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Martin Tilley: The truth about barriers to pension freedoms


The much-heralded pension freedoms announced by the now removed coalition government are rapidly becoming an embarrassment.

Rather than focus on an industry that has managed, in the most part, to totally rewrite its product offerings and systems, allowing thousands of people to exercise their newly given rights, several of the national publications in particular have chosen to lead on the minority where known issues have prevented access.

These barriers include some providers not offering the new freedoms, others seeking to impose contractually written early surrender penalties, and others delaying access simply through weight of demand, swamping resources. George Osborne even stated in the House of Commons that “there are clearly some concerns that some companies are not doing their part to make those freedoms available”.

Other political commentators have suggested that customers are now being “ripped off” by the pension companies, who hold their own profits above the interests of their clients.

That such ill researched and misunderstood comments can be made by the policymakers, and are reported at this level, is worrying – particularly as those same publications refuse to offer a counter opinion so that a balanced view can be expressed and understood.

The latest announcement that there will be an investigation of barriers and consideration given to capping charges is a case in point. Clearly the kudos of introducing the new freedoms has been sullied by recent press comment and this latest announcement is a face-saving exercise by the policymakers.

If you examine the facts, the situation is as follows:

  • New legislation was rushed through to be brought into effect before the general election. The statement that a longer run-in period was not feasible because of the worry of pent-up demand does not wash. The pension simplification rules were announced in 2002, originally to come into effect by 2004, but were delayed until 2006 with the intention of getting things correct. In that instance, consultation with industry experts would have been a factor in the delay while legislation was prepared to enact the changes. We have not seen similar measures with the pension freedoms.
  • The “penalties” to exit are incorrectly termed. They are not penalties at all. They are simply the recouping of expenses incurred on the policy at outset, which are taken evenly across the term of the contract. Thus the ‘penalty’, or cost – to use its correct label – was incurred on day one of the policy, not at the point of exit. It’s just that if the plan is terminated before the expected term, the remaining costs to be recouped are crystallised.
  • This is not a pension provider rip-off. This is a feature of the contract written perhaps 20 or 30 years ago. If a government tried to impose a ban on these charges, it would be removing the firm’s ability to recover cost it has already incurred. It is a retrospective tax because it would permit the release of the money from the firm without the cost deduction penalising the provider firm and permit the individual to draw on the money now – which, of course, provides tax to the Treasury.

Most firms have few of these contracts in existence. Hence it is a minority of individuals in this position. However, some firms, such as those that buy up the old books of business from now-closed insurers, rely on the current contract terms and would have bid on acquiring them accordingly. They are not even the firms that incurred the set-up costs initially.

However, they assumed them when they took on the book of business and if they are not permitted to recoup these costs, they could have a serious hole in their business models which could affect their viability.

These businesses often run on tight margins and rely on volume. It is precisely these firms that cannot afford to upgrade their old policies to accommodate the new freedoms. They were not designed to do so. They were designed to reach term and buy an annuity, either in-house or with an open market option. That’s it, end of contract.

These exit costs are not new. They would also have been mentioned in the consultation response, as would the fact that some providers would not be able to provide the new flexibilities. The policymakers should have been aware that there would have been barriers to some trying to access the new freedoms, yet they still went ahead with “freedoms for all”, and now, when people are faced with these known issues, they are attempting to deflect the problem onto the industry.

What I hope the review will outline is that there is no action to be taken. Those affected are bound by the contracts written in accordance with the legislation and regulation of the then government, the regulator of the time and by firms simply trying to conduct business in that environment. Government and those affected should understand this.

While I do not condone or defend the terms of some of these plans, the principle remains. Trying to alter the situation now would set a very dangerous precedent.

Martin Tilley is director of technical services at Dentons Pensions Management


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Why let facts get in the way of political point scoring.

  2. James Marshall 15th July 2015 at 1:31 pm

    Some years ago I took the Mail on Sunday “supplement” The Financial Mail to task on the lack of balance in an article. Their response was that they did not have enough word count to permit a balanced article.

    The FCA requirement that everything regulated firms produce is “clear, fair, not misleading” should apply to the press.

  3. I am surprised that Mr Tilley does not understand that what is written in the papers rarely relates to the whole truth. More likely the part of the truth that best suits one’s political bias at the time. Thankfully, he is an adviser, like much of this readership, so sees through the political smokescreens.

  4. Well said sir!

  5. Excellent article, Martin.

  6. Jonathan Lochery 15th July 2015 at 6:58 pm

    Well argued Martin! It’s nice to have some balance….

  7. Perhaps George should invite MPs to donate their ill gotten expenses to a general fund to help with “unfair” pension charges. People in glass houses etc.

    Commercial decisions are based on the here and now. If providers are to be forced to lose money by undoing old contracts, then it surely follows that they have the right to take away benefits such as Guaranteed Annuity Rates, you cannot have it both ways.

  8. No one would argue that old contracts with historic charging structures no longer fit the modern world, but they were designed ‘of their day’ in the prevailing market and regulatory background that then applied. Can you imagine the government being forced now to go back and pay back IHT which they took before allowing a deceased spouses allowance to be passed on to the surviving spouse?

    When new tax and pension regimes are brought in, it is the tax payer that incurs the costs of implementation incurred by the relevant government departments. Insurance and pension providers have to manage their own resources and pay these costs themselves. IT infrastructures of the time were mostly developed with some (at that time reasonably foreseeable) degree of future proofing but no one could have predicted the monumental changes to the life and pensions industry and regulatory landscape and IT advancements that would ensue, particularly over recent years.

    And let’s not forget that the political approach nowadays is merely to think up stuff ‘broad brush’ that’s appealing to voters…but then expect the industry to sort out the detail and manage everything even before legislation is anywhere near finalised …and then the government changes the rules on you. It’s like being told to build a football pitch and facilities that midway through construction after you’ve set the foundations you’re told to change, and when you start to play, the offside and handball rules are changed mid-way through the first half!

    So Martin, I hear you!

  9. Sebastian Adam 16th July 2015 at 9:32 am

    Excellent article. It highlights a poor communication on the changes from the government and that, sadly, people’s opinions / perceptions are in fact shaped by the press.
    I am now waiting for the first commentator to try to create a PPI type scandal and put the blame on the providers for misselling the pension freedoms.

  10. Julian Stevens 16th July 2015 at 9:36 am

    Mr Tilley makes some good points and I quite agree that it’s unreasonable for the powers that be to suggest that moral should override commercial considerations just because today’s charging norms are different from those of more than a decade ago. However the picture isn’t as black and white as he suggests.

    The margins in most old contracts ARE excessive by present day standards and correspondingly generate (arguably) excessive profits for the companies holding them. Hence, their share prices took a hit when the FCA clumsily leaked news of its intention to embark on a review and possibly impose a squeeze on those margins.

    Whilst it may be difficult to force changes to explicit contractual terms for early vesting or surrender, the contractual terms in a lot, perhaps the great majority of, these old contracts are NOT explicit. Providers commonly take unreasonable and unfair advantage of the latitude afforded by woolly clauses such as “an actuarial calculation” or “in accordance with prevailing market conditions” and they should be the starting point for any review.

    Also, is there any firm evidence that companies holding legacy policy books cannot afford to revise and improve the terms of those old contracts? Apart from unpalatable early exit charges and no facility to convert from inadequate commissions to commercially viable adviser charging, would it be so expensive and difficult to modify existing contracts to facilitate access to much better third party funds than the commonly limited and stodgy range of in-house ones? Policyholders might still grumble about the charge structures of old policies being heavy by comparison with their most keenly priced contemporary counterparts but the legitimacy of those grumbles would surely be ameliorated if policyholders were able to access much wider and better performing ranges of funds.

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