How do we stop “Price Walking” in pensions?

The FCA has changed its policy on the pricing of general insurance products so that people who routinely renew their cover with an insurer are rewarded for their loyalty. This will mean that competition for new customers will reduce and it’s expected that many of the benefits of “shopping around” will disappear.

The new rules are being brought in by the FCA in the New Year following a super-complaint from Citizens Advice about the loyalty penalty.

Those who switched have received the best deals as new customers. Those who stayed loyal are being charged more. This practice of subsidisation is known as “price walking” and the FCA say that their measures will save loyal customers £4.2m a year.

Around 10 million policies across home and motor insurance are held by people who have been with their provider for five years or more.

One caller to Felicity Hannah’s Wake up To Money program this morning claimed this was rewarding “the feckless and lazy”. This characterisation of the majority of people who buy financial products grates with me and presumably with the FCA.

But it’s a view that has been prevalent not just about the purchase of general insurance but also the purchase of pensions. The open market option was created and promoted to ensure that savers could purchase the best annuity (for them) and has resulted in a highly sophisticated market of expert buying. Unfortunately it is a market dominated by people like Felicity’s caller, who benefit from the “feckless and lazy” behaviour of others to ensure best rates for themselves.

So long as we have sophisticated markets driven by individual choice, the mass of people will support the clever few. This may work for non-essential products like annuities and private healthcare, but staples such as car and motor insurance can easily be used to favor not just the clever saver, but the insurer. Sophisticated customers can access best rates which can appear great value for money to regulators, but the average buyer can be given a poor deal for loyalty where pricing is not under general scrutiny.

The implications for those who design pension products may be profound. There are well over £400bn in legacy pension products which are currently earning out their high acquisition costs through back-end loaded charges. The FCA has reduced these charges for those who choose to transfer out of them (if you are over 55 no personal pension can charge you an exit penalty of more than 1% of your pot value). It has enforced this through the IGCs and GAAs and where there are neither, directly. But the consumers who take advantage of these “walk-away” terms are the ones that are sophisticated enough to know the rules. How many people have transferred away from their legacy personal pension in their early 50s and not taken advantage of the precipice-priced exit penalty at 55?

The FCA’s move is welcome. We are at last recognising that non everyone wants to be their own risk-manager or CIO. People have got more important priorities than rate-hopping. While I am a fan of Martin Lewis and others, who encourage engagement with good-buying, rules must be set to ensure that those who just want to renew their financial products , get a 95% solution.

Of course there is a much bigger issue with pensions which is , that unlike general insurance, people cannot identify value by price. There is so much variety in “value” that price comparison sites for investment driven products are at best unhelpful and at worst misleading. This is my constant moan at MaPS for maintaining a price comparison service on its website that suggests comparability of investment products purely on price.

Strong defaults rather than unlimited choice.

Because pension products present consumers with  a variety of risks (investment, costs and charges, longevity ++), consumers need extra protection. That’s why we have super-buyers purchasing on consumer’s behalf and fiduciaries ensuring that those who purchase and package are kept on their toes. So your primary protection may be from a pension provider purchasing investment and administration services and packaging them as a pension plan, but that service is overseen by trustees, IGCs and GAAs whose job it is to validate the product’s VFM or point out that relative to the market, there is not much value being given for the money invested.

This fiduciary management has for many years now , focussed on the default services offered by the provider. People don’t have much choice about the administration and though they have investment choice, they choose not to exercise it – or at least don’t bother reading the brochure.

Rather than judge the pension product for the funds that 2% of savers use, fiduciaries judge it by the default fund used by 98% of members. There is an acceptance that choice is not the driving force for consumer value but the good governance of fiduciaries.

Strong defaults beat investment choice for the majority of us. Nest – which has a 99% take up of its default , recently announced that it is on target to beat its break-even point and will be able to repay its tax-payer subsidised loan quicker than expected. Once it has rid itself of its debt, we can expect to see it reducing the cost of its annual management charge and/or the clip on contributions which repays the loan.

With Nest and other master trusts, we are seeing more of our pension pot invested in productive capital, getting better ESG and seeing a tighter focus on cost control in investment management and cost control – all for the same price. Where prices aren’t falling , extra value is being created. Much the same is happening in the contract based workplace pension market.

But there is still a lot of price-walking going on, outside the view of fiduciaries and (with offshore products) beyond the UK regulatory perimetre. In pensions, price walking is invariably linked with poor governance. It is not a matter of poor purchasing. Most people do not consider a pension something they need to re-purchase, indeed – loyalty is encouraged in   pension purchasing.  Pensions are the natural home of “patient capital”.

A change of regulatory tone

It was the Citizen’s Advice Bureau which brought the “super-complaint”.  I’m really pleased to read Matthew Upton’s comments on the BBC website this morning

Rip-off renewal prices have seen consumers paying over the odds for far too long. No longer can you be exploited just for staying loyal.”

He added that people tended to be at a disadvantage if they were older, on lower incomes, or unable to access the internet.

“We welcome the FCA’s bold new rules on home and motor insurance. We now need to see urgent action to protect consumers in the other markets,”

“Pensions” is one of those “other markets”, the FCA need to take urgent action on. Specifically we need a properly functioning at retirement model where people can get a pension from their savings provider and trust that the continuation option is value for money. That means reforming the current choice architecture and bringing the pricing mechanisms for spending in line with those on saving. People can of course choose to do what they like, but they need to be rewarded for staying loyal to the original promise – which is of a means to purchase a proper pension with the money they have saved.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to How do we stop “Price Walking” in pensions?

  1. Dr+Robin+Rowles says:

    Whilst as a consumer I do find it irritating that in order to get the best deal I have to shop around every year but I rather suspect that the result of the FCA’s decision will not be massive savings all round. What I expect will happen is that everyone will end up paying the higher price and insurance company profits will rocket as a result to the joy of the senior execs and shareholders. Yeah, I know, I’m such a cynic!

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