In the relentless pursuit of new business, insurance companies and other financial institutions involved in the commercial marketing of pensions , have focussed on the new customer or the existing customer increasing his or her savings. It’s not hard to understand why, everyone from the CEO down is rewarded either directly by the shareholders or by performance-bonus structures on growth.
Past wonder-products meanwhile languish, often sold to consolidators such as Phoenix and ReAsssure or managed in separate units, quarantined from the latest developments and labelled “legacy”.
The reality of product management today is very different from the promise of product management made to savers in the fifty years since pension savings products became mass market in the early seventies.
We have become used to upgrading legacy products. For instance if you have a hotmail account – you can upgrade to Outlook easily and for free.
This article looks at what has happened and what could happen, and asks just how easy it is to upgrade your pension to one fit for today’s purposes
Shouldn’t all customers be treated the same?
The idea of upgrades is to make available to loyal customers the best service provided by the organisation they purchased from. All customers should get the same value for money or “moneys-worth”.
Not all legacy products offer customers poor moneys-worth. If you got lucky, your policy might offer you valuable features guaranteed by the original policy conditions. These might include a guaranteed annuity rate and loyalty bonuses. At the other extreme, the product may deteriorate rapidly if you cease making payments or draw your money before the end of the contractual term.
These legal conditions do not however govern the provision of advice on the product. Despite insurers agreeing to pay commissions – which could be as much as everything paid into the policy in its first year- to financial advisers who recommended and help set up the product- the insurer had no responsibility for the service offered by that “adviser” who typically was never seen after the original sale.
The cost of using these advisers did not fall to the marketing departments of insurers but was passed on to the customer. So products that were bought with advice had the cost of the advice paid for from the policy, the impact of which is experienced today. Many insurance companies offered the product on commission free terms – provided the adviser was prepared to forsake his commission and we can see the impact of the enhancement in today’s pot value by comparing the returns achieved on the commission free and the commission loaded policies over time.
Research we are doing at AgeWage shows that this impact is huge and can account for more than half the total value of a pension pot.
Insurers will argue that legally the advice was paid to agents who were not under the employ of the insurer and that any claim against non-production of a promised service is against the individual advisor or the advisory firm that employed them but this could well be challenged in a court of law. Many of the commission agreements with advisers placed no obligation on the adviser to maintain contact with its customer, the insurer was simply paying a sales incentive and charging it to the customer.
The issue for customers is whether this was ever fair, or whether they were vulnerable to purchasing poorly because they were fooled that the insurer and agent were on their side. As many of these sales are twenty or thirty years, I doubt that the customer’s issue will ever be tested in a court of law, but that does not mean that the issue isn’t very real.
The rates of return we at AgeWage are discovering from these legacy products are so far below the returns that would have been achieved from an investment in an index that many outcomes are little more than a return of contributions paid.
Quite clearly, the returns for past policyholders are not comparable with those of customers in modern products such as the workplace pensions used for auto-enrolment. All customers are not being treated fairly and the issue for the FCA and tPR is how to ensure that this inequality is reduced and ultimately eliminated.
Ways of reducing inequalities
The first and most radical way of addressing the problems of legacy pensions and their outcomes is to get the shareholder to make good. Solutions could include the reduction of exit penalties – where the policyholder can walk away from legacy terms at minimal cost. This already is in place for those over 55 but could be extended to all policies.
The second is to identify policyholders who have been particularly badly treated and offer them a policy enhancement from a fund set up by the insurers and others with books of customers impacted by legacy charges. There might be a case for the fund to be seeded from the orphan assets of those insurers (eg the unclaimed pots of those who have “gone away”. This would not of course restrict the right of the gone-aways to their pension pots – if they come back for them.
The final and most radical solution would be for the Government to enforce a retrospective enhancement on all policies with a reduction in yield of above a set figure (say two percent per year). This would require a lot of work from the insurers to identify policyholders affected and a very major dent in shareholder profits – akin to the cost of PPI to the banks.
Is your pension due an upgrade?
The four hundred billion pounds worth of legacy pensions are going away. They are shrinking as people cash in pension pots , transfer them to aggregators who draw down from them or swap them for annuities. This is happening now and will continue to happen for the next twenty or so years as the hump of the old pre-RDR personal pensions and other legacy products reach maturity.
The sleeping dogs – including many of the people I advised – have often been lied to. They are now paying the price of the deceit of insurers, advisory firms and advisers who abandoned clients but continued to claim trail commission and did not pay back the initial commissions that promised ongoing advice.
I do not see Government enforcing an uplift in policies impacted, so long as insurers continue what many have started, and do something to upgrade the experience of those who have not been treated well.
So we at AgeWage will continue to explain to legacy customers with low AgeWage scores just why their scores are low and make it clear – where options to upgrade exist – what those options are.
We will not suggest people cash-out or even move pots to another pension provider until the internal options have been properly explored.
But if legacy providers whether ReAssure and Phoenix , or others insurers like Zurich and Prudential do not invest in upgrades for existing customers, we will have no problem explaining to those who use the AgeWage service, that other avenues are open to them.
Your pension may well be due an upgrade – and your retirement lifestyle with it.