The vast majority of extant UK life and pension policies are now administered by zombies and the way financial engineering has asset-stripped both mutual and listed life companies has created new hazards.
The FCA claims a consumer focus, but in its row-back from the Telegraph’s interpretation of an FCA thematic review that could decimate lifeco profits, its boss admitted that if the old contracts were clear and fair at the time of issue, they cannot be overturned.
If it were not for the way the FSA sometimes changed its rules to have an effectively retrospective effect, we might take the FCA at face value. I am sure few people will do so today and will suspect that the review could seek to enforce elements of current rules by the back door.
This completely misses the point about the zombies. Yes, many old contracts were shockingly bad value by today’s standards. But hang on a minute. When those 1980s contracts were issued, I was hard-pressed to find a decent men’s suit for under £300. I can pay less than that today for a better suit, so in real terms today’s cost is a third of what it was.
Improvements in technology have radically lowered the costs of creating and managing many products and those savings have been passed on. This is how markets work. I cannot trade in my 1980s suit for today’s model and nor can the 1980s pension plan policyholder.
Some may object that a major reason for the bad value was the commission built into the old product but that paid for the advice and to compare today’s much lower contract costs while ignoring the cost of advice, now charged separately, is economically illiterate.
Do the sums and you will find that for small monthly savings, an old-style contract with ‘initial units’ embodying extra annual charges will deliver better value if run to maturity than a lower-charge contract with an advice fee, if you also assume you can invest that advice fee on the same terms.
But the real issue of the zombies is not the contract charges but the standards of service. It is fair to say that at all the firms that have been taken over and are now penned in cages in zombie warehouses, standards of service both to clients and advisers have declined.
At my own firm, administrators at Friends Life recently returned a Letter of Authority enquiring about several old policies after passing it through four departments. On it was scrawled “No trace found”. In an hour of telephone calls the adviser went through two other departments and was then told a new computer system enabled the staff to say the policies did exist but that they had no way of finding out where they were or providing information about them.
I don’t think this is untypical. Many advisers will confirm the abysmal level of service provided by the zombies. Clients and advisers are incurring huge time and hassle costs while the zombies sit back and make easy profits from a nil-service proposition. I hope the FCA review will focus on this important issue.
Chris Gilchrist is director of Fiveways Financial Planning, a contributing author to Taxbriefs Advantage and edits The IRS Report