FCA: 84% of over-55s do not pay exit charges
Data has revealed that 84 per cent of over 55s eligible to access the pension freedoms have not been charged exit fees in the first three months of the pension freedoms, despite the administration costs faced by firms in facilitating a cash payment or transfer.
The FCA’s analysis of pension freedoms data, published today (16 September), revealed that 84 per cent equates to 3,416,000 of consumers.
Of the remainder, 385,000 (around 9 per cent) of consumers aged 55 or over would face a charge of 0 per cent to 2 per cent, 165,000 (4 per cent) would face a charge of 2 per cent to 5 per cent and around 147,000 (around 3-4 per cent) would face a charge greater than 5 per cent.
The FCA said the analysis represented a snapshot of the current potential exit charge position across all personal pension policies submitted by 23 firms (including the largest 15) as of 30 June 2015.
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.
However, this now seems unlikely following the regulator’s analysis.
The most commonly cited reason for the existence of exit charges was to cover outstanding initial expenses and/or initial commission.
“That is, the charges are intended to recover sunk costs rather than the administration cost to the firm of the customer transferring or cashing in their policy,” the paper read.
Other reasons cited were to recoup the outstanding charges that would have been deduced over the remaining term of the plan, the regulator said.
The FCA said that some firms explicitly referred to this charge, recovering part of the future ‘margin’ on the policy exiting early.
Alongside this some firms highlighted that when designing and pricing products the company would have been seeking to ensure that a combination of all charges, including exit charges, were sufficient to recoup all expenses, as well as achieving a desired competitive position at an appropriate level of profit.
The FCA said that the charges over the lifetime of the product would have been considered in aggregate relative to the anticipated overall level of expenses and usually also considered across broad cohorts of the firm’s business, for example various terms, premium levels and payment patterns.
Also, the FCA said that in a small number of firms, the rationale for exit charges was to put the individual into the position of an identical individual who would have chosen the shorter duration of the policy at the outset.
To do this, policy values on some product lines are reduced on early exit to remove the impact of an enhanced allocation rate that would not have applied had the policy been taken out for the shortened term originally.
Finally, some firms explained that specific charges would not have been aligned to cover specific types of cost to the regulator.
As such, their position was that the charging structure was designed based on the aggregate position of the firm over the lifetimes of the contracts written rather than with reference to administration costs on exit.
ruth.gillbe@ft.com
