Member-borne commission ban could move costs elsewhere

The prospective ban is the latest move aimed at ensuring value for money for savers in auto-enrolment. It follows the introduction of a 75 basis point charge cap in April last year.

The consultation, entitled ‘Better workplace pensions: Banning member-borne commission in occupational pension schemes’, was launched in response to another consultation and examines how a ban on member-borne commission could be introduced. It was launched on January 26 and runs until February 9.

It said: “In summary, the government is announcing that regulations will be introduced preventing service providers from levying a charge on members in order to recover the costs of commission payments made to advisers for certain advice or services.”

The regulations will apply to defined contribution schemes that are being used for auto-enrolment.

Deborah Cooper, partner at consultancy Mercer, said: “The direction here is in line with other government initiatives, such as the charge cap. Particularly in the context of auto-enrolment, where the premise is that many individuals are not interested in making choices about their retirement saving, it seems incumbent on providers and the rest of the pensions industry to consider what steps they can take.”

She added: “Trustees will have to let their provider know that their scheme is being used for auto enrolment, but apart from that the onus is being put on service providers to ensure any new products are structured in line with the ban, rather than requiring trustees to negotiate individual contracts.”

Later in the year the government will consult on how the ban should be implemented for existing products. Cooper said this was likely to be a “more complex process”.

The regulations will be enforced by the Pensions Regulator and introduced in April this year.

The regulations consist of three main parts:

• Preventing service providers from levying a charge on members to recover the cost of adviser commission payments.
• Requiring trustees to inform service providers whether the scheme they are managing is being used for auto-enrolment. This information must be done within the later of: three months after the regulations come into force; the date the scheme is used for auto-enrolment; or the date the service provider is appointed to the scheme.
• Allowing members to opt-in to advice and services provided. For any service the member takes, the agreement must be set out in writing, outlining the cost and duration over which payment will be taken.

Who pays commission?

Anne-Marie Winton, partner at law firm ARC Pensions Law, said even if members are not directly charged for commission on services, the cost must be levied from somewhere.

“If this means members are better off… it’s at the expense of someone else being worse off,” she said. “Does that mean the behaviour of the adviser might change?”

Winton added: “If someone feels they are getting less than they used to, will they try to get that back in some other way?”

Christopher Nuttall, senior solicitor in the pensions team at law firm Hewitsons, said that in extreme cases, “if [the scheme] were struggling to meet the cost they might ultimately look to increase member contributions”.

He added that members were “still bearing cost, just more indirectly”.

Despite this, a spokesperson for the regulator said: “DWP’s 2015 Pension Charges survey found that less than one per cent of employers are using a qualifying trust-based scheme which contains trail commission.”

They added: “The regulations on which DWP are consulting only affect commission arrangements entered into after April 2016… no existing revenue should be lost as a consequence of the current regulations. We do not see these regulations as ones which should require either employers or members to pay more, directly or indirectly.”