Pensions World

Which camp are you in when it comes to active member discounts? asks Steve Watson, Alexander Forbes

In the ongoing debate centred on the concept of active member discounts (AMD), there are two distinct camps which have emerged from the conflict: those for and those against. The voices of those who favour the latter are certainly getting louder, especially now that prominent political figures have joined their increasing ranks.

Clouded debate

Quite simply, the independent camp which prioritises the needs of the client is the faction that I would recommend joining forces with. There is no doubt that for some clients AMD may be appropriate, but for others it is not and it is our job as consultants to provide the appropriate options which point out the pros and cons of the mono charge and AMD structures respectively. It is only when we have clarified the alternatives that we can make a recommendation based on specific needs.

In my view, either of these charging structures could work for a contract based scheme, but AMD is unlikely ever to be appropriate for a trust based scheme. This is where I believe the debate is getting clouded. Surely, the appropriateness of a number of scheme design elements, including charges, depends on what type of scheme you are dealing with?

Any financial services product that relies on inertia is fundamentally flawed; all benefits including pensions are about engaging members, not hoping that somehow they will not engage so that the pricing format actually works!

Simply spin

So, in terms of trust based schemes, our view is most definitely aligned with that of the Pensions Regulator, ie AMD is unlikely ever to be appropriate and any argument for it is, in my view, simply spin. A deferred member of a trust based scheme cannot continue to contribute into it and, until Steve Webb delivers on his promise to make transfer processes more streamlined, they are unlikely ever to transfer out to a more competitive charging product, ie under the AMD concept the deferred member is now an inactive member and subject to a higher charge.

Trustees have a responsibility to deferred members as well as active members. Could a trustee, consultant or provider really justify a charging structure that penalises a member for not continuing to contribute when legally they cannot? It is a rhetorical question!

Adequate communication

However, as an industry we need to be careful that we do not throw the proverbial baby out with the bath water. Under a contract based scheme, an AMD approach can be a positive structure where the annual management charge is set at a competitive level and there is a real discount given to members who continue to contribute to their pension.

The minimum contribution requirement for the leaver also needs to be affordable. Most providers offering AMD only require a £20 per month gross contribution to retain the lower charge! Some also maintain it after a continuous period of membership, usually ten years.

Providing there is adequate communication at the outset and in the event of a member leaving employment, this approach can be used to promote ongoing retirement savings that survive the employer/employee relationship while putting downward pressure on annual management charges.
A suitable approach to communication and education will help employees to buy in to retirement planning and so continue to save for their retirement after leaving an employer.

Positive approach

In conclusion, we see AMD applied to a contract based scheme as a structure that recognises economies of scale and, if used correctly, it can be a very positive approach for pension members. For trust based schemes, however, it is unlikely that the structure is appropriate.