A state of independence

This summer, the FSA published its latest consultation on the road to delivering the Financial Services Authority’s Retail Distribution Review. Foresight examines the implications for employers and employees.

It is more than two years since the Financial Services Authority (FSA) launched its Retail Distribution Review (RDR), looking at how investments are distributed to retail consumers in the UK. Following discussions with industry and consumer representatives, the FSA’s latest paper proposes amendments to regulatory requirements with a view to:

Roger Breeden, principal, Mercer believes that this is a positive step on the part of the regulator. “The FSA is trying to have clear water between what is fully independent advice and advice which is described as ‘restricted’,” explains Roger.

For the consumer, the upside of this is that those receiving restricted advice, from a bank with its own range of products, for example, will be fully aware of such limitations. The downside is that the market may become polarised with those offering independent advice concentrating on higher value clients.

“In an ideal world everybody would get completely independent advice but there is a cost to that in terms of the research and delivery, which might put it out of reach of many people,” says Roger.

The changes create an opportunity for companies to step forward to ensure that their employees do not lose out. “Although an individual may find independent advice too costly, an employer could establish a group advisory programme with a firm that would deliver the right service at a reasonable price.

Operating as a group is far more effective than each individual negotiating their own terms with an adviser,” explains Roger. Mercer’s response to the consultation addressed issues surrounding the group pensions market. “This is at a much earlier stage of the process,” says Roger. “The FSA is trying to work out the best way of structuring remuneration – with the aim of ending remuneration bias. Firms must agree charges in advance with clients, and product providers will be banned from offering commission to secure sales although charges can be deducted from the product costs.”

The FSA plans to raise the qualifications level for advisers and set up a Professional Standards Board, a measure to ensure that those dispensing advice are duly qualified. Advisers will also be prevented from recommending products that automatically pay commission. Roger welcomes both provisions as a means of “improving clarity and choice for consumers”.

Don’t duck the advice plea

Mercer welcomes the latest guidance from The Pensions Regulator and the Financial Services Authority as a driver to aid employee engagement.

The Pensions Regulator (tPR) and Financial Services Authority (FSA) recently published a guide for employers entitled "Talking to your employees about pensions". The publication highlights how employers should advise employees to make decisions about their pensions. It also makes clear that offering such advice not only benefits employees but benefits employers too.

What is clear from the guidance is that employers will have to ensure that they have the right people, working with the right resource material, to ensure consistency and compliance with this guidance.

Engaging employees

Getting the message across to your people in the right way is key.

Employers could consider segmenting the workforce without falling foul of discrimination legislation. Different groups have different needs. Tailoring advice services to different parts of the workforce can have the desired effect where it is valued most.

In addition, employing filtering techniques such as the use of workshops can help to allocate an expensive resource. An effective way to ensure regular engagement with employees is for employers to send regular pension updates by e-mail. Ultimately, however, tPR and the FSA stress that it will be the work done on the ground, in face-to-face meetings for example, that will facilitate the best two-way communication.

Support for employers

There are benefits of working with a preferred benefits adviser. The adviser will get to know the detail of the benefits programme and all the areas of detail that could be otherwise overlooked. At its best, a good adviser relationship can effectively be an extension of the pension or benefits function in an organisation.

Some employers and trustees would argue that there is a reputational risk and possibly a financial risk by being seen to work with preferred suppliers. Advisers have regulatory responsibility to their client i.e. the employee or scheme member, even if someone else is meeting their costs.

As with any other supplier relationship, a robust procurement selection and review process helps manage this risk, as well as clear two-way communication. Naturally, advisers will be keen to maximise any commercial opportunity, so the terms of engagement need to be agreed by both sides. Being clear about the content, quality and timeliness of delivery is key to a successful outcome.

And keeping employees firmly in the picture will help benchmark the adviser’s service. Are they receiving the right level of support and is it empowering them to understand and value their benefits? After all, it is employee appreciation and satisfaction that will reap the rewards for the employer.