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The Pensions Regulator gives warning over active discounts

The Pensions Regulator has accused insurers of using active member discounts to rip off consumers as policymakers move to prevent schemes levying higher charges on deferred members.

In a statement to defined-contribution scheme trustees, this month, the regulator warned pension schemes that it does not view active member discounts as “fair” or “acceptable”.

TPR says it takes the same view of AMDs offered through contract-based pension schemes.

In an interview with Money Marketing, TPR executive director for DC June Mulroy accuses pension providers of using AMDs to boost profits.

She says: “We have found that deferred members have been paying an awful lot more for nothing – there were no efforts made to find them and no efforts made to get information to them.

“Transaction charges in general have plummeted in the last 20 years but members do not seem to be getting any benefit from that. I think active member discounts have been seen too often and too easily as a way of making money.”

This follows pensions minister Steve Webb’s decision to extend the Department for Work and Pension’s power to cap charges to include deferred scheme members.

Aegon, Aviva, Scottish Widows and Standard Life all currently offer schemes which have different charges for active and deferred members.

Aegon regulatory strategy manager Kate Smith says: “There are various reasons why an employer would cho-ose an AMD. A lot of companies like them simply because they provide a benefit to people who stay.”

Informed Choice managing director Martin Bamford says: “There is a danger that the regulator goes too far here and blurs the line between regulation and commercial practice.”


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

  1. I am not understanding this. How exactly can a member be ripped off if they are in a GPP with active member AMC of say 0.5% moving to 1.0% on leaving service? 1.0% is still considerably less than Stakeholder charging and presumably less than NEST. Given clients also have the option of maintaining their lower charge when they leave by paying a nominal premium I fail to see how anyone can see that this as ripping clients off ? In this period of low growth rates being able to reduce active client charges in this way is surely beneficial for clients?

    Presumably when a client leaves service with their employer they lose their salary, company car, flexible benefits etc. Is this also deemed “unfair” and “unacceptable” ??

  2. About time, too.
    Plenty of advisers sell AMD products saying they’ll contact a member on leaving service, but very very few actually do so.
    The headline amc rate is used by some life offices ( and IFAs?) to attract new business as some clients can be led to believe the discounted amc is the real amc. Naturally the projections look wonderful as well. The cynic in me notes the high levels of commission that some Offices link in with AMD…

  3. From the AMD rates I’ve seen, 0.5% tends not to increase to 1%. Quite a bit higher. If the plan is a Group Personal Pension, either premiums are going to have to be submitted via a former employer ( on leaving service) = Not Going To Happen, or advisers are going to have to transfer ./ assign pots of money as low as one / two months contribution. Likely to happen? Not without charging a fee.

  4. Suitable Offensive 27th October 2011 at 4:13 pm

    @Anonymous – the employer doesn’t fund the discount as part of the employee’s benefits package.

    The pension provider starts of with a basic assumption about the cost (profitability) of running the whole scheme.

    Once you leave the employer, the higher charges that then become payable from your pension pot either boosts the provider’s profits from the scheme or helps subsidise the (artifically) low costs for those still in employment/contributing.

    It’s an entirely artificial and unfair situation which the majority of individuals don’t understand/appreciate, hence why both FSA and Pension Regulator don’t like it.

  5. AMD – yes a way of making money for insurers, yes a way of providing advice and the costs associated. How many members of pension schemes would not have funded their retirement without market forces providing advice? Regulators need to consider that financial advice is essential and needs to be paid for. How many regulators have their own advisor and provide their remuneration by commission?

    How many of them would be happy with NEST as their personal retirement solution.

    Society is not ready for Fee only or poor quality

  6. Suitable Offensive 27th October 2011 at 4:59 pm

    @ Anonymous 4.32pm.

    Is the insurer is makig a fast buck out of the deferred members? You bet your life.

    Does AMD produce an attractive illustration to entice you into the product? Yes.

    Do insurers provide monetary examples of the impact of losing AMD at the point of sale? Absolutely not.

    How many insurers/employers offer free financial advice to members joining AMD schemes? Let me see – none I can think of.

    For the sake of argument, lets say this additional charge levied on deferred members does in fact pay for advice. Obviously, advice is for the benefit of all and its cost should be borne by all. Ripping off individuals who are no longer contributing left the scheme, often through no fault of their own (redundancy/liquidation etc). Which brings it back to the whole point that AMD is unfair/artificial/discriminatory/misleading.

  7. Serious question. If there is a scheme with an AMC shape of say 0.4% moving to 0.9% on a nil commission fee basis is this deemed to be better or worse than a flat 1% level AMC charged scheme???

  8. The key point is whether the customer understands AMD and its impact if they leave the scheme. Does the information provided by the life office make this clear and transparent?

  9. Group schemes that pay commision are priced using assumptions about contributions across the life of the scheme and the number of members and the size of the contributions etc. If you leave a scheme it changes this data.

    AMDs have the same effect as paid up charges that exist on old style PPs. Are they also to be banned?
    That will cause a headache for many a life company’s back book of business

    On a scheme that is 1% amc with 0.5% AMD that has to have the AMD removed may end up with say a flat amc for all members of 0.75%.

    I think it is unfair for an employee who stays with an employer to have to pay a higher charge during the term to subsidise the pension pot of someone who has left.

    If the TPR insist on this then the all life companies need to do is bring back paid up charges!!!!!

    The TPR and a lot of regulatory bodies etc seem to pick on aspects of advice/products in isolation and don’t see the bigger picture and don’t even do the arithmetic!!!!

  10. Anon @ 5:55.

    No, but the AMCs you mention are likely to be comparing a scheme with nil commission to a scheme with full commission.

    As a personal view, if the deferred member AMC is the same or lower than they could get by transferring to a PP (which requires advice), then most AMD arguments go away (if providers are transparent about it). Many AMD schemes, particularly commission schemes, probably fail that test.

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