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