Should we give the ABI one last chance on charges?

The ABI have published the summary of their response to the Government consultation on the proposed charge cap . You can read it here. The ABI are against a charge cap and this document is designed to mitigate the disruption to its membership that a retrospectively applied charge cap would bring.

It was sent to the DWP after the consultation was closed , is difficult to find , but it’s summary is now in the public domain. As the Executive Summary is 9 dense pages, we can only imagine the full response needed a fork-lift truck to get from the City to Caxton House.

The response is extremely important. It speaks not just for the insurers but all those who come under the insurers’ wing – the advisers and fund managers and brokers and custodians of the fund managers. The ABI is even responsible for the majority of funds within the master trusts (which are insured pooled funds).

As you would expect, the document is a masterful piece of filibustering and I had difficulty reading some sections without wanting to throw my laptop into the air in despair (I have a brand new MacBook Air).

But at its heart it has a number of points that need to be made and proposals which while self-serving are at least practical.

The ABI have powerful friends, not least in the Treasury, they contribute to the UK tax revenues sums without which the welfare budget would be the weaker. While it is ultimately a nonsense to argue that we need to impair our pensions to ensure we have a strong insurance sector  (to pay for better state pensions), the ABI need to be listened to.

In the ABI’s view, a charge cap on the default funds of workplace pensions would bring

  1. Further burden and confusion for employers; – employers have enough to implementing AE without disruption of having to rewrite schemes
  2. Operational risk to AE; the extra disruption could put in jeopardy AE implementation
  3. Impact for customers – insurers may pack it in meaning choice will go down, service will go down and prices could go up
  4. Potential for inconsistency; two master trusts (NEST and NOW) have dual pricing structures that can’t be easily accommodated by an AMC cap.
  5. Uncertainty – this is another layer of regulation and makes it hard for people to plan.

While all this wold normally add up to the ABI digging in their heels, they know they are in a very weak position. Having been able to head off a referral to the Competition Commission only by agreeing to set up Independence Governance Committees and conducting a full audit of their workplace pension schemes (to weed out the bad ones), the insurers are in the last chance saloon.

They have come up with a cunning plan to save their bacon (aka embedded value). It has three proposals

  1. Newly set up schemes post April 2014 should be subject to the cap (the document doesn’t say which of CAP A,B,C it should be.
  2. Schemes set up pre April 2014 would be reviewed and re-arranged three years after staging (aligned with re-enrolment)
  3. Existing workplace pensions waiting on the auto-enrolment starting line will be able to be used (as they are) with any improvements at the discretion of the IGCs.

Points one and two are not particularly contentious. All new schemes are being set up on a compliant basis (unless some fool insurer is still selling AMDs), the average charge on new schemes quoted is reportedly 0.51%). It’s not the future schemes that we’re worried about.

Employers determined to continue to run AE schemes which don’t comply are effectively in “comply or explain” territory. I’ve written in the past of such schemes- I know who you are and I’m not going to make life any harder than it is already. The clock is ticking .

Point three is different and difficult. It effectively sets the Independent Governance Committees (IGCs) up as an extension of the insurance compliance function and if we trust the insurers, we should not have any difficulty with this. The trouble is that insurers are not trusted by the DWP, the OFT or by the general public (see the current furore over annuities).

The damage of unwinding 90,000 legacy schemes that would be impacted by a 0.75% charge is not listed in the five killer arguments set out above. The cost is to the insurers, to their embedded value, to their share prices and ultimately to the livelihoods of those within those companies.

In my view, the  insurance  industry could  unwind the AMDs, commission structures and the absolute charge of  the default on its own. But that is only my view.

In my view, the proposal currently being mooted by Steve Webb of “D2” –  a tapering charge that is implemented slowly over the coming years has merit. The political imperative is to get this on the books (with cross-party consent) in April 2014. It is hard to see anything being unwound by a future Government (unless it be to the right of UKIP).

If D2 includes a concession that allows the ABI’s members to deal with legacy issues through IGCs and in a reasonable way, I would support it. But I would also be demanding on behalf of those using that whenever an employer demanded an upgrade to a new workplace pension, an  upgrade to an AE compliant pension scheme, was available

Small employers who want to  , should have the right to upgrade their pension to get a well-priced default, free of trail commission and AMDs and of them to run pension schemes  for the benefit of their staff without unnecessary intermediation.

Politically, all the easements to ensure that the points raised by the ABI are worthy of consideration. Employers are disrupted and AE will disrupt further, AE is on a critical path and could fall off, we need all the providers we can to meet the AE capacity crunch and yes there is a lot of regulation to absorb in a short time.

But this is not just about politics, it is about making workplace pensions work and restoring the public’s confidence in those pensions. The reason why the insurance companies are in the last chance saloon is because of the dodgy practices that the DWP are seeking to abolish. Namely…

  1. Milking  the legacy book– requiring their older customers to get stuck with historical charging structures and not participating in new found efficiencies (L&G excluded)
  2. Operating differential pricing which dresses mutton as lamb and leaves deferred members with high-charging contracts.
  3. Paying commission ostensibly to pay for advice but in practice to bill to members what should be billed to employers (or not billed at all).

Taken together, the insurance industry is guilty as charged. Taken individually there are good guys and bad guys. It is not surprising, there being such a diversity of behaviours, that the ABI proposals were delivered to the DWP late!

I’ll move on to one material innacuracy that makes me doubt my judgement when I suggest we might just give the ABI one last chance.

I quote from point 18 of the ABI Executive Summary

We strongly reject including transaction costs in the cap. As has been set out by the OFT, there is as yet no common methodology for measuring transaction costs. In the absence of this, it seems unworkable to include transaction costs in a charge cap.

The ABI has had a year to come up with an acceptable methodology and has failed to. It took First Actuarial, Pension Play Pen and some Swiss-based consultants who do this kind of work in the Netherlands, Germany and Denmark, to come up with a methodology. We delivered it to the Pension Regulator, we delivered it to the DWP and you can read it here. We will now deliver it to the ABI- it has met with great applause everywhere else.

I mention this point last , not because transaction costs are the biggest deal but because the attitude of the ABI over transaction costs sums up the problem the DWP has. Can the ABI be trusted?

Unless the ABI get on the front foot and start “playing through the ball”, they will continue to lose wickets as fast as the England test team. The ABI no longer have the clout to dig in their heels, they need to come up with answers. The pathetic failure to agree a methodology to tell those who invest in insured funds what they are paying is both frustrating and laughable.

And the ABI still think that this kind of disclosure is required at member level. No it isn’t!. It is required at the level of occupational trusses of pension schemes and it will be required by their own IGCs. What is more it is required by big Government.

For Otto to say, as he does in his blog , that the insurance industry has improved transparency on charges is not true. It has promised to do so, but the “noises off” suggest that the ABI have done nothing as yet to disclose transactional costs and this “response” suggests to me that they think these disclosures can be put in the “too difficult” box.

Although I support the approach on legacy and take Otto at his word when he argues the IGC can and will take out commissions, AMDs and legacy charging, I need to see clear evidence of good faith in other areas before I can trust the ABI, the IGCs and most individual members.

In conclusion, the ABI response (or at least the bit they’ve published) is about as good as it could be (it’s not great!). Its  members being split between those looking forward and those looking back it manages to sound unified.

It asks us to accept  “best endeavours” from the insurers but these endeavours have failed in the past and they are failing in the present.

The recent Financial Services Consumer Panel report on annuities shows that only a part of the insurance industry is working in the consumer’s interests. The OFT report was a damning indictment of the insurer’s malpractice in the workplace and the ABI are not delivering on their promises to be transparent (no matter what they say in their speeches). I refer to a recently published blog (a transcript of a speech by Otto Thorenson, the ABI’s excellent DG)  You can read about it here.

And this blog will go to the ABI- this is the 997th posting on this blog and there are over 70 more on .  All of them are available to the ABI in their call for evidence as they plan for “A New Retirement”.

I’ll be encouraging people using to do the ABI’s consumer confidence survey and will continue to work with them to make “A New Retirement” a better retirement.

But for confidence to improve and a better retirement to happen, we need change and though this document sees the ABI moving in the right direction – it stops short of showing the insurers are yet to “get it”.

About henry tapper

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