Edition: March - May 2015
RETAIL DISTRIBUTION REVIEW 2
Employee benefits for the employer
Where one party gets advice and another pays for it,
By definition, the RDR deals with financial advice in the retail market. But this is not always entirely so. The proposals can impact on retirement funds too.
Take the common situation where advice is provided to an employer on employee benefits. Are the advice fees to be paid by the employer directly or the employee indirectly, and to whom is the advisor responsible for ongoing service inclusive of fees? Can the advisor be an agent for both employer and employee, especially given the RDR’s pains to avoid interest conflicts?
Employee benefits are often found in employment contracts. They may include:
The advice given to an employer in relation to the occupational retirement fund, to which its employees must belong in terms of their employment contracts, could include advice on investment portfolios. These would be portfolios to which the employees may be entitled, in terms of the fund’s rules, to instruct the fund to invest the balance of the contribution(s) paid to the fund each month for their benefit.
This would be after deduction from those contributions the amounts required to provide for such costs as premiums to the fund’s insurers, the fund’s administration costs, and certain commissions. Advice on these employee benefits is usually provided to employers without regard to the specific circumstances of individual employees.
However, the cost of this advice is often borne by the employees themselves. It happens by the deduction of commissions payable to the advisors from the premiums payable (whether by the employer or the occupational retirement fund) to insurers, contributions payable to retirement funds, medical schemes and funeral schemes by the employers and/or the employees, particularly if the employees are employed on a total cost-to-company or total-package basis.
If they are, then the employer – to whom the advice on the choice of insurance product to manage its liabilities for ‘unapproved’ risk benefits (such as group life, group short-term and/or group permanent disability cover and funeral cover) – may not be particularly concerned about the cost of the cover. This cost will be borne by its employees by adjustments to their take-home pay.
The problem posed by the provision of cover to the employer at cost to its employees may be aggravated by arrangements where the occupational retirement funds – to which the employees belong– act as “conduits” for the transmission of premiums to underwriters of both the employer’s (unapproved) risk benefits and/or the retirement fund’s (approved) risk benefits.
For example, there’s a contract between an employer and its employee which provides that the employer will contribute to the occupational retirement fund at an annual rate of 10% of the employee’s pensionable remuneration and the employee will contribute to it at a rate of 7,5% of that remuneration. Then the fund– by agreement with the employer, and without the employee necessarily knowing – may make certain deductions from the employer’s contribution to the fund.
These would be the costs of premiums payable by:
As is often the case, the underwriter is the same for both sets of cover and quoted on the provision of both. Here the cost of the employer’s premiums will serve to reduce the amount otherwise allocated by the occupational retirement fund to the provision of retirement benefits for the employees, even if they are not employed on a ‘total cost of employment’ basis.
By arrangement with the insurer, the occupational retirement fund may deduct from the premiums the commissions payable to the employer’s advisor and pay them to the advisor.
The advisor may also be rewarded for investments made by the occupational retirement fund in specific investment portfolios on the instruction of an employee member of the fund, whether or not the investment was made on the advice given by the advisor to specific employees. That reward may be payable by:
This latter reward may take the form of a commission deducted from the contributions paid by the employees each month to the medical scheme, even if they were not themselves advised by the advisor..
Likewise, the advisor may be rewarded by the provider of funeral-benefit cover for placing the employer’s funeral-benefit business with it. In either case, if the employees of the employer are remunerated on a ‘total cost of employment’ basis, these employees will bear the cost of the advisor’s reward.