Nearly a year and a half on from the publication of the OTT’s damning report on workplace pension provision, the ABI have proudly announced that Frontier Economics have reported on the charges their members have been making on our DC pensions.
There should be very few surprises. The joint numbers are much as reported by the OFT and individually the insurers can hardly have failed to notice that money has been pouring into their coffers at the reported rates.
Should we laugh or cry to be told what we knew , the insurers knew, the OFT knew? Apparnetly Steve Webb was shocked but he shouldn’t be. The terms and conditions of the policies we bought made it quite clear of the consequences of our actions, I am minded to laugh!
But then I think about what those charges were used for and my smiles turn to tears. The bulk of the charges levied by insurers were justified at outset as financing the cost of advice over the lifetime of the policy.
The idea was that even if you had paid one or two years contributions, you would be entitled to advice over the lifetime of the contract which was financed from a charge- often as high as 6%pa of the first two years contributions.
To put this in terms we can all understood.
Lets look at an example.
I pay £1000 pa into a personal pension for two years 25 years ago.
The insurance company pays 75% of the first year’s contribution to a financial adviser £750.
The insurance company takes 6% of the £2000 (£120) every year for 25 years, slightly less if the fund value falls below £2000, slightly more if it is more than £2000.
After 6 years it has recovered the money it paid the adviser but the adviser continues to offer advice on the policy, financed by the intial payment of £750 .
Meanwhile the adviser has moved on. Unless there is a good reason to see the client again (e.g. he is likely to take out another policy of increase his existing policy, there is no incentive to see the client ever again.
Indeed, such a meeting is likely to be embarassing as it will become clearer every year that the growth is the first two years contributions is severely impaired- if growth there is at all.
Much of the ABI’s study is pre-occupied with the sad fate of people who gave up saving in the first two years. They gave up saving for a variety of reasons, some of which I list below
- They moved to a job with a pension (in those days it was not easy to run pensions concurrently
- They left the labour market (unemployed, maternity, career break etc.)
- They were skint and couldn’t afford the premiums
- They jacked the policy in and decided to do something else with their money
This is when their advisor should have been their friend, advising them of the consequences of stopping their policy early (making it paid up- to use the parlance).
Contributions made outside the initial two year charging window were not subject to the same charges. Allied Dunbar reduced third year charges from 4.5 to 0.75%. If people had been told of their options they could have recommenced their policies or converted them to other policies in the range. They might even have negotiated with their adviser for a commission rebate in return for releasing the adviser from his duty of care on the policy.
But in fact…
The adviser, as soon as he had the application form in his hand had an alternative agenda. The pension policy was no longer a means of securing the client’s financial security but was a voucher for a £750 payment when the next commission run was issued. Advice turned to sales , an advisory payment became points on the sales board.
The client was filed in an index card board , with the hope that two years premiums would be paid. Once the two years were up, no commission could be repaid and the 80/20 rule applied.
The 80/20 rule
The 80/20 rule says that 80% of your income comes from 20% of your clients. Ditch 80% of your clients and concentrate on the ones you can make future money from.
If you were poor or difficult you would be part of the 80%, if you were rich and compliant, you were in the 20%.
Did the insurance companies know?
Of course they did! They knew exactly what was going on , but the numbers added up. The outcomes of the pensions would be 25 years away. That policy sold in 1987 was not to mature till 2012!
And time is a great smokescreen. Those who knew in 1987 are either out of the industry or in the House of Lords. (Step forward Lord Leitch)
The successors and their successors can distance themselves from the crimes of the past.
Is this a victimless crime?
One of the saddest graphs in the report shows the distribution of the damage. It shows a massive spike among those 40 to 55 who would have been 25 some time in the window of maximum carnage (1987 – 2001).
The pensions of this generation were systematically raped. People who had done their two years with one insurer might find themselves doing their next two years with another (churn and burn we called it).
Some poor people returned to the scene of their financial abuse, only to be abused once more.
It was the poor, the ignorant and the uneducated who were most abused.
And what of that advisory promise?
You remember the theory; the payment of that big upfront commission was justified by a promise to service the policy over its lifetime. But this seldom happened. Advisers worked to the 80/20 rule, they moved on and their clients were left “orphaned”, advisory firms closed or were sold and whole “books” of clients were shunted like trucks in railway sidings, to be forgotten.
The real scandal
The real scandal was not the charges, it was a failure to deliver advice that those charges bought. The report’s terms of reference does not deal with the costs of the funds used (these will be looked at separately) . This is just dealing with the charges levied to run the insurance company, the policy and to pay advisers.
The upfront “initial” commission continued to be paid until the end of 2012. Shamelessly, advisers were still selling the myth of a lifetime of service right up to death of commission telling employers that pre-purchasing workplace pensions in 2012 would finance advice for years to come.
The promise was made to the company but the charge was levied on the member. Ordinary people were left to pay for pensions advice being given to their employers, often- as with the House of Fraser- quite large employers.
In this practice- certain insurers- Aegon, Aviva and Sottish Widows chief among them, were quite complicit.
The practice of “getting employees to pay for their fire extinguishers” (Steve Webb’s phrase) has now been banned, so has the process of disguising high charges by lowering charges for those in employment (at the expense of those who aren’t).
These charges have repeatedly been used to fund advisers lifestyles, not to fund advice. They have transferred wealth from people’s retirement to the golf and polo clubs of Great Britain. This is the real scandal.
A whopping great lie
But to suppose that all this is being mysteriously revealed to insurers is a joke. The insurers have been playing behind the door of Ali-Baba’s cave for 30 years.
The cave door has been opened by Frontier Economics to reveal the treasure spent, the robbers gone. The robbers are now peering back into cave (in new clothes) bewailing the fate of their policyholders,
I don’t know whether to laugh or cry. The spectacle of the ABI praising itself for its new found candour is hilarious, but the plight of the tens of thousands of policyholders who own the £26.7bn of over-charged product is not a laughing matter.
This report is factually correct. But to suppose that it tells the insurance companies , their advisers and the Regulator something they did not already know is a whopping great lie.
And if Steve Webb is genuinely shocked – he is more of a mug than I take him for.