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ABI is missing the point on pension charges

Ed Miliband was rightly given a hard time by the industry and the media for his ill-informed, broad-brush attack on “pension rip-offs”.

Money Marketing editor Paul McMillan’s analysis picked apart the Labour leader’s headline-grabbing speech on charges, while MM’s front page carried the story of pensions minister Steve Webb accusing the opposition of attempting to “stir up cheap headlines”.

The language used by Miliband was lurid and unnecessary – but his party has identified two critical areas which the industry would be foolish to dismiss.

The first is the disclosure of the charges customers pay on their pension pot.

On the back of some of the “cheap headlines” referred to by Webb, I have spent the past two weeks quizzing the UK’s biggest providers in an attempt to write something slightly less hysterical about pension charges. The results will be published in next week’s Money Marketing.

However, the response of the Association of British Insurers – the representative trade body for the entire insurance industry – to what is supposed to be a constructive article disentangling charges fact from fiction has been worrying.

I asked the ABI: ‘Which charges that impact on the final value of an individual’s pension fund do ABI members disclose? And which do they not disclose?’

I thought this was a simple question – apparently not. Firstly, the ABI referred me to the FSA’s “point of sale” disclosure requirements (despite the fact I had never restricted the question to “point of sale”).

“This makes it clear that dealing costs must not be disclosed”, the ABI says. This is true in the specific case of information given to the customer when a product is sold – because nobody knows what dealing costs will be in the future – but in response to the question I asked it felt like deliberate obfuscation.

So what about the potential of offering clients the ability to see all charges on annual statements then? The second part of the ABI’s response was even worse.

It says: “Annual statements sent to customers are not governed by FSA regulation, but by DWP legislation…They contain no detailed requirements about disclosing charges and expenses.”

This is, quite frankly, ridiculous and suggests the ABI has completely misread the tone of the debate. Insurers should be looking to do right by their customers, regardless of whether or not it is required by the Government or the FSA.

The problem isn’t that charges are necessarily high – it is that they are not easily visible. And as long as they are not easily visible, people like Miliband and Pitt-Watson will continue to feed newspapers “rip off pensions” headlines. This needs to become a priority for the ABI, now.

The second point, on exit fees and high charges on old pension policies, is more difficult to solve. It is widely accepted that pension companies sold products that were poor value in the 1980s and early-1990s.

In response to this, Labour – and others – want providers to look into their back-book and root out plans with unfair charges.

But why would providers do this? As Ned Cazalet points out in this week’s Money Marketing, doing so could cost the industry billions of pounds. Are companies which are ultimately responsible to shareholders – rather than customers – really going to voluntarily give up huge sums of fees?

As a result, this part of the debate is likely to fizzle out. I hope I am wrong – and the ABI is trying to work out the scale of the problem at the moment – but I suspect the suggestion of handing back money to policyholders because Steve Webb says you should will sink like a stone at most product provider board meetings.

Tom Selby is pensions reporter at Money Marketing – follow him on twitter here

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Oh dear, oh dear, journalist proves once again that a little knowledge is a dangerous thing.
    Firstly, Mr Selby, read what the ABI said about existing disclosure. The current mess is entirely the responsibility of the FSA and DWP so why are you blaming the ABI. These regulators routinely ask for submissions on consultations and then also routinely ignore them. The ABI must be as sick and tired about that as many in the industry.
    Yes current disclosure is a mess but what you must include in various disclosure statements is entirely prescribed by the regulators, not the ABI and not the providers. Indeed, variation or addition is either forbidden or frowned upon.
    Secondly, “It is widely accepted that pension companies sold products that were poor value in the 1980s and early-1990s.” Try looking a little harder. The ‘perception’ was brought about mainly because of high initial charges. They were paid decades ago. The current ongoing charges are normally very low (for these very same ‘high charge’ plans). I spend my life helping advisers do cost comparison of these to justify transfer suitability and it is very hard as the new plans (including their start up costs) are normally not cheaper.

  2. The ever increasing popularity of SIPPS is no coincidence. In the main these are not invested into insured funds.

    Some platforms even offer a unit trust pension, without the need for a SIPP wrapper. (For example Skandia’s CRA).

    What your piece has overlooked and what is not taken into account by the ‘great and the good’ is that as a result of regulation and innovation Life Offices are finding it ever more difficult to generate the profits that their bloated organisations require. You may find it instructive to read Chris Gilchrist’s comments in today’s edition of MM, as indicative of the UK life assurance industry in general.

    They now no longer can gorge on Low Cost Endowments and Insurance Bonds as they once did.

    It says a lot about the pensions industry that they were not only willing, but eager to get into bed with the likes of Roger Levitt and Trevor Deaves.

    I entered Financial Services from Industry and my first abiding impression (which has not left me!) was how pathetically poorly these large organisations were run when compared to the large organisations I was used to dealing with in industry. It was a hell of a culture shock.

    As in so many other fields it has also been the ‘bad apples’ that have contaminated the barrel. For this the ABI must shoulder some of the blame for not reining in some of the more obscene examples from the likes (Past and present) of Windsor Life, Abbey Life, Phoenix, and Resolution. Merchant Investors, Laurentian Life, Lincoln Life, Confederation Life, Target Life, Gresham, Manufacturers Life and so forth.

    From my perspective the ABI exists to promote the interest of its members – right or wrong – and when so many of its members have been no better than double glazing salesmen. (Please excuse me double glazing salesmen – I know from first-hand experience that you are not all bad – it is merely now an expression).

  3. Adrian Boulding 27th July 2012 at 10:33 am

    It’s an interesting argument as to when is something a charge and when is it a drag on investment performance. The current FSA projection approach is to use a central rate of 7% fund growth, and by fund growth they mean growth after transaction costs have been met. So we don’t take the transaction costs off again when we calculate the projection, as they have already been allowed for in arriving at the 7% number. And if we don’t think the fund is likely to achieve 7%, we have to insert a lower growth rate ourselves.

    But my sympathies lie with Tom Selby’s journalistic inquisitiveness. I think some people would like to know what the combined effect of stamp duty, stockbroker’s commission and the equity market maker’s bid/offer spread is. For a mature UK index tracking fund, I reckon it’s between 5 and 10 basis points pa. That’s not insignificant, and we should work towards a sensible industry wide way of disclosing these transaction costs.

  4. Excellent point by Adrian that some costs are already assumed in the growth rate for RIY – but then most Journos never seem to have heard of RIY anyway!

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