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Nic Cicutti: The pension industry’s dirty little secret

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


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There are 33 comments at the moment, we would love to hear your opinion too.

  1. The words nail on head come to mind.

    What beggars belief is that the most powerful financial services regulator in the world” has not done something about it.

    Instead of focussing on mindless petty rule changes why not address some of the big issues.

    I suppose I am not surprised they missed Keydata Arch Cru, the banking failures too…

  2. That’s right, Nic, you keep stoking the fires of negative sentiment. Let’s make sure no-one is investing or saving for retirement by referring to the bad old days (by the way, I completely agree these were disgraceful contracts!). Let’s ensure that the present generation do NOTHING to provide for their futures and NEVER seek advice from the many good advisers out there. Of course, I’m being naive – the press just hate any positive encouragement and I should know that by now. Incidentally, fascinated to see you’re still saving into your endowment – perhaps you suspect it may be one of the many that have matured over the years with a very decent sum?!

  3. Sounds like a gripping reunion. “So – are you still paying into that endowment….?”

    I’m no expert here, so shoot me down. But I would imagine providers were / are structuring charges on their products that recovered costs over the expected 25 year term (if anyone had sold a completely front-end loaded product, it would have looked horrific and no-one would have bought it).

    If a customer stopped paying after 3 years of the expected 25, then I can imagine the providers were keen to recover their chunk of the pot before it disappeared.

    Of course, this may be wrong. In which case, I’m off to arrange a student reunion.

  4. Nic,

    Don’t hold us in such suspense!! Did the endownment pay out more or less then the projected sum at the outset?

  5. Michael Wainwright 2nd August 2012 at 11:15 am

    Looks like Nic had a silly lot of friends and was the only sensible one amongst them. The Endowment Mortgage I had, with the help of the good old Clerical, moved from house to house and was probably the best investment I ever made. The maturity value was far in excess of what I had expected and in the meantime I had had the benefit of life cover. The policy was designed as a long term investment. Even the fairly thick amongst us should have been able to work out that there is a cost involved in writing a policy and this would have to come off any surrender value.

  6. Typical Cicutti. Negativity, negativity, negativity! Yes the contracts were wrong and did have highs charges.
    But he seems to forget that if he or his partner had died, the mortgage would have been repaid in full in the case of an Endowment.
    I was one of those who took out an Endowment in the 70s. Sum Assured – £6500, premium circa £30 pm. Payout after 25 years £35000. So they weren’t all bad. But heh! That’s a positive story.
    Maybe the answer is don’t attend reunions.

  7. It’s oh so easy to shoot the messenger don’t you think. Accepted some must have been crazy to cash in their policy’s early, I likewise switched from Endowment to repayment but kept on the Endowment. One point which should be considered, in 1989 when we had the height of interest rates the mortgage payment would have been at its highest, if the client had moved funds from paying interest only to enhancing their Endowment as the rate fell year on year so its cost negative they would have been in a much better position.

    However the point Nic is making is did they know this and have we in the industry tried hard enough to explain all ?

    Only reason I ask is what about Active Member Discounts on Group schemes, most IFA’s say my Client is the Company, the impact of the increase in charge is on the member…….. bit like terminal Bonus in reverse, seem to recall that was a problem as well.

  8. Normally I find myself getting slightly irate with Nic’s industry bashing and negative input, but I find myself agreeing with him in this instance. As an x Abbey Life Associate I am constantly embarrassed when reviewing my clients pension funds, at the disturbing difference between fund value and transfer value, in fact it has stopped me on most occasions transferring into cheaper charging contracts, because the pill they would have to swallow is obscene. I have a few x Abbey Life colleagues who have made quite a tidy profit from moving these clients away, but in these times of investment uncertainty is it really good advice for the client or the adviser? In fact I find myself losing some clients when they come across other advisers who move them out without hesitation, sometimes at a loss of £8,000 on the fund! It is a real gamble that they can recover such a charge and I feel it is only a matter of time before some third party company is targeting this market with “ have you been advised to transfer an existing personal pension away for its original company”.

    I do appreciate that not all companies charge this extortionate transfer charge, and that some advice is sound to move away, but for me it is a real concern.

  9. The Pensions companies also introduced Indemnity commission and broker bonds which led to the birth of FIMBRA,PIA and FSA so why have the regulators never persued them. Why?

  10. i guess there is one question which is whether the removal of penalties will result in some insurers getting into solvency difficulties. i am not referring to the big firms but rather the raft of really small firms. if the answer is that they will, then Mr Cicutti might have a lot more copy on this subject than he envisaged. I am not an apologist for insurers but do worry that Maxwell, Equitable Life etc has done more damage than charges ever did

  11. One point not being raised for some reason is the obscene levels of commission these plans generated. I wonder why. As I recall, the charges were increased to accomodate the undisclosed levels of commission. Is not as though IFA’s weren’t in on the act too now is it?!

    Did the regulator not introduce Stakeholder to reduce charges? Granted they weren’t widely used but industry charges didn’t half reduce!

    Isn’t RDR a terrible idea – people will actually know how much they are paying for a product or service and guess what they aren’t prepared to pay 2k for someone setting up a regular premium PP!

    If providers reduce the charges on their old pensions, are the IFA’s who sold them going to pay back their obscene commission sums and share the burden? Doubt it

  12. Bearing in mind the required customer outcome of an endowment was to repay the original loan associated with it, how many policy holders with a surplus maturity value offered to refund the excess? answers on a postcard to N Cicutti Esq please.

  13. Justin Credible 2nd August 2012 at 2:09 pm

    Particularly negative even for you Nic! Did you have to get out the history books to look for something to be negative about this week? I guess that endowments maturing for the amount projected just isn’t good news, nor the PPP I set up last week for a sensible fee (initial and ongoing) that was cheaper than a commission free SHP. If someone is in a poor and expensive contract (they do exist) they should get some advice, whinging won’t remove the charges. Mind you, as always, the FSA pendulum has swung too far and many advisers are steering clear of advising on the subject. Anyway, what are you treating us to next week? Slavery, kids up chimneys, failings of the medical profession in dealing with the bubonic plague or lack of eye protection in 1066?

  14. Anonymous1.54pm

    Okay so let see now, we pay back the original initial commission to the provider, and then charge the client for 25 years servicing! I can see that working (not)!

  15. Good one Nic.
    Endowments as you say were sold(bought) because of certain obvious advantages)
    1.inclusion of life cover until end of policy.This is now of course one of the reasons second hand endowments are still popular as a guaranteed form of investment-just imagine ‘guaranteed’!
    2.Many people could not afford the monthly payment required to buy the house of their dreams. Endowments including low cost endowments got them onto the ladder. Did they ever calculate just how much they saved and then added it back to the returns they achieved and then added it on to he very high tax free investment return they got when selling their prime residence??
    3.Those who took repayment mortgages-just how many lost a lot of money when they moved house within 5 years-none of the money they paid in interest was saved!!
    Now to the basic facts of life-
    Actuaries design products that are profitable but unsellable.
    Sales and marketing departments design products that are saleable but unprofitable.
    Far too many Life companies have had Actuaries and Accountants as their heads.
    This is now coming home to roost.
    Get us out of this mess,if you can!!

  16. In Internet slang, Nic is a troll ie someone who posts inflammatory, messages in an online community, such as an online discussion forum, chat room, or blog, with the primary intent of provoking readers into an emotional response. Don’t play his game its aimed at you and me not the public!

  17. To those who raise the question, I’ve publicly said on more than one occasion here in the pages of MM that my endowment paid back more at maturity than its guaranteed sum. But that isn’t the point is it?

    First because I was very lucky: my endowment was with ScotAm and then the Pru and – unlike so many others massiveely underwater at the present moment it actually managed to do what it said on the tin. Second if you sell a product that is so inflexible the vast majority of people surrender it long before it matures – and have to accept hefty losses into the bargain – then it isn’t the right BLINKING product for them in the first place, is it?

    In any event, the real issue, as some of the more astute among you have managed to understand is that of hefty hidden charges in the pension products sold in the late 1980s and early 1990s, products structured in such a way as to con the public that the RIY was a lot lower than it turned out to be. I am staggered that rather than attack the companies that operated these charges – some of which were sold by today’s IFAs – you see fit to attack me for being “negative”. Any casual reader going through some of your comments would be sickened by the defensive and hostile tone one or two are using to defend what was quite clearly a massive con on the general public. Kind of sums one or two of you up really.

  18. One question lurks? Did the endowment shortfall review itself cause more consumer loss through the surrender of perfectly good endowmnents than the actual predicted shortfalls at maturity, many of which were projected on a doubtful basis. Of course this is not to mention those mortgages that were not thereafter protected with death and critical illness benefits.

  19. Here is your problem Nic, although from time to time to raise a few good points, you earn your living by winding up the IFA industry, and you love it don’t you.
    So don’t be surprised mate that whatever you may say positive or negative will generally never get a good response. We don’t like you, end of!

  20. @ Anonymous 3 Aug 9:31

    “We don’t like you, end of!”

    Thats a bit harsh.

    You may not like what he says but unless you know him personally how can you possibly not like him??

  21. My job is to present a different, primarily consumer-focused look at issues that affect the industry in general and IFAs in particular.

    By definition, it will run contrary to many of the cozy assumptions and self-delusions some of you have about yourselves. If you don’t like to read what I write, that’s too bad

    Actually, the idea that some of you might not like me as a result is a badge I wear with massive pride…

    In fact, judging from some of the outrageous attempts to defend the indefensible if that weren’t the case I would be ashamed at the possibility that I hadn’t gone far enough.

    Back on topic, let’s be clear: is there ANYONE here who is prepared to say that the way PP providers deliberately front-loaded their charges to engineer lower overall RIYs in the way I described in my column was honest? That, knowing full well the majority of policyholders tend to halt contributions within the first five or six years, it was a proper way to treat their policyholders? If you do think that, I really don’t know how some of you sleep at night.

    Again, I’m happy for you to have a go at me. But while you do, remember that it is the casual dismissal of genuine concerns like this – clearly documented in the article I wrote (the figures I quoted originally came from Money Marketing in 1996, BTW) that lowers people’s estimation of the industry.

    And the appalling reaction from some of you to my column – which will be read and noted by many casual readers of this site – will resonate wider than you think.

  22. Nic

    Well said!

  23. Let us assume “Pension man” is one of Nic’s colleagues!

    I stand by what I said!

  24. Anonymous 11:50am

    “Let us assume “Pension man” is one of Nic’s colleagues!”

    I most certainly am not!

    I just dont like to see people being lambasted for putting forward their opinion and, in this case, making a very good point!

    I would assume that given your comments you agree that the charges described are perfectly reasonable?

  25. Hindsight is a wonderful thing!

    Products and processes have massively in most walks of life during the last 30 years and what was available within the pension marketplace at the time was marketed accordingly. Front-end loaded or initial and accumulation unit contracts (all with monthly policy fees as I recall). You either lost value up front, or spread the cost across the product’s lifetime, hopefully with these costs being sponsored from growth.

    That is what the industry had to work with!

    You bought an endowment Nic, would you have bought a PEP or an ISA Mortgage plan if they had been available at that time? For sure you would, not necessarily more cost-efficient, but more tax-efficient. Would they have worked as well?

    To decry the sale of the only products which were available in many instances (direct sales forces had no choice and represented a big share of the market back then) is being liberal with the facts and that is maybe why some are being more defensive than others.

    Let’s be clear Nic, nobody disagrees with the fact that modern products are more flexible and better suited, in the same way that the internet can be better than the old method of telephone and post.

    Lest we forget, even the internet was not functional back in the early to mid-80‘s. That is how far we have come in such a short time, so less selective memory and more balanced opinion might prevent you from needing to defend your stance in the future Nic. Just an observation to temper your clear frustration!

  26. “Pension Man”

    I most certainly do not think these charges are okay; I have made this point earlier.

    But this is the deal “Pension man” as it seems you don’t like to see people getting lambasted!

    If you constantly voice a negative opinion/voice to people who care passionately about a job they are doing, you have to expect some kick back, that’s what Nic gets and that’s what he loves. He couldn’t do our job for all the money in the world he has no empathy with anyone!

    It is so much easy in life to sit back and criticise what others have done. It’s much harder on a daily basis to push forward, stay positive despite all the negatives, I know which I prefer.

    Frankly the media in this country make me sick, they build people up and then try to bury them! They do nothing themselves except pick people and systems to bits.

  27. @Anonymous | 3 Aug 2012 1:35 pm

    Fair point!


  28. For someone who is not and IFA but uses this site for the latest stories in the finance world i find some of the comments astonishing.If you dont like what Nic writes then dont read his articles simple as .All i i ever see on here is people complaining about this and the other. Instead of using your time doing this why not get out there and put the energy into your business.

  29. Pension Man!

    All is forgiven!

    Neutral Man, You’re not for real either Mr Joe public I think not!

    Moneymarketing is used for industry people who share a few positive ideas from time to time, absorbing up to date information on a daily basis is part of what we do from all forms of media and research!

    You are right about one thing though, connecting with the likes of wind up merchants, you included is something I don’t need, so just about to press unsubscribe!

    Now what was I doing before I got wound up, trying to think positive and move my business forward….have a good weekend peeps.

  30. gary fairbrother 5th August 2012 at 8:33 pm

    Nic isn’t a ‘troll'(as claimed above) he’s a newspaper columnist. The fact that the newspaper has an online presence doesn’t alter this fact. However, if anyone has evidence that Nic lives under a bridge and has a strong aversion to billy goats, gruff or otherwise, I will be happy to stand corrected.

  31. Nic, thank you for answering the question on how your endowment performed, that was really bugging me! You may have stated it in previous articles but I have not read them, or if I have to not recall your name (no offense intended as I read loads of articles).

    As a journalist Nic has to have an ;angle’ and to provoke a reaction would be a success in that field of work. Although I do have a slight criticism which is that the article started out talking about endowments (and didn’t finish the story, but that was rectified later) then went into a rant about pensions.

    I wasn’t advising 30 years ago (I was a toddler) but have been advising for a decade now. It is easy to criticise the advisers back then who arragned endowments with hindsight, but obviously they didn’t have that when advisting then! The way I see it is there were some bad advisers then who said ‘this will pay off your mortgage’ knowing full well it might not, some who said ‘this will pay off your mortgage’ out of naievity as markets seemed so rosey then, and some who said ‘this is designed to pay off your mortgage but if markets fall it won’t’ – the sensible advisers! But the industry has learnt now from this ‘over optimism’ and the pension charging issue is another subject all together.

    One other criticism of saying the endowments were all unsuitable for his 16 friends, they probably were suitable for most at the time. Given that they all beleived themselves to be in stable relationships, that they would have a mortgage for the next 25 years on that property or a bigger one if things went well for them financially and/or they popped out a few babies, as I recall many liked the flexibility of ‘moving the endowment with you’ when you moved home, so for those that upsized and went 100% capital and interest/repayemyt as opposed to continuing the endowment and arranging the surplus on a repayment basis that was their choice to do so. And as many bad advisers or overoptomistic advisers selling endowments I’m sure most sold the policies to your educated university friends as a 25 year, etc policy, designed to make £X if kept for X years.

    I do very much agree Nic that something should be done regarding these exit charges on pensions. Given the money that is spent on regulation and the time spent by the regulator on more trvial matters this biggie does deserve some attention and a resolution.

    Don’t agree you are a ‘troll’ otherwise all journalists are, but love the expression, have never heard that one before and it did make me chuckle.

  32. Eliza,

    As I said, I’ve long made it clear that my endowment paid pack more than my mortgage would gave been worth had it still been used to pay off the original mortgage. But that was never my main point – especially given that almost no-one I ever met apart from me actually carried on paying into his or her endowment for the full 25-year term.

    The key issue, as I’ve argued for almost 20 years (18-19 years to be more precise) is NOT that people shouldn’t be accepting investment risk en route to higher returns but with-profit endowments were always highly inflexible front-end-loaded products unable to take into account people’s changing circumstances over 25 years.

    And realistically, how could they? How can any of us presume to predict what is likely to happen in their lives 25 years down the line? Most of us don’t even know what’s going to happen a few months away, for crying out loud.

    Sorry, there is no need to debate it, it’s a simple fact: just look at the surrender stats for EVERY provider in EVERY recurring initial five-year period from the early 1980s onwards, which showed that up to 50% of surrenders happened in the first few years. All along, these stats were well-known both to life companies and the advisers who sold them, btw.

    So if you accept this basic fact, that made endowments unsuited to the end they were being sold for. Yet sales carried on regardless for almost 20 years, clearly benefiting the salespeople and the life offices, NOT the vast majority of punters who bought them. In effect, this was a huge transfer of wealth from consumers to the industry, with the tiny minority of us who managed to keep payments going into our own endowments being allowed a few crumbs from the table.

    I think that’s disgraceful.

    As for “trolling”, the person who called me a troll clearly has no understanding of what they are. Among many things he has little understanding of.

  33. I missed this discussion and only just today tripped across it. One of the interesting topics that developed is about Endowments. When I sold them, I used Money Management & The Savings Market quarterly comparisons as part of the selection process, using their ‘Actual Payouts’ coupled with ‘Payout composition’ i.e. guaranteed sum assured, reversionary bonus and terminal bonus. The general cost of a repayment mortgage plus life cover was dearer than a Low Cost Endowment mortgage and most clients opted for the latter. Unbeknown to me – The PIA/FSA had received information from some company Acturies stating that the assumption they were working on would NEVER repay the mortgage amount covered. The PIA/FSA were in discussion with ALL THE PROVIDERS for several years and still allowed them to sell the flawed product with the misrepresented figures still being supplied to Money Marketing and The Savings Market which was used by advisers like me as proof of concept. This only came to light by an investigative journalist (NOT NIC the rabble rouser) but a proper one. Even then the PIA/FSA would not divulge the names of the companies (as it would destroy market confidence in household names). This is the type of journalism Nic should be doing and trying to ‘watergate’ the collusion between the FSA, banks and insurance companies. If this had been done in this case, the Insurance companies would have (should have) picked up the bill for miss selling not the IFA.

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