What is easier for an adviser to find: a needle in a haystack or all the information they need about a pensions policy purchased decades ago by one of their clients? Some advisers would surely answer the former.
The question goes to the heart of one of the trickiest problems in the pensions market and one of the most frequent bugbears advisers report: getting good service from closed-book and legacy providers.
There is a considerable amount of money still held in the closed-book market, spanning traditional with-profits policies sold in the 1970s and 1980s to unit-linked with-profits products sold in the 1990s.
Many of these policies have some type of guaranteed income or benefit which is valuable to the policyholder, so naturally advisers want to help clients keep track of them. But these policies can be difficult to find and base financial plans on as they may have been forgotten by clients or the life companies which sold them may no longer exist.
The FCA says 10 million policies are looked after by specialist closed-book pension providers. It estimates the sector has around £400bn in assets under management and is currently collecting data from providers as part of a probe into non-workplace pensions launched in February.
This probe is informed by an earlier review of long-standing customers across 11 firms that started in 2014. Findings were published in 2016 but advisers remain wary of exit fees and clunky IT systems.
A recent example of closed-book providers suffering technology glitches was Phoenix Group’s systems upgrade as part of its integration of the Axa Wealth pensions and protection businesses it acquired in August 2017.
In April this year, some of the 44,000 former Axa Wealth pension holders started to complain their pensions were not being paid by Phoenix’s retail arm Phoenix Wealth. The firm says a glitch affected 1,000 customers but is now mostly resolved. The error exacerbated the cynical view some advisers have of closed-book and legacy providers, namely they are resistant to change and only interested in acquiring opaque back-book policies.
Signpost Financial Planning director Nigel McTear says: “In my experience, when a closed-book legacy provider has taken over these funds, the pattern is for the legacy provider to limit the fund choice to in-house funds and for active management to be dropped in favour of passive tracker funds.
“When I have had clients in these funds, it has been difficult for me to get information about the policies from the providers. Usually I would move clients out of them unless there was a guaranteed benefit, income or return in the policy.
“It is hard enough for me to get information on these policies as a financial adviser and you then wonder about what it is like for the clients.”
However, defenders of the closed-book space say it has evolved in recent years, with the capping of various charges, consolidation and clearer business models.
Director, Navigator Financial Planning
Our experience is that closed-book legacy providers are not great. They have no incentive to deliver good fund performance and, because their sole objective is to milk as much profit as possible from an existing client bank without attracting new clients, they cannot afford to pay top dollar for good fund management.
Some of them do have chunky exit charges but, to be fair, they can only apply what was in the original contract; it is not as if the exit fees were added in once a particular provider became a legacy provider. The other issue is contract terms. Legacy pension contracts, almost by definition, are older contracts, without the flexibility and options afforded by the reforms introduced in April 2015. This also applies to death benefits.
Closed-book providers do not have new contracts to which funds can be moved. This, as much as charges and performance, is often the reason weend up recommending pensions are moved.
Towards new business models
Canada Life pensions technical director Andrew Tully says there is a nascent division in the market between those providers that are focused on capital-heavy products like annuities and those that want to manage investments.
He believes this division started before pension freedom was introduced in April 2015 but has accelerated since.
Research from Hargreaves Lansdown published in January showed how many providers had pulled out of the open annuities market since 2014. These included Aegon, LV=, Partnership (since merged with Just Retirement), Prudential, Standard Life, Friends Life (since merged with Aviva), Reliance Mutual and Retirement Advantage (since bought by Canada Life).
Alongside this, there have been a number of recent deals between providers wanting to position themselves as specialist consolidators of legacy products and those that just want to administer funds.
Phoenix Group’s acquisition of Standard Life’s insurance arm for £3bn in February put it firmly in the former camp. In its half-year results Phoenix Group chief executive Clive Bannister said the completion of the Standard Life insurance business acquisition would bring growth opportunities from new business across both heritage and open books. He also said there was “industry bifurcation, splitting into ‘capital-heavy’ insurance specialists [like Phoenix Group] and ‘capital-light’ firms”.
In their remarks about the £3bn deal with Phoenix Group, Standard Life Aberdeen co-chief executives Martin Gilbert and Keith Skeoch said it was the “logical next step” in transitioning the firm into a “world-class investment company”.
A host of similar deals have hit the closed-book market since the freedoms. Last December, Legal and General Group announced it had reached an agreement to sell its mature savings business to the ReAssure division of Swiss Re for £650m. The business being sold consists mainly of retail customers who hold traditional insurance-based pensions, savings and investment products. Swiss Re said it had agreed to purchase more than a million life policies from Legal and General as part of its strategy to acquire closed life books in the UK.
According to Swiss Re, this brings its total number of owned or administered policies to approximately 4.7 million. It also increases ReAssure assets under management, including investments for unit-linked and with-profit business, by £33bn to approximately £77bn.
The formal transfer of the business is expected to be completed in mid-2019.
But while these deals generate headlines, will they actually lead to better service for advisers or lower charges for consumers?
IFA, Solomons Financial Planning
Clients are utterly flummoxed when it comes to remembering who their pension was with. Frankly, services have generally improved from a very poor position but I do have concerns about exit penalties on many old-style arrangements.
It is my impression that they try to comply with regulatory guidance on illustrations and maturity packs, but they are invariably akin to War and Peace, and does anyone truly understand with-profits? There is something unsettling about legacy business. In a world of flexibility and low cost, they seem to be hanging on like a Polaroid. There is something to be said for nostalgia, but not very much. Service times vary enormously.
Some seem fairly prompt, under a week, and some still seem to use a horse and cart. Occasionally, I have to check the calendar to reassure myself that it is 2018, not 1998.
Fees in the closed-book world, particularly those to exit old policies, often draw criticism from advisers. Consolidator PensionBee’s annual survey of Britain’s 35 biggest pension providers based on customer transfers to it indicates charges remain stubbornly high.
Part of the survey examined exit fees across 5,431 pensions and found 305 had such charges.
Phoenix Life accounted for the five biggest exit fees, according to the survey, with the largest one being £12,245. It also had the highest exit fees on with-profit pensions.
PensionBee claimed one exit fee would have accounted for 96 per cent of a saver’s pension.
However, in its half-year results Phoenix Group said it would introduce a cap on exit fees for non-workplace pensions at an estimated cost of £68m. The company says the move is in step with what it did for workplace pensions and should be in place by the end of 2019.
These changes apply to 250,000 out of a total of a million unit-linked policyholders, the remainder of whom already have charges below 1.5 per cent.
While Phoenix warns this will require significant changes to IT systems, advisers should acknowledge efforts are being made to improve processes.
PensionBee chief executive Romi Savova, who has criticised high charges at closed-book legacy providers in the past, says this is the sort of move she has been waiting for.
Other closed-book legacy providers such as ReAssure and Old Mutual Wealth Life Assurance have reduced charges as well.
In January 2017, ReAssure capped both annual management charges and policy fees at 1.5 per cent each a year for non-workplace policies. Customers in these policies saw fees capped at between 1.5 per cent and 3 per cent per annum.
ReAssure adds it has not applied a market value reduction on transfers out of any with-profits funds since 2010 and has no plans to introduce a cap should one apply in the future.
Old Mutual Wealth Life Assurance has closed a number of retail pension products in recent years. These products have a variety of charging structures but none operate with-profits.
A spokeswoman says it has invested in and increased the frequency of communications to help customers make informed decisions.
She adds many customers bought their products years ago when different legislation applied and they are offered the opportunity to transfer into current flexible drawdown products when appropriate.
The FCA has also asked the firm a range of questions including breakdowns of charging structures and product make-up, as part of the data collection for the non-workplace pensions probe. In its response to Money Marketing’s query about charges, the FCA says it anticipates the data collection will find the number of paid-up closed-book policies has reduced as a consequence of consumers accessing pension freedoms. It notes over 1.5 million of the 6.5 million policies were held by those eligible to access the freedoms.
It adds a further reduction in the number of paid-up policyholders may have flowed from the introduction of the cap on early exit pension charges with effect from 31 March 2017. This cap may have reduced the number of paid-up customers deterred from seeking more competitive products. Steps taken by providers following the thematic review in 2014 should have also cut the number of paid-up policyholders.
Advisers should be more optimistic given the FCA’s drive on non-workplace pensions, IT investments by closed-book providers and caps on fees, some experts conclude. A market which seemed stuck in the stone age is evolving.
Reasons to be cheerful as systems are improved
IT systems at closed-book legacy providers have been a perpetual annoyance for advisers. An adviser who has been asked by a client to get all the information on an old policy before a meeting and then fails to do so will look bad.
However, advisers should take heart from the fact there are closed-book legacy providers who want to be administration specialists in this area and are spending to improve systems.
It is in the interests of closed-book legacy providers to have good IT systems as this helps them and advisers keep clients happy through providing solid services. If clients are unhappy they could move elsewhere to the detriment of both the adviser and closed-book legacy provider.
Regarding market value reductions in with-profit funds, these are distinct from exit charges and the FCA has yet to shift its position on this matter.
Adrian Boulding is director of retirement strategy at Dunstan Thomas