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Capital punishment

A-Day reviews have highlighted exorbitant transfer penalties faced by clients

Over the past year, I have spent most of my time looking at clients’ pension portfolios in readiness for A-Day. What I want to talk about here is transfer charges and the unbelievable attitude of some of this industry’s leading companies in respect of clients’ monies.

Some companies pay lip service to the concept of treating customers fairly and fail miserably when it comes to the reality of carrying this out. Let me talk you through an example of what I mean. One of my clients has a paid-up group personal pension with Axa Sun Life, which was set up by her previous company’s advisers. Over five years, this client paid total contributions of 15,000 into the policy. It is currently worth 23,900 and the transfer value is 17,900. The transfer penalty is therefore equivalent to two years’ contributions and is over 25 per cent of the total fund value. This is ludicrous.

I know the contract was written on the basis that it would have capital units and accumulation units, with the capital units subject to a higher annual management charge than the accumulation units. But we need to bear in mind the climate in which we are currently operating, where clients are reluctant to make pension provision. We all need to encourage them to save for retirement and this sort of policy charging structure does not do that. Most clients will look at this as a complete rip-off.

I am not singling out Axa Sun Life because lots of companies also have old policies that operate in the same way. What I am saying is simply that not giving clients an option other than to pay these exorbitant transfer penalties or leave the pension paid-up means that they are upset and infuriated and, more important, less trusting of the current products we have on offer.

Just to say that you will treat customers fairly is not enough. Life companies need to demonstrate this by their actions, including reviewing their old policies.

Some 29 per cent of the UK working population make no pension provision (Origen 2005 survey). I believe it is morally incumbent on all of us in this industry to make it possible for those 29 per cent to make some pension provision. By making sure that all our actions are designed to treat customers fairly, we will promote confidence in the financial services that we offer.

My suggestion is that companies with old policies which have capital units should take a pragmatic view. I am afraid it will mean a loss of income for some companies but the transfer charges on these policies should be commuted as long as the policyholder takes out a new plan with the same company. In this way, at least the company will not lose the pension fund.

Funnily enough, I made this suggestion to Skandia recently on a fund of 150,000 and it rejected the idea out of hand because it probably feared the floodgates might open. In my view, these contracts are unfair and most clients did not understand at the point at which they made a commitment to these contracts that the transfer charges would be so high.

Some might say: “What about the high commission taken by the advisers? This will have had an impact on the size of the capital unit charge levied by the life companies. It is therefore not all their fault.” In most, if not all, of the cases I am seeing, the penalty charges reflect future earnings which would be lost due to the transfer of funds. I am not saying the life companies should not make penalty charges but they must be fair. Twenty-five per cent of a pension fund is not fair.

I would like to see somebody take the argument to a court of law that some pension contracts constitute unfair contractual arrangements which, under the Unfair Terms in Consumer Contracts Regulations 1994, would make them void. But we would not want this to actually happen because it would create another PR disaster for our industry.

Therefore, I think some leading figures in our industry should sort this out before someone does it for us because this is a growing problem which has been highlighted by A-Day.

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