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