How easy is it to leave a bad pension plan?

leave

This is the 6th of 8 blogs I’m writing which address the questions asked by the Work and Pensions Select Committee.

Today’s exam question is

If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?

The quick answer is “perhaps” , but it’s pretty hard to know if there are or aren’t!

It is usually very easy to leave a good DC plan and hard to lose a bad one. The bad ones need to put up barriers to entry and the good ones don’t.

When Quietroom got its first appointment it was with the Halifax, who claim Quietroom saved them £400m in outflows by making it easy for customers – panicking about Northern Rock – to withdraw their savings. In practice, putting up barriers was just making savers panic more!

Sadly, the same mentality that demands high charges from customers, demands those charges be crystallised on exit. The FT report (August 6th) that “investors are charged hundreds of pounds for …SIPP exit fees”.  The FT reports ”

“Exit fees force customers to pay each time they move an investment to a rival provider. The Financial Conduct Authority has proposed banning such charges due to fears that they deter customers from switching”.

These fees are for “in specie” transfers too!

By comparison, moving money from one workplace pension to another is usually “free”- (though you might lose a little on some hidden spreads).

As well as the cost of moving money from one place to another, there is the hassle-factor. The FT reports that some SIPPs can take over 100 days to transfer. I haven’t seen evidence that it takes quite that long, but the Pension Bee Robin Hood Index shows that there are huge differences between good and bad providers, in the time it takes to get the money from one place to another.

This entitlement to keep your money, extends beyond the bad guys. NEST, who are in many ways good guys, told us they were negotiating with Origo (who do the clearing between pensions) so that they could get money into NEST quickly. They hadn’t considered negotiating with Origo so customers could get the money out quickly!


Customers should be able to move freely and easily

As long ago as the late 1990s, the Stakeholder Regulations made it possible for anyone buying a stakeholder pension , to be able to move from or to that pension without charge (from the stakeholder pension).

This simple rule has been inherited by workplace pensions today. People who enter a workplace pension cannot be charged on the way out. They cannot (since active member discounts were banned in 2014) be charged more for being a deferred member of an employer’s scheme). In other words, those pensions which are governed by tough regulation, provide people with safe harbour when it comes to leaving and joining.

By comparison, those pensions that are not strongly regulated, especially those that the FCA call “non-workplace pensions” are able to do what they want. At the most extreme level, the offshore scams can be little more than Ponzis with it being pot-luck as to what you get out. Typically – if you’re first in the queue, you’ll be most likely to get a pay-out.

But the number of these dreadful schemes is few and thankfully, getting fewer as the impact of successive anti-scamming campaigns begins to be fealt.

What is much more worrying, is the way that SIPPs can invest in what appear to be legitimate investments which have clauses written into the small print, which allow – legitimately, the fund to impose an exit penalty – typically a tapering penalty which reduces to ensure a minimum charge has been taken (on early redemption). Such fees can be fund specific and even share-class specific. We found that some shareholders in Newscape funds, invested through Gallium by Active Wealth Management were clean of these charges, and some not. What was clear was that the people buying into these funds had no idea what the cost of getting out of them were. Even the experts struggled to find that out.

This business of tapering exit penalties, gains legitimacy from the practices of large and legitimate enterprises.  Perhaps the most notable example of which is St James Place – which levies ratcheted exit penalties on many of its policies. These fees are explained as a means of ensuring that the costs of setting up the policies is recovered, though these fees are typically levied on the whole fund, rather discrediting the argument (surely adding an extra 0 to an investment does not mean the fees increase by ten!)

Less legitimate outfits are able to point to SJP as a precedent. I think that there is no grounds for exit fees – a view echoed by Mike Barrett of the Lang Cat in the FT article

 “Exit fees should be scrapped. It is widely expected that customers will want to move at some point. Putting a barrier in place to do so feels unnatural. The world has moved on [from exit fees] and platforms need to catch up with the way other services and industries are operating.”


Sadly we cannot move on from exit fees – quite!

In 2016, the FCA required all insurers to reduce exit penalties for those 55 or over to a maximum of 1%. Some – like Scottish Widows – went further – and scrapped them altogether. I was 55 in 2016 and was able to be one of the first to benefit. My Allied Dunbar 226 policy went up in value from around £5k to £9k. I moved it as soon as the transfer value increased.

How many people know about this? I did a straw poll at a recent Pension PlayPen lunch, not one of the ten people there knew – and one was the Chair of the Transparency Task Force!

If you are under 55 – you cannot be sure if you have exit penalties on your legacy policy or not.


The other man’s grass is not always greener

Even if you are over 55, you need to make sure that in switching you do not lose valuable benefits in your policy. These can include life cover , waiver of premium, with-profit terminal bonuses, contractual loyalty bonuses or ultra low charges for the final years of your plan.

All of these clever features come down to the incentivisation by pension providers of loyalty. Many of them are very valuable and it is entirely understandable that these providers built them into your policy, they want you as a lifetime customer and these positive barriers to entry need to be weighed against the possibility that the other man’s grass is greener.

This suggests that nobody should take a transfer unadvisedly.

I find this barrier to exit entirely unacceptable! Weighing up the pros and cons of what you’d lose by staying against what you’d get from staying should not require an adviser.

If the insurance industry tell you it does, then you should ask them why?

There is no reason for a savings plan, for which the member is taking the risk, not to be transferrable. There is no reason why an adviser needs to be employed to move it.

If an insurance company wants to employ an adviser (at its expense) to help in the decision – so be it. In my view – few will.

I caveat this with the exceptions (proving the rule). It may  be that what looks like a DC pot – is in fact a DB promise; this can happen when the pot is underpinned by a guaranteed minimum pension or offers guaranteed annuity rates. In such cases the rules governing DB transfers are helpful. When in doubt – do nought! Take advice if you can afford it , otherwise – if it says “guaranteed” – stop!


Remedy!

We need to find simple ways to help people make decisions to stay or go and they need to include an assessment of the cost/benefits of moving money. My simple solution involves the colour of the value for money number. Here is my idea value for money assessment.

age wage simple

You will notice that the score is in green. In my world green scores indicate that the policy is good to go! If I had put that screen in red, it would have said that the policy should stay where it is.

This system relies on conviction from the people doing the scoring and the co-operation of those giving data to the people doing the scoring. It does not rely on financial advice.

It may be that someone who gets a red – wants to know why. It may be that the red goes green when the person reaches 55 – or the end of the contractual term or some other point. But this can be explained at a high level through guidance.

We should not make the need for advice a barrier to exit – on our DC savings.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions. Bookmark the permalink.

8 Responses to How easy is it to leave a bad pension plan?

  1. Peter Tompkins says:

    I totally agree with your comments on obligations for advice. The patronising attitude of authorities who believe we should be forced to take (pay for!) advice is inconsistent with the pressure for greater freedoms. By all means encourage people to “look before they leap” but focus on transparency of information so the customer can make informed decisions rather than be spoon-fed someone else’s advice. We may be ok to “nudge” people in the right kind of direction but it should be encouragement not obligation.

    And don’t get me started on regulations seeking to stop me rewiring electric plugs or household consumer units. The trained professionals can do a more dreadful job than a careful householder!

    Liked by 1 person

  2. Adrian Boulding says:

    Henry, you are absolutely right, being able to withdraw your money is a flexibility that customers greatly value even where they have no intention of ever doing that.

    So why can’t you surrender an annuity?

    Adrian

    Liked by 1 person

    • Peter Tompkins says:

      We know some of the arguments against annuity surrender. The insurer does the pricing not the customer so there is an asymmetry of information.

      But I am guessing that you might be putting the case that were annuities to be surrenderable then they would be less unattractive and might be taken up by more people for whom they are really the right choice.

      By the way I just did some sums on the comparison between the annuity I would have taken at 50 and the drawdown I actually entered into then. The years 2010-2018 are probably pretty atypical years but I’m about 150% better off than I would have been without drawdown!

      Liked by 1 person

      • henry tapper says:

        I’m not buying an annuity at QE depressed rates and I do support the right to drawdown. I’m not sure that everyone is a Peter Tompkins, so I’m suggesting CDC as a third way!

        Liked by 1 person

    • henry tapper says:

      I don’t have a problem with surrendering annuities – so long as their is VFM in the process, I was the guy who stuck his hand up to say that CDC schemes should offer transfer values in payment (as noted by the WPC report). The question is fair value on the surrender – not the principle.

      Liked by 1 person

  3. Michelle Cracknell says:

    Answering a slightly different questions (and supporting the Quietroom/Halifax experience), when pension freedoms were introduced, customers did not change their mind about accessing their pensions when they find out about the exit charge although it made them grumpy. In contrast, under age 55 customers who were asking about consolidating pensions chose not to consolidate when they found out about exit charges even when you explained that the exit charge was just the total of the charges that were going to be collected from their plan for the rest of its term i.e. you will pay the “exit charge” one way or another

    Liked by 1 person

  4. alan chaplin says:

    A massive barrier for people in workplace pension schemes is that their employer chooses the scheme. It seldom matters what the individual thinks of the pension as employer unlikely to change and hardly any scheme is poor enough to justify giving up the employer contributions.

    Liked by 1 person

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