Exits fees are unfair. If you’ve been following the national press coverage of pensions, that statement will seem so obvious as to barely need saying.
Much has been made of the devastating impact of exit fees on pension pots and savers’ ability to enjoy the new pensions freedoms come April, with the conclusion that any other outcome than providers dropping them would amount to a scandal.
Surely, no-one could defend evil insurance companies catching unwitting consumers in sneaky penalties if they try to switch to a rival, or take their pension early?
George Osborne’s pensions revolutionary Budget was sold around the idea of freedom – savers can finally do what they want with their pots. It is true to say that exit fees, some wiping out up to 35 per cent according to advisers, will act as a very effective disincentive to transfer their savings to somewhere that allows access to the range of new options.
There have been calls for the Government to intervene on savers’ behalf, but Steve Webb recently played down the scale of the problem, hinting he will not be bending any arms.
The pensions minister is right not to force providers to scrap early exit fees. Exit fees were, in the main, inserted to help recoup adviser fees that were priced on the assumption the customer was going to retire when they said they would.
That may seem inflexible and unrealistic by today’s standards but that’s just it – these policies were written decades ago when the pensions world was completely different.
For instance, some policies were designed around the idea that the running costs of the pension – including the commission paid to advisers for selling them – were paid back over the life of the policy. However, some customers chose to pay all their charges up front, meaning they would lose out compared to those who pay them over time if early exit charges were waived.
Likewise, with-profits customers would lose out if a subset of with-profits policyholders left with the full value of the assets.
As Dobson and Hodge IFA Paul Stocks points out, if the Government steps in and starts tampering with the past it sets a dangerous precedent.
“I’m not against good deals for customers, but I’m pragmatic in so far as when pensions were sold by door to door salesmen and there was an office on the corner, high-costs basis products were just more expensive. In any walk of life, when you go back retrospectively and change things, you set a dangerous precedent. The world is just different now and costs change – it’s very easy to look back 20 years and say it’s a scandal.”
Likewise, with-profits customers “would be detrimentally affected if we were to waive a surrender penalty for a specific group of with-profits policyholders,” he says.
“This is because the surplus in the with-profits fund belongs to the with-profits policyholders and not the insurer.”
Rowley Turton director Scott Gallacher says it would be difficult for the Government or the FCA to get rid of the contracts and that, more importantly, such a move would “destroy confidence in anyone investing in the UK pensions industry”.
“It makes it hard for anyone to launch in the market if they can’t be sure of fees. We should have seen a flood of European companies coming to the UK, but apart from Now: Pensions I’d struggle to find anyone who has made a success of coming here.”
Of course consumers need to be protected, but so do the conditions that allow businesses to make confident plans about the future. Without that, and the competition it should bring, the very same consumers will lose out in the long run.
Sam Brodbeck is pensions reporter at Money Marketing