“Commissions structures review - a step in the right direction,” says PPS Investments

The reforms proposed by Treasury earlier this year to commissions structures and reduced penalties on the transfer of retirement annuities is a step in the right direction. If adopted, they will come into effect in August and bring great benefit to the average investor.

Nick Battersby, CEO of PPS Investments (PPSI) – the investment arm of PPS, The Professional Provident Society – warns that the positive spin and hype being placed on these proposed changes to the underwritten products need to objectively assessed. They should not be misconstrued and this certainly does not mean that investors should nowrecklessly go and make decisions without weighing up the pro’s and con’s.

Currently, there are twodifferent product structures within the broad category of retirement annuities. On one hand, is the traditional under-written RAprovided by life offices, and on the other a new generation unit trust based RA provided by linked product companies and asset managers. This is an important distinction, since the issues addressed in the Treasury reform paper are only relevant to the traditional products.

The proposals shouldmake it easier to be able tomigrate from thetraditional products to the new generationRA products on offer. They address commission levels payable and the timing of these payments, as well as significant reductions in the penalties that traditional funds have been able to charge members to move their assets to the new generation funds.

While the penalties to migrate have not been done away with in its entirety, the drop from 30% to 15% is a step in the right direction. Up front commissions will now be limited to 50% of the full commission. This still falls short of the arrangement with the new generation unit trust based RAs where fees are only paid at the time of the premium payment, i.e. on an“as and when” basis.

The announcement of these proposals has certainly led to an even greater number of investors seeking to transfer to the much less expensive and simpler model of the new generation RA. A relatively simple calculation will illustrate the break-even point and hence whether or not it makes sense for the investor to incur a short-term penalty in the interest of a lower cost environment for the rest of their contributing period. With the reduction in the maximum penalty, the barrier to leaving an under-written fund has been halved.

The move towards an “as-and-when” commission model will in all likelihood hurt some intermediaries, especially those who were not servicing the financial needs of their clients on a continuous basis. The positive spin-off from this model will encourage a more professional and continuous service being offered to the investor.

Battersby offers the following advice, for people looking for a new RA. “The traditional product has become slightly more attractive to investors than it was before, however an indepth comparison with the new generation product is essential and specific to each individual. A thorough analysis and understanding of the subsequent charges that may exist i.e. can you switch your investment options, are there heavy annual policy costs etc” is essential. For those in traditional RAs; a reduction in premium will still incur a penalty, albeit that the penalty will soon be reduced. For those looking to transfer their RA, find out what your penalties would be and assess the cost differential with your financial advisor.”