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Billy Mackay: Why is the industry still handcuffed to legacy products?

Billy Mackay 620

With age comes a tendency to reminisce and 1997/1998 sticks in my mind for a number of reasons. Daughter number two came on the scene, so sleep was in short supply. I also broke my leg playing football (an eejit from Ayrshire did it and ran away). It was a bad one and meant I was in leg plaster for three months. With my mobility gone I had lots of time on my hands for reading.

During that period I remember getting the specification for a product that was about to launch. It was time for big change; gone were the penalties that applied when the customer decided to cease contributions or transfer elsewhere. Real progress would take some time. Some would champion “no exit” or “premium cessation” charges, even though 10 per cent of every premium (5 per cent bid offer spread and 95 per cent allocation to units) and a hefty monthly policy fee were deducted to pay for the privilege. Over the next three or four years product shapes changed as the shape of adviser remuneration did and the push towards simpler products became real.

Over recent months the debate on penalties on old-style products has intensified and here is the thing: daughter number two is no longer a baby. In fact, she is maturing into a fine young woman. She drives, is at university and enjoys the odd glass of wine. My leg is much better too.

Today things are also very different in the world of pension products. With time moving on it seems odd we need to debate things like pension exit charges and the merits of products that were popular such a long time ago. There are some aspects not open to debate. I totally get that, from a contractual point of view, providers have the right to apply these charges. I also get it that the charges were disclosed in the product literature. It is reasonable, therefore, to argue these points cannot be ignored. It is why our recent call for change related to providers that applied penalties that prevented their customers from accessing the pension freedoms. We surveyed advisers at a recent event we held to get a feeling for whether they had clients being prevented from accessing the new benefit options as a result of penalties. As the table shows, almost half of the room had clients affected by this.


The problem with some early encashment charges on older pension contracts is that there is no obvious link between the charge and the work required by the provider to make the transfer. Any exit fee has to be relevant to the work carried out by the provider today and should be set at a reasonable level. It should also be clearly disclosed and easy for people to understand.

The main reason given for old-style exit fees is to cover initial costs and I understand that this has to allow for the commission that was paid. Even allowing for that, you have to question whether it is reasonable to still be collecting charges for events that may have happened around a quarter of a century ago.

It is also debateable whether some exit fees really do relate exclusively to initial set up costs, or whether they are actually about ongoing provider profitability. It is admirable some providers have moved to soften penalties but there is a reason why many have not: many of these old style products are very profitable. It is also interesting that the providers that have moved to reduce early exit fees are those that remain open to new business and hence have brand and commercial interests to protect. Closed book businesses do not have this motivation. If this trend continues there is a case to be made that this is where additional regulatory pressure is needed the most.

Looking at everything together, the financial challenge for these providers has proven to be the elephant in the room for many years. Change will only happen if you can balance the needs of the customer with the financial consequence to the provider. If you can find a balance then it is possibly not a bad place to be but you can be sure the answer is not handcuffing people to products from such a long time in the past. After all, situations change, which is why my daughter no longer has to be in bed by eight and I no longer have my leg in a plaster cast. Mind you, that clown from Ayrshire would still be well advised to keep running if we ever cross paths again.

Billy Mackay is marketing director at AJ Bell



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Excellent article Billy but only concern is your scandalous comment an Ayrshire footballers, who, as anyone from Auchinleck and other junior outposts will inform you, are renowned for fair play.

    • Craig, all I will say is this charming young lad was from Ardeer. Not quite as fiesty as the Auchinleck lads but not much in it!

      • Yes Billy, everything changes with time, except how you looked in your school photo.

        P.S. According to the Postcode Annuity Guide, the average life expectancy for a male from Ardeer is 38. I reckon your assailant’s running days are long gone.

  2. Good article, I was recently told that the 5% exit penalty was based on the client leaving the funds with the company until age 60. The client has 3 years to wait or pay £4,500 penalty. When challenged they stated that was the cost of looking after the policy to 60. I questioned that if the client took the benefits early they would not be doing any further work, so why the penalty. the response was that’s was the contract.

  3. Looking back even further, whilst a lot has changed in the last 20 years, earlier the pace of change was much slower and anyone taking a nap between 1976 and 1996 wouldn’t have noticed much financial services change except maybe the ‘polarisation’ of advice between independent and tied. So what makes the last 20 years so different? Dare I say it was the launch of platforms, particularly the unbundled pricing wrap variety, with no exit penalties. All of a sudden, Capital units, and all these other methods beloved by insurance companies for hiding charges (the main cause of exit penalties) were a thing of the past as wrap platforms came to dominate, some even reducing charges and applying that to all account holders – which pre wrap provider ever did that?
    Now this is the new normal for modern products. Does that mean that old, legally binding, contract charges should be torn up? Any government that tinkers with the law in that way to introduce both retrospective and retroactive law would be creating an unsettling precedent – considered by many lawyers to be unconstitutional. Can providers, particularly those that can afford it, have their arms twisted by bad PR, quite possibly.

  4. Stewart Hutcheson 20th April 2016 at 5:01 pm

    A lot of sense in that article and for a change an understanding ind insight into the commercial pressures aspect. My only other comment would be how did Billy get MM to use his profile photo clearly from 25 years ago

  5. The world has indeed moved on, apart that is from the Government, who have recently launched a product with a potential 5% exit penalty until age 59, for no obvious reason other than to influence the “clients” behaviour. I think I preferred Capital units to Das Kapital units.

  6. Well balanced article.

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