Scottish Life warns of ‘hidden dangers’ surrounding active member discounts
Wednesday, 22 October 2008
Scottish Life, the pensions specialist arm of the Royal London Group, has highlighted the potential dangers of 'active member discount' (AMD) charging structures in a document for IFAs.
AMDs have been introduced by some providers as a two-tier charging structure, with a higher annual management charge (AMC) for 'paid up' or 'inactive1' members of group personal pensions, and a lower AMC for those who remain with the company and continue making contributions.
In the web article, 'Active Member Discounts - The Myth of the Free Lunch'(www.scottishlife.co.uk/dualamc), Scottish Life debunks many of the arguments used by AMD providers to justify this dual AMC approach. For example:
Argument: The AMD contract is cheaper
Scottish Life's response: "Our projections demonstrate that these contracts may cost customers more than a comparable 'Factory Gate Price' model. Also, FSA persistency reports show that nearly 50% of GPP policies have stopped paying premiums after three years and the percentage is increasing. And the experience of most providers is that policies will typically stay with that provider as a paid up policy for many years after ceasing premiums. That's a lot of extra charges and a compelling reason to look beyond the discount."
Argument: Long-term members benefit from AMDs
Scottish Life's response: "In fact, those who serve many years with one employer but leave when they still have some time to go until retirement are likely to lose out most under AMD. This is because they have built up sizeable funds but still have several years before they can claim their pension, during which the higher AMC will apply to the sizeable fund."
Argument: Short-term members pay more with AMDs, which is fairer
Scottish Life's response: "How 'short-term' is 'short-term'? It stands to reason that if you have a small fund, for example where less than a year's contributions have been paid, then it doesn't really matter how high the paid up AMC is, the charge in ? terms will be low. So that member will pay little towards the overall costs and other people will have to pick up the tab."
Argument: AMD is the way forward for AMC-based commission
Scottish Life's response: "There is no way forward for AMC-based commission. AMDs fly in the face of the FSA's challenge2for providers to stay out of setting adviser remuneration. Customer Agreed Remuneration (CAR) is the future. We can't see how AMDs with commission are compatible with CAR. AMDs with commission are just a pretence that it's possible to achieve Personal Account levels of AMCs within an AMC-based commission model."
Alasdair Buchanan, Head of Communications at Scottish Life, said:
"We believe AMDs, as are typically available at present, run an unacceptably high risk of not meeting the requirements of the Treating Customers Fairly principles. This is a risk for advisers as well as for the providers which offer the AMD charging structures.
"In our view, AMC-based commission has a very limited shelf-life. CAR is the future for the commission market and modern remuneration models, such as our Financial Adviser's Fee, offer a fairer, more transparent and more sustainable solution.
"The pricing structures with AMDs are extremely complex and advisers need a complete understanding of both the benefits and drawbacks. Our document has been designed to help de-bunk the myths surrounding AMDs. It includes some questions IFAs might want to ask AMD providers, so that the adviser has the information needed to make a fully informed recommendation to their clients. It illustrates Scottish Life's ongoing commitment to provide Independent Financial Advisers with the support and information they need to give clients the best recommendations possible."
- ENDS -
1 Typically the 'paid up' or 'inactive' members of the group personal pension (GPP) will have left the company's employment and therefore make no further payments into the GPP. However it may also include the situation where the GPP has been closed, for example if the company has gone out of business or the employer has decided to wind up the pension arrangements.
2In the FSA's Interim Report of responses to the Retail Distribution Review Discussion Paper.
For further information please contact
Scottish Life
Alasdair Buchanan, Head of Communications
0131 456 7133
Polhill Communications
Nicola Pierce / Jenette Greenwood
020 7655 0530
Editor's Notes:
Scottish Life was founded in 1881 in Edinburgh as a proprietary company, becoming a mutual company in 1968.
On 1 July 2001, Scottish Life demutualised and transferred its business to The Royal London Mutual Insurance Society Limited. Scottish Life is a division of Royal London and is the specialist pensions business within the Group, providing individual and group pensions to the market via intermediaries.
Scottish Life and Royal London's other intermediary businesses are based in Edinburgh where 1,200 staff are employed, with 600 working in other parts of the UK and overseas.
Royal London Group is a specialist financial service provider. Its businesses focus on those sectors of the market which value quality propositions, operating through a number of brands:
- Scottish Life - UK pensions market
- Bright Grey - UK protection market
- Scottish Provident - UK protection market
- Phoenix Life Assurance Limited - provides life and pensions products to Abbey's national branch network
- Scottish Life International - offshore investment markets
- Scottish Provident International - offshore investment markets
- RLAM - fund management
- RLAS - life and pensions administration
- Fundsdirect / Ascentric - funds supermarket; Wrap platform
Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £32.4 billion. Group businesses serve around three million customers and employ 2,750 people. Figures quoted are as at 30 June 2008, prior to the acquisition of Scottish Provident's new business capabilities (in respect of individual life protection business) and of Phoenix Life Assurance Limited.