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The Actuary The magazine of the Institute & Faculty of Actuaries

Pensions under the RDR

The Retail Distribution Review (RDR) has taken a long journey from [former Financial Services Authority (FSA) chief executive” John Tiner’s concept in 2006 to its position today. As it stands, the new FSA rules spring into life at midnight on 31 December 2012. More recently, some of the RDR’s specific applications to individual product lines have come under consideration. Corporate pensions have been through a separate consultation process and now have their own specific rules.

The RDR affects those corporate pension products whose sale currently comes under the jurisdiction of the FSA. Occupational pensions are not affected, but products such as group personal pensions, group stakeholder pensions and group SIPPs are. Under the RDR, commission is banned for general retail investment business and is to be replaced with the new concept of Adviser Charging — remuneration paid by the consumer to the adviser (or paid by a product provider on the instruction of the consumer) on a pre-agreed basis that is not dependent on any product or provider recommendation.

The FSA’s remuneration position for corporate pensions recognises the different sales approaches typically taken in this market. The two scenarios shown in Table 1 (see below) are common, but by no means the only ways in which advisers sell corporate pensions.

The RDR introduces the concept of consultancy charging. This is the corporate pensions equivalent of adviser charging for the retail investment market. The consultancy charge will be agreed between the adviser and the employer and will be levied on employees who choose to join the arrangement. The mechanics for the payment of the consultancy charge will largely mirror those for adviser charges and may be deducted from contributions paid by the employee and passed over on a onefor- one basis from the product provider to the adviser. So what will be the impact of consultancy charging on the common sales scenarios?

Employee benefit consultant (EBC)/fee
>> Little or no impact
>> No commission was being paid previously, so there is no effect of commission ban
>> Consultancy charging is an option, but no reason why the current approach of the employer paying a fee to the adviser should not continue.

Independent financial advisor (IFA)/ fee
>> Consultancy charging arrangement will be needed as commission is banned
>> Little impact other than where commission is currently indemnified, although the mechanics of agreeing a charge and spreading it over X number of members may be problematic.

Neither the EBC model, nor the nonindemnified commission IFA approach look like they will be significantly affected by the RDR. Existing practices can continue almost unchanged. However, the FSA has already detected moves towards EBCs receiving commission on product sales, so it remains to be seen whether a combination of financial pressures on employers and the introduction of consultancy charging might lead to further transfers of cost from employer to employee for traditional EBC business.

The biggest impact of the RDR on corporate pensions will be the removal of indemnity commission for new schemes for that part of the IFA market where commission remains important. Over time, the number of providers offering indemnity commission has steadily reduced, so market forces have made it a limited problem. However, until the RDR comes into effect, indications are that indemnity commission will remain an option for those IFAs who wish to transact business on this basis — raising ‘buy now while stocks last’ concerns. After the RDR, these IFAs may find that they cannot continue to operate in this market without ongoing indemnity commission.

The introduction of consultancy charging removes the scope for commission bias in the corporate pensions market, a clear objective of the RDR. However, despite introducing rules specifically for this market, it is likely to be less effective than for the mainstream retail investment market. A fee levied on employees, agreed by the employer, is very different from an adviser charge, negotiated and agreed between adviser and consumer. Time will also tell just how workable the mechanics of consultancy charging are.


Paul Shallis is a principal advisor in KPMG’s life actuarial practice