The Government is threatening to cap exit fees as it looks to remove barriers to people accessing the pension freedoms.
The Treasury has set out three options for limiting exit fees in a consultation published this morning. These include a cap on all early exit fees, a flexible cap or a voluntary approach for providers.
A fixed cap could either be set as a percentage or a monetary amount, which the Treasury says would provide “a clear simple limit” for both individuals and schemes.
However, it concedes such an approach would raise issues where, for example, high fees are attached to very small funds. The Treasury also acknowledges potential issues in applying a cap to contracts retrospectively.
By contrast, it says a flexible approach would allow for a cap to be limited to pots above a certain threshold, or to apply to certain components of an exit charge.
Such a stance would “allow for more egregious early exit charges to be capped to benefit customers, whilst ensuing that firms aren’t unfairly penalised for charges which are justifiable,” the Treasury says.
The final option of allowing the industry to lead with a voluntary approach would encourage trustees and managers to reduce or waive early exit charges, whilst avoiding the legal issues of retrospective action, the Treasury adds.
Officials are seeking views on the pros and cons of each approach, as well which components of exits fees or other charges could fall within the scope of a cap.
The Treasury says: “The Government is clear that any option which could cut across existing contractual property rights, such as a statutory cap on exit fees, would represent a significant step. Any such measure should only be taken as a proportionate means of achieving a legitimate objective in accordance with public interest.”
In laying out the plans, it cites figures from the Department for Work and Pensions which suggest one in 10 savers in workplace schemes could be affected by charges when they transfer their pensions. An FCA study from December last year suggested that 7 per cent, or £4.8bn, of total assets under management in legacy schemes were in schemes where savers would face charges for an early exit.
Of that sum, nearly 60 per cent, or £3.4bn, is in schemes with exit charges of 10 per cent or more.
A spokeswoman for the Association of British Insurers says: “No pensions sold on the market today have early exit fees and nearly nine out of ten people making use of the pension freedoms will not face an early exit fee. Providers will engage constructively with this consultation so all the relevant facts and issues can be fully understood.
“Many people are accessing the pension freedoms successfully, with over £1.8bn withdrawn in the first two months. For those few that are encountering problems we have set out an action plan to address these issues, which is with Government and the FCA.”