With four different Master Trust products being launched over the last number of weeks, I found myself logging onto a number of webinars to find out more about these new products that are replacing one person company pension plans.
One thing that struck me was all the life company wanted to emphasise that financial brokers wouldn’t be losing out on their commission options under the new Master Trust structure.
In the absence of the Central Bank changing the rules, this was an opportunity for life companies to move away from the complex smoke and mirror structures of pensions and they passed it up.
Firstly, early exit penalties have been removed so policy holders can transfer their pension benefits to another provider whenever they want. Previously, most pensions had penalties if you moved your benefits in the first five years. This gave the life company a period of time to start making some money on the policy (it can take a number of years for a life company to start making a profit on a policy). It also insulated the financial broker from commission clawbacks.
When commission is paid out on a pension, the policy has to remain in place for four years (usually). If it is moved, there is a proportionate clawback of commission. With the early exit penalties, financial brokers are protected against this and their only risk is when the policyholder stops making contributions.
With the removal of early exit penalties, jeopardy now shifts to the financial broker. There is nothing to stop someone moving to another provider at any time. Someone can easily move job in that time and take their pension to their new employer. Four years is a long enough time for someone to exposed to a clawback, so we can expect there to be an increase in clawbacks
Secondly, all transfer values are to get an allocation rate of 100%. That is, if you transfer €100,000 from another pension, €100,000 is invested.
This was an opportunity for life companies to move away from the commission model for pensions. Every investment starts with 100% allocation. If someone wants to pay their advisor from their contribution, it comes straight out of their contribution. As the life company isn’t paying any commission to the financial broker, they have nothing to recoup, so the management fees will be lower. This benefits the policyholder in the long run by having lower ongoing fees.
This would mean each provider has one contract structure for their Master Trust pension.
The life companies did their best of replicate the old executive pension charging model. There are four providers of Master Trusts and 13 (THIRTEEN) different charging structures for the monthly pension contracts. Some of these contracts see policyholders having just 97% of their money invested. The financial broker gets 20% of the first year premium on that one!
There are 14 different contracts for single premium contracts. Instead of reducing the annual management fee and giving 100% allocation, there are contracts that have an allocation rate of 104%. But the most the policyholder can get is 100%, so the financial broker gets the 4% in commission. With no exit penalties, they can’t ask the policyholder for the 4% back if they transferred out but they can do a commission clawback on the broker
As someone who charges fees to implement pensions, commission clawbacks aren’t a issue. But what struck me is that more financial brokers than I thought are still charging large commissions to set up pensions for people. And these financial brokers have a big influence on the product providers.
This was a real opportunity for product providers to start changing the way people pay for advice, one that they sadly passed up.
05 December 2022