Spookily, a couple of hours after I’d published yesterday’s blog about how the DWP had ducked the dodgy question of how to sort out legacy pension charges, Steve Webb, the Pension Minister issued an appeal to the pensions industry to help Government out on this very issue.
So here is more help for the DWP- provided without obligation.
I can give Steve Webb a list of organisations with vested interests in this subject but very few who are not paddling their own canoe.
Fortunately I am not here to protect the insurers and their trade body , the ABI. Nor am I an IFA, a politician , unionist or a representative of an employer’s body. I speak with a wish to bring pensions , in this case legacy pensions “into repute”.
When Steve Webb talks about the outrageous prices insurance companies charge on the pensions they set up in the last century he has half , but only half, a point.
Contracts were entered into , usually between individuals and the insurer but sometimes between trustees – even employers – and the insurer. These clearly set out the contractual terms being entered into and even in those days, some form of disclosure of adviser remuneration was in place. People did not pay as much attention because pension plans were working, with high growth in the markets, low-cost annuities and a backdrop of a strong and confident occupational pension system (and state second pension). We didn’t pay much attention to the insurer’s “outrageous costs”.
Where Steve Webb is right is that no insurance company would think of levying those charges today. But then no electrical manufacturer would think of charging £1,000 for a small black and white box but that’s the price in today’s terms of a top of the range black and white TV forty years ago.
We do not accuse TV companies of charging too much at a time when things cost too much nor should we have a go at insurers for “sky-high” charges at point of sale 20-30 years ago.
But while those TVs are either in museums or skips, the pension plans are still going. In fact they are maturing today to the consternation of disappointed policyholders.
The question Steve Webb should be asking is why insurers have not migrated these plans onto their new efficient platforms , using new and efficient fund structures and clean and lower charges.
The insurers will say “why should we?” and even if they did offer upgrade options – as most still do, why should they offer an upgrade without transfer penalties. As I pointed out previously, those transfer penalties are a means to recoup upfront costs involved in setting the plans up, principally sales commissions to “advisers”.
The answer is not to require the insurers to banish these penalties but for them to adopt a system which makes those penalties fair. They can do this very simply by auditing the insurer’s method of establishing the transfer values on legacy pension policies and granting those pensions a kitemark ;- provided they can prove that they are “treating their customers fairly”.
We should encourage people to crystallise the repayment of upfront costs through penalties so that they can move on and get best value from here on in. Hopefully this will benefit insurers who will be able to turn off some of their legacy systems that little bit quicker. The trick is to be fair to both sides of the contract.
Obviously the judgement about what is “fair” will be controversial which is why we need an independent arbiter with specific skills (step forward the Government Actuary-GAD). GAD already do sterling work setting rates which are used by IFAs and policed by the FSA and tPR.
(The spaghetti soup of acronyms is unfortunate and demonstrates some need for consolidation of Governors!).
We need this specialist arbitration because we need more than the Labour Party’s suggestion of auditors – telling us what is going on today. We need financial folk who can take a view of what will happen in the future – our old friends the actuaries!
Once we have a kitemark attaching to a transfer value , policyholders and their advisers will be able to take a transfer of money to one of these nice clean new pension plans around today and do so without fear of mis-advising or mis-buying.
This may all sound very easy but it isn’t. To establish an agreed method of valuing transfers and putting in place the regular checks to make sure that the insurers are applying it is not going to be easy. It is however possible provided this is carried out by actuaries on both side. Like Doctors, actuaries agree to abide by professional standards which mean that while they don’t make sense to you and me, they generally make sense to each other and they can be trusted.
It was the actuaries who dreamt up these charging structures, the actuaries who understand how they work and it will be the actuaries who can sort this mess out. Who you gonna call- INDEPENDENT ACTUARIES organised by GAD .
Creating a system to upgrade our legacy pensions by exchanging them for new shinier models is a key task for Government and the many thousands they employ at their Regulators. It is good for IFAs who are currently bumming around looking for things to do (and generally getting in the way). More importantly, it is a way of bringing the pensions that we bought all those years ago into the brave new world, a way of restoring confidence in what is going on and nudging pensions a couple of inches back into repute.