where available, employers usually opt for the commission-based option, but if this is scrapped, it will be harder for employers to get a return on investment on pensions. The new proposals will remove the options open to staff and push up costs. The worst-case scenario is employers will decide they cannot afford to pay fixed fees to an adviser and will stop offering staff any sort of financial advice on benefits and retirement planning, says Laverty.

Longer-term view on earnings

Employer contribution But Hix does not think the FSA’s plans will affect all consultants and advisers. “For those whose business model has incorporated reasonable levels of ongoing renewal income, as opposed to only taking up-front initial commission, and which have a good existing client base where it seems current terms will continue, there is unlikely to be much of a difference as they will be able to take a much longer-term view on earnings from new schemes,” he says.

But for advisers and consultants who rely on initial commissions, the future looks bleaker, says Hix. “Although it will be a level playing field in terms of what everyone can offer, employers that cannot afford advice and have compulsory costs because of auto-enrolment will probably just do without.”