Royal London asked to review exit charges on legacy pensions

Loney-Phil-Royal London-2013
Royal London group chief executive Phil Loney

Royal London’s independent governance committee has asked the provider to review exit charges on some of its legacy products because they are no longer justified by commission payments to advisers.

In its annual report on value for money at the provider, the IGC says that while exit charges were necessary to offset “significant up-front costs”, including IFA commission payments, on pensions decades ago, the provider should be able to remove leaving penalties on more modern contracts since commissions have been banned.

The IGC’s report reads: “The one area of Royal London’s charges we have asked them to re-examine for 2017 is exit charges on older products sold prior to April 2001. Exit charges were a necessary feature of the market in some older contracts before that date in order to ensure fairness across customers and to recoup expenses where members left the scheme early.

“The manufacture and sale of workplace pensions in the 1990s and early 2000s involved significant up-front costs. It was commonplace to recoup these costs, including the cost of commission to financial advisers, throughout the term of such contracts…Modern contracts do not support commission payments so can be offered on a clean basis with no exit charge.”

The FCA’s 1 per cent exit charge cap for over 55s came into force on 31 March. The IGC says that Royal London should also examine exit charges for customers below retirement age however.

The IGC says: “We encouraged Royal London to consider whether reductions should be made to exit charges, particularly in relation to any outliers. This was in addition to forthcoming regulatory restrictions on these charges…We consider that taking proportionate voluntary action on exit charges during 2017 in respect of legacy workplace customers may be appropriate, in addition to that required by regulation.”

The IGC also reviewed how Royal London checks that advisers who select a default fund ensure it remains appropriate for customers.

It concludes: “We were satisfied with the general procedures Royal London has in place, but will be doing further work in this area during 2017.”

While the IGC finds that the standard of customer communications is generally good, ongoing contact could be improved.

The report reads: “Royal London clearly strives to achieve engaging communications with customers. While this ambition is met for the initial communications with new customers research has shown that other communications are not achieving the standard desired. We have asked Royal London to prioritise this area and show their plans in this respect for the short, medium and long term.

“One aspect of customer service that we will be asking Royal London to consider during 2017 relates to customer annual statements. We consider that it would improve the customer’s engagement with their pension for these to be issued quicker than at present and the statements should engender a stronger sense of ownership from the customer.”