Almost 30 years ago, give or take, I bought my first house. It was a small Victorian two-up, two-down terrace, with a downstairs toilet and bathroom accessed through a galley kitchen.
The repayment vehicle for our interest-only mortgage was a ScotAm with-profits endowment, for which we paid back £21.40 a month.
Back then, our decision to take out an endowment was common among my friends. From memory, out of 16 people in my student cohort, three quarters of us bought properties around that time, some before we qualified, others shortly afterwards – and all of us took out endowments to pay for them.
Issues such as charges, performance, surrender penalties and the like did not concern us: shares were rising, property prices were rocketing, we were all in jobs and for those of us who bought jointly with partners or spouses, our relationships appeared stable and permanent.
Within a few years, those cozy assumptions had been shattered. The property market collapsed after 1988, marriages foundered, others left their jobs as nurses and found it difficult to get alternative work. Or they moved away, without feeling the need to buy another home.
Either way, in less than 10 years almost everyone I knew stopped paying into their endowment or surrendered it back to the life company they took it out from. When I went to a 20-year reunion a decade or so ago, I was the only one still paying into a policy until maturity.
My erstwhile colleagues had poured many hundreds, sometimes thousands of pounds into mortgage repayment vehicles that paid out a pittance on surrender. Yet this fact was greeted with little more than a shrug of annoyed but reluctant acceptance. The dominant feeling was that this was all you could expect from the life and pensions industry and there was nothing really to be done about it.
I am reminded of this story by the ongoing debate over personal pensions costs, specifically with regard to older contracts. As any financial adviser who has been around the industry for a while will remember, the way some companies levied charges back in the 1980s and 1990s was pretty amazing to observe.
Otto Thoresen, the most recent director general at the ABI, was recently quoted in Money Marketing as promising that his organisation “will look into the impact that exit fees are having on old pension plans”. In other words, people who have been trapped for decades in products that levy extortionate charges should be able to leave for cheaper ones without hefty penalties.
In that case, our Otto shouldn’t have too far to look: over at Scottish Equitable, which he joined out of university and where he trained as an actuary back in 1978 – and where he occupied senior management roles from 1994 onwards – they were selling a pension back then where the charges levied actually increased when contributions stopped or reduced during the lifetime of a policy.
This despite knowing that up to half of its policyholders were halting contributions into their pensions within the first five years. Not only, but ScotEq’s so-called “specific member charge” increased in percentage terms even when policyholders tried to raise their contributions.
Then there was Skandia, whose contract involved a “contribution servicing charge” for policyholders who reduced or stopped their payments. For example, someone paying £50 a month into a 25-year policy with Skandia who missed the third year’s payments would pay an extra £68 as a penalty, on top of the £2.45 monthly charge.
Abbey Life, previously owned by Lloyds Bank and now part of Deutsche Bank, charged an extra 6 per cent of a fund’s value if the pension was halted within a year of starting, reducing to 1 per cent in year six.
Sun Life, now part of Axa, used another nifty little trick to make charges on its 25-year pension product look less expensive. It would add an extra 2.5 per cent every month into policyholders’ funds over a period of 36 months – but only between about eight and five years before retirement.
This meant that while the company’s overall charging figures looked great on paper, the vast majority of scheme members who stopped payments early paid through the nose.
Albany Life, now part of Canada Life, paid a “loyalty bonus” starting at 2 per cent in years 10 to 13 of a unit-linked pension, rising to 10 per cent after 25 years. This too had the convenient effect of improving Albany’s projected charges. But for the majority of its policyholders to benefit from the new charges, the company’s lapse rates would have to be several times lower than industry averages.
The truth is that charging structures of this sort have long been the industry’s dirty little secret, helping to sustain profits at a time of falling sales and low returns. If Otto and his outfit really wanted to do something about it they would have done so many years ago.
As to whether there is enough public anger to force companies to end these charges, or facilitate penalty-free exits from these rip-off funds, I have my doubts. After all, this no more than we’ve come to expect from the industry, and in a battle between long-term reputational risk and short-term money in the bank, money always wins.
Nic Cicutti can be contacted at email@example.com