Skandia Life pensions development senior manager Brian Newbould responds
to Standard Life's views on transfers
Standard Life's article headlined, Think about customers' needs (Money
Marketing, April 27), casts serious doubts over how many top pension
providers can claim to offer their customers penalty-free transfers between
The article contains a paragraph which throws into doubt how many
companies have been able to market their high early transfer value plans
over recent years.
The paragraph says: “Where a customer has already made a significant
investment in with-profits, it may not make good financial sense to
crystallise the terminal bonus that has been built up.”
In simple terms, this means customers will be penalised as the terminal
bonus will be less than the amount they are entitled to.
It is worth remembering that terminal bonuses represent the difference
between the amount earned on the contributions and the amount already added
by way of reversionary bonuses. Terminal bonuses are subject to smoothing
but the paragraph clearly implies a deduction beyond that required just for
This underpayment must be due to good old-fashioned with-profits
discretion being exercised in one or a combination of the following ways:
To pay less terminal bonus on transfers than the amount due in order to
build up “free reserves”.
To recoup out of the terminal bonus the balance of the high acquisition
expenses not recovered at the time of transfer by the “penalty-free”
level-loaded contract design.
In either case, the effect is the same – customers are suffering
retrospective charges. They will, therefore, have been misled by their key
features documents which would have shown high transfer values without any
such addit-ional deductions.
The table above shows the transfer value to expect on with-profits
policies taken out one, two, three, four and five years ago for a single
premium of 10,000 and a regular premium of 100 a month.
It can be used as a ready reckoner by applying it pro rata to the level of
premium actually paid by a client.
The table assumes the with-profits fund has performed in line with the
average balanced managed fund over the period.
It assumes a 5 per cent bid/offer spread and an allocation rate of 100 per
cent for single premiums and 95 per cent for regular premiums.
If anything, this is likely to be an understatement of the asset
performance, and hence transfer value, especially for those offi- ces which
have advertised themselves as financially strong and, therefore, able to
invest an above average amount in equities.
Transfer values below these values will indicate either poor investment
performance on the part of the with-profits fund or retrospective charges.
It will be very difficult to blame a large shortfall on the cost of
No doubt, this is an area where the regulators will take a close look
next year as the high-profile “penalty-free” contracts marketed over recent
years are transferred to stakeholder pensions.
The number of such transfers, and hence the potential hidden penal- ties
involved, could be enormous.
Once again, this all points to the need for with-profits to come clean and
to start to operate in a far more transparent way.
In particular, mixing up charges and investment performance in terminal
bonuses should stop.
Charges must be made explicit as they are in unit-linked contracts so
there is no possibility of retrospective charges in future.
Then, with terminal bonuses only there for investment purposes to make up
the shortfall in the bonuses that have been added, customers must be able
to invest safe in the knowledge that there will be no hidden investment
penalties and terminal bonuses will make up the short- fall, no matter when
they are crystallised.