“Lest we forget” – can we sweep legacy under the table?




No more self-regarding monkey business please!


Yesterday, I wrote about why a good chunk of the personal pensions sold before 2000 (and a few after) were poor value for customers. The pensions were sold with “a lifetime of advice inside”, scandalously, the advice seldom materialised.

Today I’m going to focus on what good can come of the ABI’s review of legacy charges.

It is quite clear that the review only confirms what we all knew. The insurers have now a year to think about it. What they will be thinking , if I was them, was that they have spent a few quid with Frontier Economics and can walk away from the carnage of the past with impunity.

There is an important issue of agency here. Are the insurers responsible for the delivery of the advice that wasn’t delivered, is this a regulatory failure or should advisers be responsible?

Pragmatically, the advisers are long gone, any attempt to retrieve money from them is bound to fail and the use of FOS and FSCS would be extremely unfair on current practitioners who never profited.

It could be argued that the failure of the various regulators – FIMBRA, LAUTRO,PIA,FSA et al to enforce delivery leaves individual policy holders with the opportunity to band together and mount a class action against the FCA. The chances of this happening are slim to non-existent, it would amount to a general levy on tax-payers to sort out a problem few people even recognise exists.

Finally there are the life insurers including those currently on life-support systems or in communal nursing homes (the Zombie Life companies). These are the members of the ABI who have commissioned the report; they would argue- with some merit- that they paid commission in good faith to advisers who they might reasonably have expected to have provided the advice that policy-holders had paid for.

I am not a lawyer, but there is something not quite right about the life insurer’s position. And this is why I am nervous about the Frontier Economics Legacy report. That all these problems are given the semblance of “just being discovered” is very convenient for insurers. It allows Government to be “shocked” (as Steve Webb says he was) by the severity of the charges and their impact on a generation of savers.

The reality is different. The insurance companies may have booked the profits they are enjoying today, many years ago but they booked these profits in the full knowledge that they were profiting from their policyholders who were not being treated fairly.

To return to the question of agency, where it can be proved that money was being paid to agents (IFAs and direct reps) for services that clearly were not being delivered, did the insurers have a responsibility to whistle-blow, enforce the advisers to advise or call for the policy-holders money back?

I don’t know the answer to that question. But I don’t think it conceivable, having been both on the sell and buy side of this process, that the insurers were ignorant of what was going on.

It is not beyond the scope of Government to ask the insurers for answers to this question. If the OFT report is worth anything, if this or a future Government have courage and if the Regulator is up for it, I think that the ABI and its membership should be called to account.

It would be a setback for many insurers if they were asked to revisit their back-book of front-end loaded personal pensions. Some like Fidelity and Legal & General will escape lightly, others will not.

If the door is left open to policyholders who paid for advice and did not receive it, then the insurers who paid out to advisers will need to contest the question of whether the advisers were their agents. If the answer is that they were- that they were selling policies on a false pretext, then there is a strong case for the liability to revert to the insurer. If the insurers can prove that advisers were deliberately concealing from the insurers what they were (not) up to, then the case for redress from the insurers are weak.

I think it likely that a proper investigation into the practices of the past that looked at what really went on in the late eighties to the end of last century will discover that there was massive collusion between advisers and manufacturers to the detriment of the consumers.

If we are to put the past behind us, I believe all policyholders who have paid more than 2% pa for their pension (excluding the costs within the funds) are due an uplift on their pots or (if they are an annuitant) a cash settlement.

Each application for redress should be taken seriously, we cannot ignore the legacy of our actions and those advisers (including me) who are still around, should play a part in ensuring not just that this does not happen again , but that there is a record of why.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to “Lest we forget” – can we sweep legacy under the table?

  1. Simon Ellis says:

    Henry, there’s more!

    From my personal experience, life cos. will know precisely how much value has been given or not to their customers, since the lapse rates of existing policies are a key internal financial measure. This is where the beauty (in some eyes) of embedded value accounting comes into play. The actuaries and accountants will deem the pension policies in question to have an expected life, and that will be written into the P&L of the life co. on an ongoing basis, even if they know that the assumptions of the lifetime vale of each policy are, in reality, not matched by the history of the pensions book.

    (If you don’t believe this could happen, look at the fiasco of contracted out personal pensions around 1990)

    I’ve not yet met a life insurance CFO who has wanted to reveal the gap between experience and expectation on this score. So not only are policyholders not necessarily getting a clear picture or fair deal, but shareholders have also been unwitting victims.

    • henry tapper says:

      The persistency assumptions are open to challenge by shareholders. It is dissapointing that the FCA aren’t able to share the returns from the life cos so that a comparison between expected and real can be made.

      You are spot on in highlighting this, I remember some life cos in the 90s still working on 20 yr + persistency assumptions, those that persisted are now swallowed by those that were more realistic but I fear there is still bad news for the shareholders in the pipeline.

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