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Smoke and mirrors: Osborne moves to deflect pensions blame

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George Osborne’s crackdown on exit fees has been dismissed as a media gimmick by providers who warn the FCA is dangerously behind on regulating the new pension freedoms.

Leading figures at some of the country’s largest life companies say the Government could run into problems if it attempts to force firms to scrap exit charges.

The Chancellor’s latest announcement also calls into question the Treasury’s relationship with the regulator, with former pensions minister Steve Webb suggesting the industry investigates how independent the two organisations really are.

Long grass

The Government has faced mounting pressure in recent weeks as its flagship pension reforms threaten to come unstuck. The problem centres around barriers to access, with some savers – such as those with guarantees – finding it harder than expected to cash in their pots.

Politicians’ responses have been to blame pension companies for blocking the reforms. They argue providers are being overly conservative in applying the advice requirement and are levying “unfair” charges. The Treasury consultation, due to launch in July, will address “excessive early exit penalties” and seek to make the transfer process “quicker and smoother to help people make use of the new freedoms”.

A life company insider says the move is a way to kick the issue into the long grass. He says: “How do you get rid of media interest? Say you’re consulting on it.”

He adds if exit charges were abolished or capped, the policy would have to be applied across all products, including platforms and with-profits funds.

He says: “The worry for providers is this could start a merry-go-round with the platforms that are out to snatch new business. If you look back in a few years you’ll see the with-profits funds that have already moved onto platforms will be another misbuying story.

“Is it wise to encourage people to leave policies – essentially what you’re saying if exit fees are scrapped – meaning they move to a new platform which actually has quite high charges and doesn’t have as valuable benefits?”

Aegon regulatory director Steven Cameron says: “There’s been trial by media over the last few weeks so we welcome a more considered consultation which can allow everyone to review what’s reasonable and what’s not.”

But providers say the Government will stumble if it goes after exit fees.

Legal & General pensions strategy director Adrian Boulding says: “As a general principle, when you buy something and say you want to pay in instalments then say you want to chuck it away before you’re finished, you have to pay up.

“It will be very hard for the Government to say a provider should waive the last instalments – that’s rewriting what was a fair contract in the first place. But if the regulator finds it’s more than that and providers are applying unfair charges, then the FCA or Government should step in. But I suspect the regulator could already do something – it has such broad treating customers fairly powers if it found unfair penalties being applied it could already deal with that.”

Exit charges are typically levied to recoup commission or set-up costs intended to be paid off over the life of the policy. Some customers were given “signing on” bonuses when they began using certain products, sometimes up to 10 per cent, on the proviso they would stay invested
until their planned retirement date. In addition, with-profits policies often have early exit fees to protect customers who remain invested.

Playing catch-up

The FCA has been tasked with supporting the Treasury’s consultation by collecting information to try and understand the “scale of the problems” facing customers who want to transfer to different providers.

But providers and regulation experts warn the regulator has fallen behind the Government’s agenda and failed to listen to the industry ahead of the reforms’ rollout.

Dentons director of technical services Martin Tilley says: “The Financial Ombudsman Service and the regulator have not caught up. For instance, the FCA said recently it is going to review the transfer value analysis process and it acknowledges the process is outdated. They should have been looking at these ahead of the flexibilities coming out.”

Regulatory consultant Richard Hobbs warns there is a danger the Government is beginning to ride roughshod over the regulatory process. He says: “Healthy debate between Whitehall and Canary Wharf is a good thing. But are they engaged in a proper consideration of the facts or has it descended into something less than that where personalities begin to predominate over facts and analysis?

“It’s tricky because a balancing act has to be performed, where it is assumed the needs of the many are greater than the needs of the few. Those people wishing to access their cash are probably the few, not the many. The Government must be careful not to create subsidies from one class of investor to another.”

The regulator is already engaged in a long-running review of legacy pension schemes. After finding up to £26bn of pension assets held in funds charging over 1 per cent, the new independent governance committees were told to assess the value for money of old contract-based schemes, including those with exit fees, by December 2015.

But former pensions minister Steve Webb says the new consultation is not duplication.

He says: “There is a case for a broader piece of work – there is a distinction between a considered review of the legacy audit and the more immediate problem of 55-year-olds wanting their cash tomorrow.”

Webb also questions the independence of the regulator.

He says: “It’s always been a dilemma that the regulator was set up to be at arm’s length from the Government. How long can we keep saying the regulator is independent when the Government tells them what to do? If you observe that the FCA’s being told what to do, you could say they are effectively one and maybe we should stop pretending they are not.”

Free the pension prisoners – scrap exit penalties

There is £800 million held by savers aged over 55 in pension schemes which have exit penalties of greater than 10%. These unfair exit charges distort competition, stifle innovation and damage consumers’ interests. It is time the industry put this legacy issue behind it and for the Government to introduce legislation scrapping these charges.

I was told last week on Twitter that pension exit penalties were the amortisation of future charges. That is a bit like eating a starter in a restaurant and wanting to leave because it was poor quality but being charged the “amortised” cost of your main course, dessert and coffee.

Consumers facing these charges have been abandoned. It is not entirely unexpected that the Association of British Insurers failed to mention exit charges in its 10-point plan for making the pensions freedoms work. It does not have good record of confronting poor practice in the industry.

The FCA could eliminate exit charges with new rules if it thought they were an issue, but the regulator sits on its hands. Will the new Independent Governance Committees insist on the removal of exit charges? Well, probably not, as these committees are largely retirement homes for actuaries, investment bankers and pension company executives.

All of these groups are asleep at the back of the shop whilst consumers exercising the new pension freedoms are gouged with excessive and unfair exit penalties. It is time for Ros Altman to take some action. She should immediately publish the names of every single insurance company levying exit penalties and announce the swift introduction of new rules banning this legacy practice.

Ex-Which? financial services team leader Dominic Lindley

Adviser view

Alistair Cunningham, director, Wingate Financial Planning

Most penalties are recouping early charges or to protect the interests of other policyholders. If a pension contract has unfair terms legislation already exists for consumers to get out of those contracts.

If the terms were due to an old style of plan that levied charges in a different way it does seem perverse that the Chancellor would be looking to make a special case. I’m all for consumer protection but sometimes these things go too far.

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. The problem with Dominic’s argument is that all exit charges are automatically being branded as unfair and excessive. There were many contracts around in the 1990s where transfers received enhanced allocation rates depending on the term to retirement. If a client takes funds early from these contracts then the exit charge (not penalty) is there to achieve the same result as if they had selected the early retirement age as the original term. Otherwise that person would receive an unfair bonus over a different client who selected the early retirement age as the original term.

  2. If a mortgagor cried foul upon exiting a fixed rate contract and being charged loan breakage fees, he/she would be given short shrift. Contractually, these policy terms were set by reference to prevailing overheads and targeted margins. After all, policyholders are quite happy to hold providers` feet to the fire and insist that GARs are honoured. It`s a two way street.

  3. Exactly as Adrian Boulding stated – the Ts&Cs for these contracts at the outset should have been clear and concise. If they were not or if the charges were unfair then there are grounds for compensation.
    If i buy a car on a 5 year lease deal and decide after 4 years I want to sell it i have to pay any outstanding balance and outstanding interest as that’s what I signed up to – how is this any different ?
    This just reeks of politic points scoring – implement a half thought out reform and blame others when something they hadn’t thought about comes up !

  4. Blame? He ain’t seen nothing yet. As I have been bleating for ages these ‘freedoms’ are nothing but a tax grab. Any who bother to read my rantings will have seen that I estimated an increase in tax revenue of about £300 million in the first couple of months of allowing the stupid to trash their cash.

    Well according to a recent report by Hymans Robertson the Treasury is surprised to learn that they will probably take about £1.2 billion in extra tax this year. Surprised? Again this proves they are pretty clueless. Since April 6th about £1 billion has been withdrawn, a significant proportion by those still in work. So my estimate of £300 million extra tax in the first 2 months is not wide of the mark.

    When these people then have to rely entirely on the State when they give up work the effluent will then truly hit the ventilator.

  5. But that will be after the next election.

  6. Trevor Harrington 26th June 2015 at 10:23 am

    Morning Gentlemen,

    In my opinion, the problem is deeper.

    In order to reduce the massive budget and fiscal deficit, which was left to us by the previous Labour Government (remember the note in the treasury to say that there is no money left), this Government has had to dig very deeply indeed in order to find the savings necessary to stop us going bankrupt (remember the trip to the IMF in the 1970s after the Wilson and Callaghan Governments who also spent everything, resulting in two consecutive years of 25%+ inflation?).

    The obvious way of dealing with these twin budget crises is to tackle the largest visible public spending item – state pensions.

    Using the excuse that we are all living longer, which according to the Office For National Statistics 2012 survey we are not, the Government has had to cut the state pension, by reducing and merging SERPS into the basic state pension, and also by extending the retirement age of women and men to age 67.

    The cost of these two changes to an “average” married man and woman, in lost state pension income over their retirement years is anything up to £250,000 – yes you read that figure correctly – please check the maths for yourself.

    Of course, the saving to Government spending is the same figure, per couple in the UK who are approaching retirement. That is an awful lot of money, and I would speculate that it is sufficient to close and redeem both budget deficits all on their own, probably within the next 15 years.

    However, as I said at the beginning, there is another problem.

    We are probably just about at the time when very few, or indeed no more at all, new state pensions will be awarded or come into actual payment for the next several years. Obviously, this is due to the movement of the state retirement age out to age 67 for men and women.

    The Chancellor’s problem, to which I am referring, is that this huge saving to Government spending, has two corresponding, and rather unfortunate side effects –
    1) there is a massive corresponding reduction in new money coming into “high street” spending
    2) there is a corresponding reduction in income tax, corporation tax, and vat revenues from the reduction in that high street spending.

    One way of increasing spending in the high street, and the resulting revenue to the Treasury, is to allow people to take their pensions in whole and early, tax them accordingly, and hope that they spend the rest.

  7. Let’s not forget that the charges date back to a time (before my time incidentally) when life companies had offices in most towns, the cost of admin was higher, human intervention was high, commissions not only existed but were no doubt significantly higher than the advice charges now typically being made and therefore the costs associated with such contracts reflect this.

    Perhaps the question should therefore be on which regulator and Governments watch were these ‘rip off charges’ (if that is indeed what they are) being applied.

    On an aside, I’m going to complain about a washing machine I paid £500 for 20 years ago. It’s not a patch on the £250 washing machine I bought last week….. my new one does all manner of things – various temperature settings (even one for training shoes!), an Eco cycle, it’s much cheaper to run and even has a tumble drier built in. The one I bought 20 years ago did nothing like this and therefore I must have been miss sold….

  8. “the Government is beginning to ride roughshod over the regulatory process”. How’s that for irony? The government riding roughshod over a regulator that itself has a long and unequivocal history of riding roughshod over anyone and any body that dares to try to stand in its way!

    If the regulator wants to initiate meaningful action on apparently unfair early exit charges on long term contracts, it should start by scrutinising the wordings in those contracts to establish whether or not providers are exercising unreasonable latitude in how they take advantage of woolly wordings such as “an actuarial calculation”. A defined scale of contractual early exit charges is one thing and probably difficult to challenge. You can’t just take a sledgehammer to a legal contract (much though the FCA would probably like to). Providers imposing whatever charge they feel like on the day is quite another matter and should be open to challenge.

    Then again, the FCA rather shot itself in the foot (at our expense) with its botched announcement of its proposed review of closed policy books, so that in itself has compromised its position.

  9. At the risk of playing devil’s advocate, I’m not sure I really buy the argument that exit fees are necessary to pay for the costs of the contract. As Paul Stocks says, the charges for these contracts relate to a time when life companies had more local offices, higher admin costs, higher commission, etc… well, they don’t have those any more, so what are the exit penalties going towards? Are the life companies really paying for costs incurred 20 or 30 years ago with exit penalties paid today? I really doubt it. Since those costs were incurred 20 or 30 years ago, many of these life companies have been taken over by others, floated on the stockmarket and then taken over again. The initial costs of these plans were paid for, absorbed and forgotten years and years ago. If you asked Phoenix what these transfer penalties pay for, could they really explain it convincingly?

    I have more sympathy for the argument that removing exit penalties would be unfair because they reflect enhanced allocation, and that someone who selected an earlier retirement date, and therefore didn’t get enhanced allocation, would lose out. But all of this is so far in the past that I’m not sure any of those who would “lose out” really care…

    …and quite frankly, having seen dozens of old-style pensions, I haven’t seen many of these generous enhanced allocations that others above are referring to. More likely, you paid a 5% bid-offer spread, 7% per annum charges on a large chunk of the fund thanks to “capital units”, 1% on the rest, and now the provider is asking us to believe that it needs to take an exit penalty as well, otherwise it wouldn’t be able to cover the amortised cost of these incredibly generous terms. Piss off.

    I can understand the “fairness” argument and the “the Government shouldn’t be allowed to tear up contracts” argument, but the “exit penalties cover costs incurred 20-30 years ago” argument is specious. Life offices are not going to go bankrupt if they’re banned from levying a £1,000 penalty on a £50,000 pension fund that they’ve had 5% initial and 1.5% per annum from for years. These exit penalties are insignificant to the life offices but very significant to the people that are stuck with them.

  10. Fully agree Harry. Pension tax relief should be a way of deferring tax revenue into the future. All these freedoms have done in my cynical view, is allowed the economy access to a huge wall of money. We all know that savings are a net leakage to the GDP multiplier equation(C+I+G+(Ex-IM)-S). All Osborne is attempting is an increase in personal consumption (C) in the hope of kickstarting GDP and making the Tories look good. All at the expense of future tax revenues in the face of a demographic timebomb. Government is supposed to look after its citizens and protect our futures. All they are doing is robbing tomorrow to pay for the profligacy of today.

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