Who should take responsibility for the long-term management of pension portfolios post-A-Day? Ultimately, it is only the adviser who can know which of their clients are affected
Chris Cummings, head of AIFA, has recently reported (un-named) product providers to the FSA for their lack of preparation over A-Day. He reportedly said that providers were too quick to blame 'bad advice’ and forget the vital role that they had to play in preparing the nation for pension provision post-A-Day. This raises the issue of who does have the duty of care for consumers' pensions? Is it providers, regulators, advisers or consumers themselves?
According to Cummings, some providers had blamed HM Revenue & Customs for not providing sufficient guidance. He believes it is vital that there are products out there to address the change in tax rules and some providers are ill-serving their client base of both advisers and consumers.
The next generation
It is clear that this is a very real problem on a number of levels. Initially, the new generation of pension products require much more management than previous generations. When personal pensions just consisted of a managed fund or two, it was possible just to sell it (or buy it) and ignore it for the next 20 years. Clearly, this proved a poor investment strategy, but the structure of the product required no day-to-day upkeep.
The new generation of 'platform-style' pensions, with their links to different fund groups, require a lot more day-to-day upkeep. With the wealth of fund information available, it would be difficult to justify keeping a client's pension in an underperforming fund for any length of time. These products imply, by their very nature, that advisers will be monitoring clients' portfolios, re-assessing their asset allocation and looking at their fund choices.
In addition to the structure of pensions, A-Day introduced some hefty pitfalls for advisers who fail to analyse all their clients' long-term pension outlook. For those clients who already had a £1.5m pension pot at A-Day, using the primary or enhanced protection offered was a no-brainer. But there is worry germinating in the industry over the fair few individuals who may be 40 with a pension pot of £500,000 or so.
These individuals would not be an obvious target for the protection offered. Yet, even moderate stock market growth could send them over the £1.5m limit by the time they are 60 or 65. How happy will they be with a 55% tax charge? Dave Lowe, pensions management director at Zurich, believes this is an important issue and one that may have been overlooked by some providers and advisers.
These and other factors show the importance of constant monitoring of consumer pension portfolios, both from the investment side and the regulation side. Who should be doing this?
The role of the provider
On the investment side, it is fairly simple. Providers can keep advisers updated of new funds that are being added to the platform. They can also keep advisers informed of rating changes or fund manager changes for the range of funds on their platform. They can provide asset allocation tools to help with portfolio construction. Some pensions' providers do remove underperforming funds from their platforms, but this runs the risk of the performance chasing that has led to so many of the criticisms of the investment industry in the past.
But what providers cannot do is make the final decision. They can provide tools for risk profiling, but they do not know the client or their risk profile. That is the adviser's job and he cannot delegate it.
The role of the adviser
The responsibility for the day-to-day monitoring of a pension portfolio must lie with the adviser. If it lay with the client, why would they be seeking advice? Issues like multi-manager muddy the waters, but it is increasingly clear that while an adviser can outsource the fund selection to a multi-manager, they cannot outsource the responsibility.
Responsibility for legislation is a thornier issue. It may sound utopian, but legislators and regulators should have a responsibility to listen to the industry when making changes, especially if they expect the industry to help them solve the pensions' crisis. They also have a responsibility to make sure those changes are clearly stated and practical. If they do not, one of the numerous representative industry bodies should speak out, which they have not been terribly good at doing over the years.
Providers clearly have a duty to the client base to inform them if their products are affected by changes in legislation. They also have a duty - and a commercial interest - to provide products that help advisers deal with those changes as effectively and quickly as possible. They need to help advisers do their jobs efficiently.
But ultimately, only an adviser can know which of their clients are affected by A Day. If a client faces a 55% tax charge on his pension in 15 years, guess who they will come to first? It is a sad fact of life that advisers are often powerless to stop the course of legislation and are usually the ones who have to bear the brunt of its impact.
Advisers need to find a way to get paid for this. It will become increasingly hard to manage clients' long-term pension provision while relying on initial commissions to get paid, because the product has already been sold and advisers will not get paid for the day-to-day management of it. Advisers will need to think long and hard about their business models under the new pensions' regime.
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From 6 April 2019