Yesterday I spoke on Money Box in support of a cap on exit fee penalties from legacy personal pensions. Claire Trott spoke well in opposition and I’m quite sure that the ABI will take comfort in her argument that a contract is a contract. You can listen to the debate here (from about 17.30 minutes).
I am arguing that whatever the contract signed at outset, it has been breached countless times by the failure of the provider and agent to deliver advice and support through the life of the contract rendering the contract invalid.
This has not been tested in a court of law , but it is the only argument that George Osborne can use to intervene and impose a cap on the amount that can be withdrawn from a transfer value by a provider if a policyholder wants to exit the contract early.
Three rules that I would impose
Rule one – a clearly stated cap expressed as a percentage of fund
The amount that can be taken should be expressed as a percentage of the full value of the fund as stated to the policyholder prior to any request to transfer.
Rule two – a cap inclusive of hidden dealing charges
The amount that can be taken must include the costs of executing the transfer (eg all dealing costs impacting the price of selling the units.
Rule three – the cap set at five times the cap on workplace pensions.
The total amount taken should be no more than five times the current cap in place on workplace pensions (5 x 0.75% = 3.75%).
Rationale for Rule one
The purpose of exit penalties is to be equitable between policyholder and provider. The provider can recover subsidies in costs given in the early years of the contract.
The charges that are taken out of member’s funds over the years are expressed as a percentage fund. The Government has introduced another charge cap within the past three years which was also expressed as a percentage of the fund. People get percentages of the fund.
Rationale for Rule two
It is very simple to measure and manage a total charge. The expression of the value of the fund before a request to exit will have been made on an agreed basis. That basis should be the offer price of the units – or if the units are quoted at a single price, the single price.
There is a mechanism for depressing the price at which units are sold which dilutes the price of the units to reflect the cost of the sale. Any attempt to manage the cost of the sale beyond the terms of the bid/offer spread or through dilution levies on the unit price must be absorbed into the charge cap.
This rule prevents providers from circumventing the charge cap through the use of hidden charges.
Rationale for Rule three
The acceptable maximum level of management charges for a workplace pension is 0.75% pa. This reflects what the provider was expecting to make (gross) before pay aways to suppliers – fund managers, administrators etc. It makes sense to use this as the maximum that legacy pension providers could take to cover loss of profits.
The majority of legacy pensions have an expected retirement date of either 60 or 65, the expectation commonly given to those taking out contracts was that they could use the policy to bring forward retirement.
It makes sense to use a default retirement age of 60 to calculate the default financial loss.
Where someone is taking money before 60 , say at the earliest now permissable (55), then the cap can be set at 3.75% with the taper being 0.75%pa with no capacity to make a penalty charge at 60 or older.
This would get round the ridiculous practice of establishing contracts to as old as 75, primarily driven by a wish to maximise commission and not for the benefit of the policyholder.
A straw man for starters
The reason we have had this intervention from the Chancellor is probably political, now is a good time to be sounding consumerist, with a contentious budget only a few weeks away.
But the Chancellor has a right to be kicking arse. It’s been over a year since the ABI’s last move on dealing with legacy policies and since then nothing has happened. In the meantime the FCA reckon that 700,000 people have reached retirement , 22% of whom are facing charges of more than 5% and 10,000 of whom are facing charges of more than 10%. These are the FCA figures, the Telegraph quote much higher claiming 62,000 savers face penalties of 40% or more.
Whatever the figures, there is no time to waste. You may be cynical and claim that the Chancellor is only trying to big up his own pension freedoms policy, but that’s not fair on the people who desperately need their money and are paying these huge fees.
If it were done, it was well it were done quickly
This is not a time for fannying about or for complicating the argument with red herrings like with-profits MLA/MVRs. Forget all the fancy talk about the value of waiver of premium or ongoing arguments about point of sale disclosure. The FCA should get on with it, issue a short time-framed green paper, get a group of people (like me) in , who know where the bodies are buried and nail this.
We have plenty of things to worry about already and things will get a whole lot more contentious post March 16th. If anyone is reading this in the FCA and wants to get in touch, I can be contacted at henry.tapper@pensionplaypen.com. I will be seeing the right people in tPR in the next couple of weeks.
Thanks to the Telegraph for the images
Henry,
I have not listened to the Money Box debate, but you mention the ABI quite rightly argue a contract is a contract. You are argue the “typical” has been breached countless times” by failure to deliver “implied advice and support”.
I would like to remind you of another failure. Most of the older style pension contracts were promoted by insurance companies using projections based on assumed rates of return, or continuation of bonus (for with profit funds). Many of these projections were often in double digits, over long time horizons. I do not have access to actual figures but I would be very surprised if many pension contracts have actually achieved the estimated returns illustrated prior to signing the contract.
LAUTRO and IMRO, fore runners of the FCA stepped in to regulate illustrations, however I would argue that any contract that has not achieved a return akin to the illustrated return at the point of inception should be barred “by regulation/law” of recovering any kind exit charge. And if an exit charge is allowed it should be a percentage of the real growth in assets not the value of the total fund.
I recommend you listen to the Podcast Bob and read my recent blogs which make the point you’re making. The difference between a projection and a promise is quite clear, but the range of projections 13-8.5% suggests an expectation of more than 0% which is what a lot of people are getting.