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.
Henry, as ever an interesting slant on the state of the pension world. It does however beg some simple questions, If I was renting one of your £1000 B&W TV’s in the 60’s from good old “rediffusion”(a name from the past) and along comes colour what stops me switching at the right time to one of the latest colour TV. This means I still keep some of the benefits that I have gleened from my original purchase but channel my new found watching pleasure through the new medium of colour?
The same is true of pensions, many pensions sold early on had higher charges i.e. bid offer spread on contributions, something which I hope is dead and gone, but in 2001 we saw the introduction of mono charged Stakeholder and Personal Pension Plans. Many of the outdated charges went by the by and where not all old style pension can be transferred without penalty there are many that you can cease putting good money after bad into and redirect your efforts to the new shiny value for money style!
Few poeple benefit from buying a pension and ignoring it for 40 years until they retire to find out whether it was any good. These types of decisions are made good by regular review and advice, small touches to the tiller if you will as you travel along your retirement journey. Would you expect to take the Lady Lucy all the way along the Thames safely whilst sat below sipping coffee, I thnk not. Old style pension pension plans are exactly that and I for one was glad to see the introduction of Stakeholder style charges and reduced commissions as suddenly everything was transparent and and clear. No actuarial camera tricks just simple face value charges and fund values.To use your phrase, “It is good for IFAs who are currently bumming around looking for positive things to do (and generally getting in the way)”…. maybe if more IFA’s where getting in the way and advising their clients on their alternatives on a regular basis we would have less dissapointed consumers and less savings gap!
DC pension provision in one way shape or form is teh future of pension provision and teh sooner we wake up to this the sooner we will turn the corner with our country’s saving gap. Unfortunately the days of open DB schemes where members need not involve themselves are sadly gone and the 14 milion people in this country who have no pension provision need to realise that they have a part to play in their own retirement future. The sooner we all take responsibility for this and start to spread the good news about the current pensions available the better, unless you are a polititian in which case they don’t understand pensions anyway and should take advice form RELIABLE industry sources.
Steve
In the DWP paper they talk about advised an non advised switches. The non-advised looks like being for auto-enrolled pensions (eg high quality stuff- supposedly) while legacy pensions -PRe RU64 presumably, will neeed advice. I can’t see how advisers can establish whether DC transfer values with whopping penalties are offering good value or not- it depends on the insurer’s methodology, integrity etc.
Do you agree that haing a kitemark against a DC transfer value would be helpful to advisers trying to get people to upgrade their old stuff or do you think it is another bit of regulatory hoopla we could do without?
It was possible, in those old days of initial units, for example, to discontinue payments and start again. In the context of this discussion, starting again would mean putting new contributions into a mono-charge product. This is fine, and any informed customer could work this out for him/herself and do the necessary work. The trouble is, of course, that the only people likely to be that well informed were advisers and the people who work for the insurance company. And who would pay an adviser/sales-person to deal with the establishment of the new product.
Turning then to the money left with the old product, how is it to be released? Well, it isn’t because, certainly in the case of initial units, it’s the increased drag on the investment performance that is supposed to pay for those high set-up costs: the costs have been borne so it’s not reasonable to expect an insurance company to write them off (especially a mutual, of which there used to be not a few). So the surrender value is the discounted value of the unrecovered drag: I think of it as paying now (the surrender value) or paying on the drip (over the rest of the life of the policy).
I’m not sure the comparison with the TV works too well. Henry, you talk about a contract: that is what a pension policy is. It’s fashionable to talk about products, but a pension plan isn’t (though a TV is).
The difficult cases are the old-style with profits plans which definitely worked like contracts – policyholder agrees to keep paying and, if (s)he does, the insurer agrees to pay a specified amount at retirement along with accumulated bonuses. It’s difficult because the surrender value is difficult to understand (well, it is for me). And my first solution – suspend payments into the old and start payments into the new – doesn’t necessarily work because I for one don’t know if the paid-up value is fair.
So would the Kitemark just say, yes that’s a fair surrender/ paid-up value? Would that help the customer who only looks at what’s been paid in and what’s coming out? I don’t think it would.
If someone who is still below retirement age was smart enough to set up a pension policy 40, 30 or even 20 years ago, leave it alone, it’s doing it’s job. What would be a tragedy would be if someone that smart that long ago, later stopped being smart and didn’t review the policy and pay in more. If they paid in more, in more recent times the extra should have gone into a lower-cost policy/plan. This whole thing looks like a wild goose chase to me. The financial services “industry” isn’t liked and politicians can get a vote the or two by showing the public that they understand and they share that dislike.
Derek
I agree with almost all your points and had made them in our (First Actuarial’s) submission on the DWP consultation. The best option is often to let sleeping dogs lie and the list of untouchable contracts should also include those policies with high loyalty bonsues which even when unit linked – provide a “terminal bonus”.
I think we may have coined the phrase “virtual aggregation”, it’s certainly a good one. If we can get people to manage a portfolio of small pots through to retirement without encasment- great- I just don’t see it happening (often)
Your point about politicians trying to score points is also well made. Steve Webb and the DWP appear to be being bounced on this and seem to be making it up as they go along- mainly because Ed Milliband has so many noisy neighbours- NAPF, RSA, most newspapers , Michael Johnson etc.
That said, this kind of attention to detail is what has been missing from politicians these past years and I’m impressed that the debate has moved away from big picture discussions on “adequacy” to practical ways to get people more from what they’ve already saved.
The point about TVs was originally that we can now buy more for less because of impovements in technology. The technology divident is certainly not being passed on to legacy policyholders which is why it’s worth crystallising penalties on a lot of old stuff (provided the penalties are fair).
This is very “real life” for us. First Actuarial are delivering workplace education seminars up and down the country , We can’t implement transfers as we aren’t advisers but we want to show people how to organsie their legacy pensions before retirement. If you know Alan Higham, you’ll know he is trying to provide pre-retirement advice that tackles these issues and there are a lot of good advisers who are equally enthusiastic.
Both from our and from the adviser’s perspectives, an easement in the advisory process would be good.
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