Over the next couple of years, two major legislation changes are set to be implemented as part of a consumer protection strategy and a government initiative aiming to restore consumer trust back into the market.
Tobin Murphy-Coles, commercial director of Lorica, explained:”Where HR directors used the old commission system to budget for an effective pensions and financial advice programme for employees, new rules under the Retail Distribution Review means that many HR directors will need to write a cheque for the service – or agree that it will be deducted from the employee’s fund. This will not be an easy transition or choice for many organisations, particularly with budgets squeezed as tight as they are.”
Changes to the Retail Distribution Review (RDR) implemented by the Financial Services Authority, aims to improve the clarity in how firms describe their services to consumers by increasing the professional standards of investment advisors and addressing the potential for advisor remuneration to distort consumer outcomes.
Under the changes, from 1st January 2013 commission used to pay financial advisors will no longer be used on new schemes and instead, companies will be expected to foot the bill, either directly or by deductions from pension scheme contributions.
Murphy-Coles said that the impact of the RDR is going to be wide-reaching: “The RDR will hit a HR director’s budget hard,” he said. “For many businesses, commission paid to advisors has allowed full engagement and advice to staff when it would have been far more difficult if it was funded by a fee paid by the employer.
He warns that such changes to RDR could exacerbate the old dynamic between HR directors and FDs who each have potentially conflicting priorities. The former must engage with employees and continue to be an employer of choice, whereas the latter must save costs and show ROI.
Previous research carried out by global leader in assurance, tax and advisor services, Ernst&Young, reveals that under the RDR, it will not be financially viable for banks to give advice to the mass Market. Ernst&Young predict that banks will have to charge at least Ã‚Â£200 per hour for advice just to recover their costs.
“It’s a triple whammy for HR.” Murphy-Coles said. “In addition to dealing with legacy DB issues and cost, HR is also coping with the spectre of finding fees to provide education and advice to employees under the RDR changes, plus the additional funds to cope with the new auto-enrolment.”
Auto-enrolment, a further piece of legislation which comes into effect from October 2012, requires employers by law to enrol their staff into a pension scheme, making contributions on their behalf. The exact date each company will need to comply depends on the number of employed staff on 1st April 2012.
As pensions remain the highest costed benefit which businesses provide, this is likely to be exacerbated further as auto-enrolment and RDR changes kick in, requiring some businesses to find significantly more budget.
Murphy-Coles said: “Employees are going to be auto-enrolled at a contribution that will not be anything like the amount needed to meet their retirement aspirations. Their need for education and advice will be essential, yet under the changes, HR budgets will be really squeezed to foot the bill.”