Personal PensionJul 30 2015

Gov’t gives trio of options to tackle exit fees

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Gov’t gives trio of options to tackle exit fees

The government has given the industry three different options to address excessive early exit fees and charges on pensions in a consultation published today (30 July).

In June, chancellor George Osborne revealed the government was set to consult on exit charges to ensure that savers are not penalised if they wish to transfer their pension scheme to access the pension freedoms.

The government’s consultation warned that if there is “clear evidence” of “excessive” early exit fees and charges and a “sound rationale” for policy action, it would step in.

The Treasury identified three options as a basis “for further work” to address the issue and wants to hear industry views. These are: a cap on all excessive early exit fees; a flexible cap in certain circumstances; and a voluntary approach to restricting exit fees and charges.

The first option would cap all exit charges for those aged 55 and over before their scheme retirement date, either at a fixed percentage of the value of funds being transferred or at a capped monetary amount.

The government said that it is aware that there are a number of issues that would “need to be worked through”, for example in instances where high fees may be attached to very small funds.

The consultation stated: “The government is also mindful of any cap that could discourage investment in certain asset classes; and the potential legal impact on existing contracts of applying such a limit retrospectively.”

The government said that as an alternative second option, it would also welcome views on a more flexible approach to capping early exit charges.

It added as an example, that in order to address concerns about smaller funds, a cap could be limited to pots above a certain ‘de minimis’ threshold, or tailored to apply to particular components of an existing charge that are difficult to justify as fair treatment of customers.

Finally, the government suggested a “voluntary approach” to restricting early exit fees and charges. This would provide scope for trustees and managers to consider action, such as waiving or reducing early exit charges where members move from an existing arrangement to another offering flexibility, including within the same company or scheme.

The consultation made clear that the government wants pension transfers to have the same ease for consumers as when they switch utility providers.

The principles which should apply would include conducting the transfer in as short a time as possible, making sure effective redress mechanisms in place if things go wrong and, unless contractually bound, making the process free to the customer.

The government added that although not all of these principles are directly applicable or relevant to the pension transfers, they are echoed by the Financial Conduct Authority’s principle of Treating Customers Fairly.

The consultation stated that the government is keen to understand whether and how these universal principles could apply to pension transfers, acknowledging that pension transfers are an irreversible transaction and often a one-off event.

Furthermore, the government also addressed the issue of insistent clients.

It said that, despite the factsheet recently published by the FCA on the issue of the pension reforms and insistent clients, industry and consumers may still be unclear on specific circumstances where independent financial advice is required.

As a result, it said it wants to understand whether the process for ensuring individuals understand the need for, and importance of, independent financial advice is operating as intended.

Ben Gaukrodger, savings policy manager for the Association of British Insurers, commented: “No pensions sold on the market today have early exit fees and nearly nine out of 10 people making use of the pension freedoms will not face an early exit fee.

“Providers will engage constructively with this consultation so all the relevant facts and issues can be fully understood.

He added that while many people are accessing the pension freedoms successfully, for those few that are encountering problems, the ABI has set out an action plan to address these issues, which is with government and the FCA.”

The consultation closes in 12 weeks time on 21 October.

ruth.gillbe@ft.com