Laith Khalaf from Hargreaves Lansdown says that Aviva has just announced it will stop paying initial commission to company pension advisors from the end of 2014, fifteen months before commission is banned in April 2016.
The announcement came as the insurer released details of how it intends to meet the new workplace pension reforms, including the charge cap and the ban on active member discounts.
Laith Khalaf, Head of Corporate Research, Hargreaves Lansdown, commented: ‘Advisers who had been hoping to sit on their hands and collect commission until 2016 better make other plans, because Aviva won’t be the only insurer to turn the taps off early.
As a result, employers can probably expect a rueful call from their adviser to discuss fees going forward. This is likely to prompt a wave of scheme reviews as those employers consider, perhaps for the first time, whether they are getting value for money from their adviser.’
Aviva, of course, are taking measures to meet the new workplace pension rules, announced by the DWP in March 2014. These rules require pension providers to stop paying commission to advisers by April 2016. They also impose a charge cap on pension default funds of 0.75%, effective from April 2015, and a ban on Active Member Discounts from April 2016.
While these rules are in theory separate, in practice they come as a job lot, because the charges in part reflect the commission paid to advisers. Hence while commission is in theory available until 2016, insurers are likely to turn the taps off before then to accommodate the charge cap.
Aviva have done just that. They have announced the following:
- Their schemes will comply with the 0.75% charge cap by the end of 2014
- They will move all schemes with an active member discount to the lower, active charge by the end of 2014 (except schemes with an active charge below 0.35%)
- They will stop paying initial commission to advisers by the end of 2014
- They will however continue to pay ongoing commission until April 2016
- They may charge the employer where the scheme is small
Employers in the dark
These changes are going to put the squeeze on advisers who will now have to charge fees sooner rather than later. This probably wasn’t in the plan for many of them- a recent survey conducted by Hargreaves Lansdown found that half of employers have not yet been told by their adviser about the forthcoming commission ban.
The survey also found one quarter of employers are not willing to pay fees to a corporate pension adviser, and so intend to deal with a provider directly.
14% of survey respondents didn’t actually know if their scheme paid commission or not, which suggests the move to ban commission is probably justified, and that the transparency of fees is likely to prompt a lot of employers to address the question of what value they put on their pension adviser.
Eh? I thought commission was already banned?
Yes it is, on new schemes written since 1st Jan 2013. However it is still currently permitted for schemes written before that date. This probably partly explains why half of employers used their existing scheme for auto-enrolment- the alternative would have been to pay fees to their adviser.
Now those fees are going to arrive anyway, those employers may well put their auto-enrolment pension scheme under the microscope again. They will almost certainly have to do this anyway, in light of the pension freedom announced in March’s budget.