Group Pensions – Who is the Client?

I have some questions I’d like help with please.

A regulated firm provides advice on a group pension scheme. Who is the client?

On the one hand, the client agreement is probably with the owner or representative of the business. The advice letter is addressed to the company. At some point it is stated that any advice provided to individual members is generic only. So it is pretty clear that the company is the client.

However, the product is provided to the individual. The quality of the product (particularly in terms of charges) affects the members, not the company. The end recipient of the advice is the individual. So are they actually the client?

Perhaps we should consider who pays the bill for the advice. If the scheme is nil commission (as all future new schemes must be) then the company pays the fee, and probably has the right to consider itself the client.

But what about where the members pay the bill, via commission (aka consultancy charging)? If I am asked to pay for something, I think I’d probably feel like I was the client. And yet the member has no say in the product they receive.

Let us apply this to the current position. I don’t have any figures on this, but I’m guessing that the vast majority of schemes set up last year were done so on a commission paying basis. And, with that clever product provider invention called Active Member Discount (or Leaving Member Penalty as it might have been called) some of those commissions can be pretty high.

Post RDR it is highly possible that such schemes could now be moved to one that would offer considerably lower charges. But that would cost the employer a fee.

Thanks to the recent decision to ban consultancy charging for any new schemes but allow it to continue for old ones, the option to move to a new scheme with lower charges but still paying a modest commission is not permitted. So an adviser firm is faced with a decision. Who is the client?

Assume the company is the client and keep existing schemes will result in more expensive than necessary schemes and allow commissions – sometimes very high commissions – to continue.

Or assume the individual is the client and recommend moving to lower charging schemes, resulting in unwanted fees to the company and turning off any legacy commission.

We know which option regulated firms would probably like to choose, and many employers too. But that is not the question.

Question number 1 – who is the client and who, therefore, does the regulated firm have a duty towards?

Question number 2 – does the FCA see it this way?

Question number 3 – will the FCA see it this way in 3 years time when they look back and realise that customers have higher charging pensions than they might otherwise have had as a result of the ban on consultancy charging?

 

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18 thoughts on “Group Pensions – Who is the Client?

  • I’d suggest that the approach we take is the employer is the client. This means that they pay the fee for the initial report, the fee for implementation and the ongoing retainer for ongoing compliance and due diligence.

    I think the auto enrolment has moved the question away from who owns the ‘product’ to who is responsible for the right processes

    These responsibilities (and the penalties if they don’t comply) sit firmly with the employer. Therefore it seems sensible that the fees do too.

    I believe that the danger for advisers is that they receive a legacy commission from a group pension provider and therefore the employer assumes that their adviser is also responsible for auto enrolment compliance too!

    Whilst there might be an issue with charges being more expensive in the next couple of years due to the ban on consultancy charging I’d suggest that other issues will impact how pensions are charged…

    Over the next 2 years, and for the first time in many years the ‘demand’ is likely to potentially exceed the ‘supply’ for group pension schemes. This may also have a fundamental impact to how manufacturers might charge!

    Reply
  • I used to get asked this a lot when I was provider side, and working in GPP-land.

    The clue is in the ‘PP’ part of ‘GPP’. A GPP is not a scheme. It’s just a bunch of individual policies grouped together for administrative ease. The adviser, if her agency code is against that individual PP as part of the GPP, is responsible for suitability of the product for that individual; they are the client.

    The employer is also a client; albeit normally on a fee basis these days (which makes it simpler).

    There’s a reason that the big EBCs always used to make sure that, when they were writing GPP/GShP business, the provider’s own direct agency code was against the individual policies and that their agreement was purely with the employer. They understood contract law, and risk.

    Thankfully, most GPPs are pretty benign in their structure and have been for some time (excepting the execrable AMD or Paid Up Penalty as I like calling it), so the chances of the adviser being spanked for an XO sale through their agency are minimal.

    But it would be dangerous to think of the employer as the client just because that’s where the relationship is. If it’s your name on that individual’s plan, they are a client of yours until you get your name taken off.

    It was all a lot easier in OPS days, when everyone knew that the trustees were the client, and they in turn looked after the members…

    Reply
    • So if the individual is the client, do all adviser firms have a responsibility to get the best deal possible? Which presumably means stopping legacy commissions

      Reply
  • From what I’ve seen there are a lot of firms doing precisely zero for their legacy commission. With new providers coming onto the market offering superior products, how can adviser firms justify keeping existing schemes that happen to pay legacy commission?

    And my real question is, how will the FCA view this when the complaints roll in.

    Reply
  • Follow the money !

    This phase of auto enrolment brings the biggest business opportunity that any adviser will ever see in their lifetime.

    Forget all the nonsensical charges currently mooted in this industry and look to develop a low charging proposition which will create lots of small regular payments over time.

    You will find enough new clients you can grow with who will stay with you forever and which will be the source of many referrrals.

    The person paying the money is the client !

    Reply
  • The OFT’s DC Pensions Review may force the issue of legacy commission based AMCs and leavers’ penalties out into the open and may even result an a solution being imposed on the industry (aim not sure exactly how it would play out).

    Even if that does not happen, if, as an adviser, you do nothing about telling an employer that they could get a better deal for their staff, do you not risk an interlining adviser stepping in and telling the employer that’ve not received good advice?

    Reply
  • Hopefully I can help to clarify (at least a little!!). Our view is that both the employer and the member can be ‘clients’! Whilst the advice to the employer is not regulated advice – following RDR and the implementation of consultancy charging, there will be a ‘client’ relationship between the adviser and the employer involving some form of agreement for services and payment of fees / consultancy charges.

    You then come to the underlying member. They will tend to join a GPP either by way of an advised process (in which case they are a client in the normal sense, having received advice e.g. risk profile, recommended funds and contributions etc) or by a direct offer. Under the direct offer approach they are still technically a ‘client’ of the firm (although not advised) as they will have relied upon what is effectively a form of financial promotion prepared and approved by the firm, to help them make an informed decision.

    There are references here to ‘the client is whoever pays the fee’ etc. This may not always be the case. There have been instances in the past (possibly not as common now) whereby schemes were nil commission with the employer paying fees etc –but where the member received advice. The member would clearly also be a client in this case.

    Hope of use?

    Reply
    • Thanks, Mike. However, your clarification suggests a follow up question (as ever with compliance!). What must advisers advise?

      The employer being the client suggest keep existing scheme, with high charges and (possibly) commission, but no fee to the employer.

      The employee being the client suggest change the scheme to one with lower/fairer charges, cutting off legacy commission.

      What should a firm advise?

      Reply
  • As the one who thinks that the person whose pension is being funded is and should always be the client I guess I should explain further.

    The population in general has developed a mistrust of the pensions concept and need to be shown the value which they can add to their lives by doing without a little today to provide something for their futures.

    The mistrust in our industry in my opinion has come about from the almost total disregard of pension scheme members by providers and employers alike.

    Communication has been in arrears and in incomprehensible jargon leaving most people with no idea of how they were doing – I exclude Final salary Schemes here as they are not the target of auto enrolment.

    Changes in pensions legislation such as contribution holidays for employers have rarely been explained to employees and have mostly been to benefit employers as have laws which permit pension promises to be broken and expectations unfulfilled.

    As advisers we now have the opportunity to rebuild trust in both ourselves and our industry. We have facilities such as on line wraps which give clients the opportunity to view their pension fund for themselves whenever they choose .We can construct low cost electronic -( e-mails etc ) – ways of explaining what is happening to their money.

    People do understand the need to provide for themselves and will pay for good advice which demonstrates value but it will not be at the level we received in commission.

    Explain the effect of compounding to them and possibly to yourself as over time you can build a significant income from workplace pensions advice.

    This isn’t theory by the way as my firm has run Transact accounts for many hundreds of ” GPP ” arrangements over many years at 1% charging with great success.

    Reply
  • The OFT’s DC Pensions Review may force the issue of legacy commission based AMCs and leavers’ penalties out into the open and may even result an a solution being imposed on the industry (aim not sure exactly how it would play out).

    Even if that does not happen, if, as an adviser, you do nothing about telling an employer that they could get a better deal for their staff, do you not risk an interlining adviser stepping in and telling the employer that’ve not received good advice?

    Reply
  • I’d suggest that the approach we take is the employer is the client. This means that they pay the fee for the initial report, the fee for implementation and the ongoing retainer for ongoing compliance and due diligence.

    I think the auto enrolment has moved the question away from who owns the ‘product’ to who is responsible for the right processes

    These responsibilities (and the penalties if they don’t comply) sit firmly with the employer. Therefore it seems sensible that the fees do too.

    I believe that the danger for advisers is that they receive a legacy commission from a group pension provider and therefore the employer assumes that their adviser is also responsible for auto enrolment compliance too!

    Whilst there might be an issue with charges being more expensive in the next couple of years due to the ban on consultancy charging I’d suggest that other issues will impact how pensions are charged…

    Over the next 2 years, and for the first time in many years the ‘demand’ is likely to potentially exceed the ‘supply’ for group pension schemes. This may also have a fundamental impact to how manufacturers might charge!

    Reply
  • Hopefully I can help to clarify (at least a little!!). Our view is that both the employer and the member can be ‘clients’! Whilst the advice to the employer is not regulated advice – following RDR and the implementation of consultancy charging, there will be a ‘client’ relationship between the adviser and the employer involving some form of agreement for services and payment of fees / consultancy charges.

    You then come to the underlying member. They will tend to join a GPP either by way of an advised process (in which case they are a client in the normal sense, having received advice e.g. risk profile, recommended funds and contributions etc) or by a direct offer. Under the direct offer approach they are still technically a ‘client’ of the firm (although not advised) as they will have relied upon what is effectively a form of financial promotion prepared and approved by the firm, to help them make an informed decision.

    There are references here to ‘the client is whoever pays the fee’ etc. This may not always be the case. There have been instances in the past (possibly not as common now) whereby schemes were nil commission with the employer paying fees etc –but where the member received advice. The member would clearly also be a client in this case.

    Hope of use?

    Reply
    • Thanks, Mike. However, your clarification suggests a follow up question (as ever with compliance!). What must advisers advise?

      The employer being the client suggest keep existing scheme, with high charges and (possibly) commission, but no fee to the employer.

      The employee being the client suggest change the scheme to one with lower/fairer charges, cutting off legacy commission.

      What should a firm advise?

      Reply
  • From what I’ve seen there are a lot of firms doing precisely zero for their legacy commission. With new providers coming onto the market offering superior products, how can adviser firms justify keeping existing schemes that happen to pay legacy commission?

    And my real question is, how will the FCA view this when the complaints roll in.

    Reply
  • Follow the money !

    This phase of auto enrolment brings the biggest business opportunity that any adviser will ever see in their lifetime.

    Forget all the nonsensical charges currently mooted in this industry and look to develop a low charging proposition which will create lots of small regular payments over time.

    You will find enough new clients you can grow with who will stay with you forever and which will be the source of many referrrals.

    The person paying the money is the client !

    Reply
  • I used to get asked this a lot when I was provider side, and working in GPP-land.

    The clue is in the ‘PP’ part of ‘GPP’. A GPP is not a scheme. It’s just a bunch of individual policies grouped together for administrative ease. The adviser, if her agency code is against that individual PP as part of the GPP, is responsible for suitability of the product for that individual; they are the client.

    The employer is also a client; albeit normally on a fee basis these days (which makes it simpler).

    There’s a reason that the big EBCs always used to make sure that, when they were writing GPP/GShP business, the provider’s own direct agency code was against the individual policies and that their agreement was purely with the employer. They understood contract law, and risk.

    Thankfully, most GPPs are pretty benign in their structure and have been for some time (excepting the execrable AMD or Paid Up Penalty as I like calling it), so the chances of the adviser being spanked for an XO sale through their agency are minimal.

    But it would be dangerous to think of the employer as the client just because that’s where the relationship is. If it’s your name on that individual’s plan, they are a client of yours until you get your name taken off.

    It was all a lot easier in OPS days, when everyone knew that the trustees were the client, and they in turn looked after the members…

    Reply
    • So if the individual is the client, do all adviser firms have a responsibility to get the best deal possible? Which presumably means stopping legacy commissions

      Reply
  • As the one who thinks that the person whose pension is being funded is and should always be the client I guess I should explain further.

    The population in general has developed a mistrust of the pensions concept and need to be shown the value which they can add to their lives by doing without a little today to provide something for their futures.

    The mistrust in our industry in my opinion has come about from the almost total disregard of pension scheme members by providers and employers alike.

    Communication has been in arrears and in incomprehensible jargon leaving most people with no idea of how they were doing – I exclude Final salary Schemes here as they are not the target of auto enrolment.

    Changes in pensions legislation such as contribution holidays for employers have rarely been explained to employees and have mostly been to benefit employers as have laws which permit pension promises to be broken and expectations unfulfilled.

    As advisers we now have the opportunity to rebuild trust in both ourselves and our industry. We have facilities such as on line wraps which give clients the opportunity to view their pension fund for themselves whenever they choose .We can construct low cost electronic -( e-mails etc ) – ways of explaining what is happening to their money.

    People do understand the need to provide for themselves and will pay for good advice which demonstrates value but it will not be at the level we received in commission.

    Explain the effect of compounding to them and possibly to yourself as over time you can build a significant income from workplace pensions advice.

    This isn’t theory by the way as my firm has run Transact accounts for many hundreds of ” GPP ” arrangements over many years at 1% charging with great success.

    Reply

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