The AE commission and consultancy charges conundrum

These include the lack of clarity around the value members get from these payments; poor transparency regarding how much advisers get paid; uncertainty of what work is done to justify the income; and the potential impact on member-borne costs.

So should we just end all commission and consultancy charges for auto-enrolment defined contribution schemes?

By doing so, it surely takes us into a bright new world where everything is transparent, members appreciate the value for money aspects of their scheme, and people can choose as and when they take and pay for advice.

Or is it perhaps more likely that the reality of such a post-commission world means we head for a world where ‘zombie’ schemes are left to their own devices, and become less well run with less oversight?

Will we be faced with members stuck in arrangements and investments that are either outdated or entirely inappropriate, as schemes will be without oversight?

The problem is that the services delivered for the cost of commission was not always fully explained and appreciated

Alternate reality

Of course, it might be possible that companies will pick up the tab for consultancy services.

Perhaps they will recognise the value of ensuring schemes are delivering good member outcomes and value for money.

Companies are already paying millions of pounds in contributions into auto-enrolment schemes – and these schemes are supporting today’s workforces and UK plc – so why not cover the costs of fees, too?

The Pensions Regulator and Financial Conduct Authority are ensuring DC schemes are well run through new governance requirements and the introduction of independent governance committees.

Finally, members will demand their employer properly looks after the scheme that makes up a substantial proportion of their reward package.

Sadly this is not always the case and may be something of an alternate reality.

Squaring the circle

The problem is that the services delivered for the cost of commission were not always fully explained and appreciated.

So when it comes to asking an employer to pay for those services there are issues, such as:

• The services offered were wide-ranging – from implementation, to design of the options, to helping members decide where to invest and how to draw their savings (which is considerably more important post-April);

• The employer may not be willing or able to put their hands in their pockets to pay for this advice and guidance, as they have not had a budget to do so before;

• It may be difficult for HR or the finance team to justify the additional budget in an often challenging economic environment.

So how do we square this circle?

Well, perhaps we will have to live with the curved lines – at least for the time being. Maybe it is time for the individual to step up and engage.

Perhaps the fact that DC savings are now true savings rather than a ‘pension’ means members will start to understand some of their responsibilities and the decisions they need to make.

In this world technology will play a huge part, creating the potential to focus communications on the person and their individual financial situation.

Once we start properly taking advantage of these new developments, the true value of added charges can be understood and appreciated by both the member and in turn the sponsor.

Maybe then, the reintroduction of commission and consultancy charges, supported by a clear and transparent framework, would be a welcome delivery of charging for value-adding services.

Alternatively, maybe it is time to start thinking in a different way and look to other markets for how they deliver quality arrangements – the Australian model of DC pension saving is a useful example.

The Australian super has been the primary way of delivering that country’s version of auto-enrolment through a master trust and is a good advocate for economies of scale.

This mastertrust approach could be the answer to the conundrum of looking after people in a cost-effective way, but still begs the question, who is going to pay the fees to make the change?

Gail Philippart is a principal at Mercer and member of its UK DC leadership team