Why your personal pension/FSAVC may be worthless.

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Stephen Tiley’s starting a campaign to get restitution for those who invested in valueless FSAVC and Personal Pensions. You can read about it here.

The comment box isn’t working so I’ll blog a response here as Stephen’s opening a can of worms I’m quite sure a lot of people  would prefer kept shut.

In the old days before stakeholder pensions, insurance companies were able to employ back end loaded charging. What this meant was that units you purchased in the first 24 months of a regular premium policy like a personal pensions, Retirement Annuity Plan, FSAVC , EPP and some AVCs would carry a supplementary charge of up to 6% pa. Supplementary to the 1% charge you paid on units later in the life of the policy.

This 7% pa charge on initial or “capital” units is to cancel out part or all of the growth on the units. Indeed, in times of low unit unit growth (as we’ve experienced on equity based funds in the past ten years, these units can reduce in value to a point where they are pretty well worthless.

Provided you bought a policy with these expensive initial or capital units and then bought lots of accumulation units in subsequent years, you’d find the impact of the 7% charge diluted to reasonable levels. However, if you stop paying into a policy which you took out on a monthly or annual premium basis, you’ll find that the 7% charge may not only be reducing your policy’s growth but actually reducing its value in real terms.

As Stephen points out, many of these policies purchased in the 1970s onwards are practically worthless today,

Now this may sound scandalous but I’m afraid that policyholders have a tough fight if they are going to get compensation in the way they did on personal pension transfers or with the endowments covering mortgages.

The high charges on pensions were justified by insurers because of the high price of advice demanded by the people who sold them. IFAs and direct salesmen could take up to 75% of the first year’s contributions (premiums) as a commission on these policies. Add to that the relatively inefficient insurance company administrations, their high overheads and the high cost of active fund management employed in those days and it is easy to see why the capital unit charge was so high.

But there are questions that the insurers need to answer;

  1. Was the “advisory” charge payable to advisors warranted in terms of advice or was it a mutton dressed as lamb sales commission which only benefited the adviser,
  2. Did the insurance companies really design their products to be reuseable or were they happy to allow one individual to take out policy after policy, each with the high charges of these capital units.
  3. Did some advisers deliberately avoid the option to reuse existing policies to get more front-end commission (churning).

I suspect that any individual who has lost out in this process could put up a pretty good case in court to demonstrate that the answers to these questions amount to a total failure on behalf of the insurers and advisers to “treat their customers fairly”.

Stephen seems to be suggesting a case for a “class action” similar to those mounted to get compensation in other areas of mis-selling. Ironically, one of the few companies that would be exempted from criticism for the practices mentioned would be the Equitable Life. Charges on their contracts were considerably lower than from their commission paying rivals. This was not because they did not reward their advisers, but because their advisers spent most of their time advising, rather than hunting down sales.

Interestingly, the Equitable model which is now adopted by high-brand IFAs like Hargreaves Lansdowne – does lead to substantially better outcomes for customers. The model does however assume savvy customers and there I suspect is the problem.

The world is split between the financial services purchasers who get value from their policies by buying well (a small minority) and the rest of us who take what we are offered.

The question that the insurers and possibly the law courts need to answer is whether they will compensate their policyholders for mis-buying?

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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