Handcuffed to products of the past
With age comes a tendency to reminisce – 1997/98 sticks in my mind for a number of reasons. Daughter number two came on the scene so sleep was in short supply. I broke my leg playing football – a big eejit from Ayrshire did it and ran away. It was a sore one and meant that I was in full leg plaster for three months. With my mobility gone (some would say it never came back) I had lots of time on my hands for reading.
During that period I remember getting the specification for a product that was about to launch. It was time for big change – gone were the penalties that applied when the customer decided to cease contributions or transfer elsewhere. Real progress would take some time. Some would champion ‘no exit’ or ‘premium cessation’ charges – even though 10% of every premium (5% bid offer spread and 95% allocation to units) and a hefty monthly policy fee were deducted to pay for the privilege. Over the next three or four years product shapes changed as the shape of adviser remuneration changed and the push towards simpler products became real.
Over recent months the debate on penalties on old style products has intensified and here is the thing. Daughter number two is no longer a baby. In fact she is maturing in to a fine young woman – clearly the influence of her mother. She drives, she is at university, and she enjoys the odd glass of wine. My leg is much better too.
Today things are also very different in the world of pension products. With time moving on it seems odd that we need to debate things like pension exit charges and the merits of products that were popular such a long time ago. There are some aspects that are not open to debate. I totally get that from a contractual point of view providers have the right to apply these charges. I also get it that the charges were disclosed in the product literature. It is reasonable, therefore, to argue that these points can’t be ignored. It is why our call for change related to providers that applied penalties that prevented their customers from accessing the pension freedoms. We surveyed advisers at a recent AJ Bell event to get a feeling for whether they had clients who were being prevented from accessing the new benefit options due to penalties. As the table below shows, almost half of the room had clients affected by this.
|Roughly what proportion of your clients have been prevented from accessing the new pension freedoms due to early encashment penalties?||%|
|more than 25%||2%|
When we went public with our view that an early encashment penalty that gets in the way of someone accessing the pension freedoms was wrong, some were quick to point out that we apply a charge on transfers. The problem with some early encashment charges on older pension contracts is that there is no obvious link between the charge and the work required by the provider to make the transfer. We charge a platform custody charge that is significantly below the average in the market. It means that we charge for specific events such as transferring out but, importantly, our charges are always appropriate to the work required. So any exit fee has to be relevant to the work carried out by the provider today, and should be set at a reasonable level. It should also be clearly disclosed and easy for people to understand.
The main reason given for old style exit fees is to cover initial costs and I understand that this has to allow for the commission that was paid. Even allowing for that, you have to question whether it is reasonable to still be collecting charges for events that may have happened around a quarter of a century ago.
It is also debateable whether some exit fees really do relate exclusively to initial set up costs, or whether they are actually about on-going provider profitability. It is admirable that some providers have moved to soften penalties but there is a reason why many haven’t – many of these old style products are very profitable. It is also interesting that the providers that have moved to reduce early exit fees are those that remain open to new business and hence have a brand and commercial interests to protect. Closed book businesses don’t have this motivation, if this trend continues there is a case to be made for ensuring that this is where additional regulatory pressure may be needed the most.
Looking at everything together, the financial challenge for these providers has proven to be the elephant in the room for many years. Change will only happen if you can balance the needs of the customer with the financial consequence to the provider. If you can find a balance then it is possibly not a bad place to be, but you can be sure that the answer is not handcuffing people to products from such a long time in the past. After all, situations change – which is why my daughter no longer has to be in bed by 8 and I no longer have my leg in a plaster cast. Mind you, that clown from Ayrshire would still be well advised to keep running if we ever cross paths again.