We knew we were cheating our clients.

Faux naive


Mark Wood (now of JLT and formerly of the Prudential) is calling on insurers to relax the early exit penalties on pension contracts set up in the “bad old days” when commission was paid in advance for premiums paid over the life of a contract.

To understand how these exit penalties came to be, we need to understand how these products were sold.

An adviser had a choice, either he could take 5% of the first year’s premium and 5% of subsequent premiums (single premium costing) or he could choose to take indemnity commission where the 5%’s were added up and discounted back to typically an adviser got paid up to a whopping 75% of the first year’s premium with a lttle on the drip after that.

The incentive to “take your money and run” was overwhelming

Firstly, the chances were that you working for someone else and if you left their employ, you could kiss goodbye to any recurring commissions- so 5% was all you got. Even when you had a proper contract (as I did with Allied Dunbar) , the insurer could turn off repeat commissions and there was nothing you could do about it.

Secondly, the way that contracts were established meant that the customer didn’t see any of the damage of your taking upfront commission as (in those days) stockmarket growth was assumed to dwarf the measly 6% pa charge on units purchased in the first two years.

Thirdly, we all knew that the persistency of payments from our customers was unlikely to last long, so even if we did offer a single premium costed contract, we wouldn’t get rewarded for long.

While the adviser had no difficulty taking the decision to get paid up front, the client had no idea that there was a choice in the matter. Somewhere on the application form, there might be a box that could be ticked for single premium costing but we skilfully bypassed this choice and defaulted all our clients into contracts where we got paid plenty of Wonga upfront.

I understand that Mark Wood’s argument on these personal contracts runs like this..

contracts were silent on exit penalties because when they were drawn up no one envisaged that access rules would be changed. People should not be penalised for accessing their cash when legally possible, that would be against the spirit of the contract.

This misses the target by a country mile

Access rules haven’t changed and people were sold access from 50

Every insurer in the 1980s and 1990s was holding out the possibility of early retirement, many showed projections of how by paying extra, you could bring forward your retirement age. In our brave new world, 50 would be the new 65.

But while the sale was about early retirement, the contract would be structured to push back the selected retirement age. There was another box which had to be filled in which determined the selected retirement age of the policyholder. The formula for an adviser to be rewarded was anything up to 2.5% pa of the first year’s premium x the number of years to this selected retirement age.

So for a 35 year old, maximum commission could only be achieved if the SRA was 65. I would hazard a guess that all advisers tried to avoid commission dilution by ensuring this 30 year earn-out, even when it meant pushing SRAs for 40 year olds back into their 70s.

A common trick was to explain to a client the advantages of adding a waiver of premium to the contract that ensured the premiums were paid by the insurer in the event of a long term illness. Since the cost of “WOP” was on a fixed basis, setting the SRA as late as possible was to the policyholder’s advantage (so long as the negative impact of extra commission was not taken into consideration). WOP was a smokescreen.

Insurers and advisers were complicit in this deception

Far from discounting the possibility of early retirement, the industry openly encouraged it, while offering incentives to create penalties which would only become apparent in many years later.

And nobody noticed

For even when the client stopped paying contributions (usually because they got a job where they got a company pension and had to stop the personal one), it wasn’t apparent there was a problem as the penalties did not crystallise.

The point at which clients started noticing something was amiss would be when , even in reasonably good years, the growth on their pension pot was minimal (and in bad years the losses substantial). Many customers tried to escape from these poor performing contracts and this is when the coin dropped.

Because when you get a transfer value, it takes into account all the charges the insurer was expect to take on your pot but wouldn’t (if you transferred it away). Often the transfer value would be substantially less than the premiums paid, always it would be a lot lower than the “notional” value of the pot.

That wasn’t to say that the transfer value was bad value, it might have been good value. I wish I’d cut and run from some policies I took out in the 80s but I hung on , hoping for a miracle.

The early exit penalties that Mark Wood is complaining about are the direct result of deliberate collusion between advisers and providers to the detriment of policyholders. The problem was rife and only the non commission houses (ironically principally Equitable Life) did not indulge.


Arise Saint Mark

So that’s the history; like me, many people have hung on to these minging personal pensions hoping that a miracle will happen. Arise St Mark, to magic away all the exit penalties still applying to these policies! A miracle is on the horizon and we have the saintly Mark Wood to thank for it.

Eagle eyed readers will have noticed that this saintly Mark Wood was on the other side of the fence in his previous life with the Prudential. Infact he had overseen the system by which these changes had come into being! Infact his overall remuneration was  linked to the sale of these policies!

I don’t know what Mark Wood is after. Perhaps he wants to follow other alumni of his era such as Sandy Leitch into the House of Lords or maybe he just wants to win some brownie points for JLT.

Simply penalising life companies is not the answer


But I can’t agree that there exists a prima facie case against life companies which would require them to do a PPI and refund all the monies deducted through non-disclosre.

For one thing, there was disclosure, it just was obscured by advisers who were able to sidestep the difficult conversation about the likelkihood of the client staying in his current job for the rest of his life. For another, the salesmen of these contracts were smash and grab merchants. The old idea of the man at the Pru, with his bicycle clips and loyal round of customers was already an anachronism by the time I started selling insurance (as a financial consultant in 1983).

We knew what we were doing, the life companies knew what we were doing and it seemed that the Regulators were complicit- I never saw sanctions against advisers who took indemnity when they knew a drip approach to commission was in the interests of the client. I never saw an adviser taken to task for extending the term of a pension contract when there was no reasonable cause (and the Waiver of premium argument was typically spurious).

The contracts were wrong from the start

These contracts and their terms had been designed for the professionally self-employed, partners of law-firms, stock-brokers and accountants who could expect to stay in one place and contribute regularly for the whole of their lives.

The honest truth is that the whole system of indemnity commission went wrong when the Government started encouraging insurance companies to re-use these contracts to provide the pretence of security to people who would change jobs and have periods  of unemployment, the vast majority of us unfortunate enough not to be in a company pension scheme.

Insurance companies, coming under pressure from Mark Wood should point out that they simply extended access to what had stood as good practice in a previous market. What could be more Thatcherite than to treat the plumber like you treated the barrister? And what could be more financially ruinous to the plumber’s wealth..

We’re all in it together

Any Government that decided to attack insurance companies on their legacy, would have to explain the complete failure of its Regulators to impose any kind of discipline to the sales of these products between A-Day in 1987 and Z-Day in 2013 (when the RDR finally did for commission).

Nor should journalists, broadcasters or the legion of think-tanks and commentators who have failed to pick up on this muddy stuff be exonerated.

What happened was a systematic process that transferred personal savings from the policies of those who most needed to save, to the bank accounts of insurers and their salesmen. But to suggest that we can escape the consequences of that by dumping the bill purely on the insurers is both unfair and illogical.

Sadly, we must accept that like those expensive colour television sets, what seemed good value then, now appears to be a rip-off. And we must use some of the experience we have gathered from the past, to make sure this does not happen again.



About henry tapper

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