I had an interesting conversation with Alan Higham of Retirement Angels.
Alan has recently purchase Annuity Direct and has been analysing the DC pots which are coming his way for annuitisation. I’d assumed that the pots would consist of units invested in cash and long dated gilts – the classic endgame of a lifestyle matrix. It turned out that 90% of the pots were invested in pure equities or managed funds. Of the 500,000 people estimated to be purchasing an annuity this year, the majority will be cashing in old fashioned DC plans – section 226, mark one and mark two personal pensions – no lifestyling, investments rarely if ever altered during the life of the policy, funds massively depleted by capital units, high AMCs on accumulation units and policy fees.
These are the outcomes of decades of unrestricted rape and pillage from the financial community, advisers taking commissions of up to 75% of the first year’s contributions, insurers loading charges into the back – end of contracts and levy swingeing early redemption penalties, policyholders abandoned with nowhere to turn for advice or ultimately restitution.
Stephen Tiley calls on the Pension Play Pen for us to turn our attention to the impact of all this and to find a way to put people right. I advised on such policies throughout the 80s and 90s and can see Stephen’s point. Ironically, one of the few pension providers who offered genuine value for money was the Equitable Life. By dint of their policyholders being well-educated, well-heeled professionals, the Equitable policyholders have received some restitution for a problem associated with over-distribution of bonuses and guarantees.
There is a moral case, as Stephen argues, for Zurich (Allied Dunbar, the Prudential, Lloyds (Abbey Life ) and other financial institutions to top up the pots of their legacy policyholders. But it’s only a moral argument. The insurers in question have done what they said they would and while it can be argued that the commissions paid to advisers were never earned (ongoing advice rarely being provided), the abuses associated with commission are more properly regulatory failures which have at last been put right.
The point of this article is that we will, if we continue to grind our teeth about the iniquities of the past, lose focus on the future. Despite many of these policies having been taken out 20 or even thirty years ago, they are only now maturing. The damage we can do to the policyholders retirements by failing to get them best annuity rates is today’s problems. People like Alan Higham have identified the scale of the problem and decided to do something about it.
Throughout Britain , people are continuing to save into personal pensions with charges way higher than they should be. While the old mark one and mark two pensions had early surrender or “paid-up” charges, the mark 4 (stakeholder and stakeholder equivalents) don’t have these charges. Many of these new style pensions have been established through corporate sponsorship as group personal or group stakeholder pensions.
Unsurprisingly, the providers of these corporate plans are not advertising the fact that the opportunity exists to bring down the charges through re-broking. Instead they are busy bringing to market new versions (personal pension mark 4) the so-called corporate wrap accounts. It is a shame that so many reputable employee benefits consultants have become obsessed by these corporate wraps and seem to be oblivious to the fate of those int he plans they have set up for their clients in years past.
Just as Alan Higham has decided to do something about those “at retirement” so First Actuarial have decided to do something about the legacy DC plans established over the past twenty five years.
We have only so much energy, so much time , so many people and the challenge is that there are literally thousands of group and stakeholder pensions, CIMPS and even COMPS that need our attention. History suggests that these plans will be abandoned as so many of the individuals sold s226 and mark one personal pensions were abandoned.
Our task is to make sure this doesn’t happen.
- The Pension Play Pen on good DC outcomes (henrytapper.com)
- What we can and cannot do (to provide our staff with better DC pension outcomes) (henrytapper.com)
- What really matters -DC outcomes (henrytapper.com)
- A blueprint for DC pensions (henrytapper.com)
- Clearing up a few things around pensions (henrytapper.com)
- The outlook for pensions: Sharing the burden (economist.com)
- Defined-contribution plans: Over to you (economist.com)
- Behavioural economics: A nudge and a wink (economist.com)
- Equitable Life: timeline of a two-decade disaster (telegraph.co.uk)
- Should men claim pension benefits early? (confused.com)
- Tell them the truth (a ridiculous notion) (henrytapper.com)
- Equitable Life investors paid to go (telegraph.co.uk)
- Equitable Life investors paid to leave (telegraph.co.uk)
- The State can take longevity risk. (henrytapper.com)
- Equitable Life investors paid bonus to leave (telegraph.co.uk)
- Advice where advice is needed (henrytapper.com)
- Falling short (economist.com)
- Annuities explained (confused.com)
- Annuity Value – How To Guarantee Your Annuity Value Will Never Go Down Again (annuitycampusblog.com)
- It’s not just about costs (economist.com)