The Government has been warned proposals to retrospectively attack pension exit fees are misjudged and will hurt UK financial services.
The Treasury’s consultation on barriers to the pension freedoms – including exit penalties and transfer processes – closed last week.
The consultation sets out three options for limiting exit fees: capping all early exit fees, a flexible cap or a voluntary approach for providers.
Pensions minister Ros Altmann has urged providers to scrap fees. She told the Telegraph at the weekend: “This is a wake-up call to the industry. I beg you, just look after the customers.
“There are some insurers being fair, writing off some of their back book and bringing down the old legacy charges – that’s great, they get it.
“My message is – if you don’t look after your customers, then whatever Government does to get people into pensions, they are not going to stay.”
In its response to the consultation AJ Bell has also called for penalties “that block access to the new pension freedoms” to be scrapped.
Marketing director Billy Mackay says: “The main reason given for exit penalties is to cover initial costs but 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 debateable whether some exit penalties really do relate exclusively to initial set-up costs or whether they are actually about ongoing provider profitability. In reality the cost was baked into the contract many years ago to ensure the product was profitable over a range of customer circumstances.”
But advisers warn forcing providers to change the terms of contracts will block investment into financial services.
Rowley Turton director Scott Gallacher says: “I have an issue with the idea that providers should be made to scrap exit fees. It creates a precedent that providers can set up businesses on one set of terms, which can then change. It sends a message that you shouldn’t invest in UK financial services. You need to be able to plan for 30 years. If there was a big rip-off culture here, you’d have a flood of firms coming in but you don’t.”
The Government is not considering extending the exit penalties changes to with-profits funds.
Furnley House director Stefan Fura says if market value adjustments and fees in place to recoup commission are not included within the scope of the changes, the Government “is not really addressing the issue”.
The consultation also asks for views on the impact of the advice requirement on the transfer of safeguarded benefits worth £30,000 or more.
The Association of British Insurers and Royal London have previously urged the Government to scrap the requirement for policies with guaranteed annuity rates, while Aegon argues mandatory advice should be removed entirely.
Aegon regulatory strategy manager Kate Smith says: “There has been widespread confusion about how to apply the £30,000 advice requirement, particularly when valuing safeguarded benefits and the pensions industry needs urgent clarity from the Government and regulator.
“A simpler way forward would be to replace the advice requirement with regulatory principles for providers to point out the value of safeguarded benefits in all relevant member communications.”
The speed of transfers has also come under scrutiny, with Hargreaves Lansdown backing a 30-day transfer deadline and Altus calling for the adoption of open standards for pension transfers.
Exit fees: The scale of the problem
In September the FCA published its audit of exit penalties levied by providers.
It found nearly half a million pension customers have policies subject to exit fees of over £1,000. The regulator’s survey of 23 firms found 463,000 people with unitised pension policies – excluding conventional with-profits policies – of all ages would be hit with a fee of £1,000 or more if they left policies early.
However, there would be no exit fee at all for 83.6 per cent of customers aged 55 or over and 89.6 per cent for people younger than 55. This is equivalent to 17 million people.
In addition, 990,000 would pay £250 or less, while at the opposite end of the scale 39,000 people would pay £5,000 or more if exiting a policy early.
The most common reason firms gave for levying exit fees was to recoup outstanding initial expenses and/or initial commission already paid out.
Other reasons given included recouping charges that would have been deducted over the full life of the policy and ensuring exiting individuals were put in the same position as someone who had chosen a shorter duration of the policy at outset.