Personal PensionJul 30 2015

Five key takeaways from exit charges consultation

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Five key takeaways from exit charges consultation

Earlier today the government published its consultation into whether exit charges could be cut or capped for those looking to access their pensions early, asking the industry for views on its three proposed courses of action.

FTAdviser has dug deeper into the document to unearth five other key points of interest:

1. Take the survey.

Alongside the consultation paper, the Treasury launched an online survey to ask pensioners and industry experts how to remove other barriers that may be stopping people enjoying the benefits of increased flexibility over their pension pot.

Running for the same 12 week period and forming part of the government’s response, it asks for the experiences of people transferring their pension from one scheme to another, including whether they have faced any fees for leaving early.

2. Regulators also hard at work.

Mentioned several times in the consultation is the fact that the Financial Conduct Authority and The Pensions Regulator are also carrying out a comprehensive evidence gathering exercise on the existing processes for pension transfers and any exit fees members might incur for.

Both regulators are also gathering evidence on how the advice requirement for safeguarded (DB) benefits is being applied and how this interacts with schemes and providers’ decisions on requiring advice.

“The government appreciates that there may be circumstances when individual schemes and providers may require independent advice in relation to a particular product,” read the paper.

“However, the government does not want such requirements to become a barrier to accessing products and therefore wishes to avoid the situation where schemes and providers may feel forced to require advice where it is not necessary.”

3. Defining exit penalties.

The consultation admitted that there is no single working definition, either in legislation or used by the regulators, to cover the various fees and charges commonly perceived as ‘exit penalties’.

This is partly because they can arise from a number of things, including administrative costs to the provider, other charges related to the divestment of certain assets, and the recovery of an initial commission payment previously paid to an adviser.

The government made clear that any option which could cut across existing contractual property rights, such as a statutory cap on exit fees, would represent a significant step, adding that “any such measure should only be taken as a proportionate means of achieving a legitimate objective in accordance with the public interest”.

4. Investment deductions.

Alongside the broad umbrella of ‘administrative costs’, the government pointed out that exit charges may be conflated with deductions to projected investment value.

Market value adjustments (MVAs), sometimes referred to as market value reductions, take the form of an adjustment to the underlying value of a person’s rights in a with-profit fund contract when that individual leaves the scheme before their selected retirement date.

The consultation considered that providers’ rationale for applying MVAs in the case of personal pension schemes is to ensure that remaining investors in a scheme are not disadvantaged by the exiting member where investments are pooled, adding that “there is also an argument that, since customers are signing up to a long-term contract, early exits can disrupt insurers’ long-term pricing models”.

The government does not propose to consider the position with regard to MVAs as part of the consultation, but should evidence emerge that they are being applied by occupational pension schemes in addition to, or instead of, using the process for calculating the cash equivalent of the benefits, it will investigate the issue further.

The document also mentioned terminal bonuses – an additional bonus added to a with-profits policy, specified at the end of the contract and paid as a percentage at the discretion of the provider. These can vary from year to year, by provider, and based on the performance of the underlying investments around the end of the policy.

There may also be a need for providers to improve their communication of these deductions to their members, stated the government, as studies show UK consumers have a limited understanding when it comes to more complex finance terminology. As such, providers should take additional steps to make the valuation sent to members simpler and more transparent, explaining why particular fees and charges have been incurred.

5. Prevalence of exit charges.

Again, the government conceded there was limited consistent research across the market regarding the prevalence of exit fees, which in many cases relate to policies dating back 20 to 30 years or more.

“Although the majority of these schemes are now closed to new members, a significant number of these plans continue to operate for existing customers,” it added.

These assertions were backed by an independent review into legacy workplace schemes published in December found that roughly 7 per cent (£4.8bn) of assets under management in legacy schemes existed where savers would face charges for early exit. Of this, £3.4bn (nearly 60 per cent of funds) is in schemes with exit charges of 10 per cent or more.

“The evidence described above provides relatively good coverage of the workplace market,” it stated, adding “however, the government is keen to obtain further evidence.”

peter.walker@ft.com