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.
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.
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
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.