A year on from the implementation of the pension freedoms, unconsidered secondary consequences continue to make headlines.
I refer to the high profile condemnation of “rip off pension companies” by government ministers, reported through national press in connection with perceived penalties on individuals wishing to access the pension freedoms through existing pension contracts, or moving to others if the ceding contract will not permit the flexibility. Headlines have highlighted clients often suffer a loss of “hundreds of pounds”.
I believe that the industry has put up a readily defendable position in response to this ill-informed attack and despite the fact that these penalties – and in particular the ones deemed “excessive” – impact upon only a small minority of contracts, the FCA has been tasked with the review and capping of excessive early exit charges.
This is a hugely complex area and one that I am sure the FCA will not be looking forward to investigating and enforcing. However, the regulator’s job has been made slightly easier by one or two insurance companies voluntarily capping fees on their own policies to 3 per cent or 5 per cent maximums.
It is interesting to note though that these companies, while waving the white flag of surrender, are among those whose exit charges do not feature highly in the lists of “the guilty”.
Accessing the freedoms
It is a good idea to understand what these charges are and how they have arisen.
They fall into two sections. The drawing of benefits under the pension freedom rules and the transferring away from contracts which do not permit the full flexibility of benefits.
The two are connected since the contracts, when drawn up many years ago, were not designed to operate unfunded pension lump sums (UFPLS) or flexi-access, and nor were the administration or computer systems designed to accommodate them. It would seem reasonable then that in enhancing these policies to accommodate wider benefit options the consumer should be asked to contribute towards the costs as they benefit from the new options. What might be a reasonable cost, of course, remains the question.
Some providers, and in particular those who are managing closed books of business, are not able to spend considerable sums adopting new processes and systems since they are running their businesses on what were previously known conditions and on fixed servicing fees. For these and some other firms, a transfer away is the only means of the client accessing the new freedoms.
The charges themselves were almost without exception contractual terms written into the original agreements and in the main recouped expenses such as commissions and setting up costs which were expected to be claimed back over the full term of the contracts. By withdrawing early from the contract, the charges to be recouped from future years are simply crystallised now. As such, the charge is not an “exit charge” but simply the cost of the contract incurred at outset being withdrawn from contract proceeds now, rather than spread out over future years and gradually recouped.
