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.
These contracts were in the main old contracts, mostly written before the stakeholder pensions launch in October 2001. From this date, charges reduced across the industry for new contracts and often a single pricing of units policy was adopted.
Sipp effect
So how does this phenomenon impact on Sipps? After all, one of the key selling points is their transparency of charges and the vast majority were established post-1995 when income drawdown and the deferral of annuity purchase helped boost their popularity.
In reality it should not but it appears that Sipps and their operators are often tarred with the same brush and dragged into the argument, again by those that do not always appreciate the additional complexities that apply to Sipp administration.
Sipps most often fall into one of two categories. The first is an extension of a conventional platform-based personal pension and offers investment into a variety of registered funds and shares, all of which are registered on recognised exchanges. These arrangements are usually costed by way of a number of basis points and as such charges are based on the value of the Sipp itself. Again, most often the functionality of the plan and the payment of benefits, for example, are costed within the overall calculation of basis points, which is charged across its whole book. Others offer a fixed fee irrespective of the value of the plan with additional charges depending upon the frequency and/or value of the trades made within the plan. These plans might also have a small administrative fee each time a benefit vesting occurs. Being that these Sipps have more often than not been created recently, they will already have had income drawdown flexibility built into them and the adaption to flexi-access and UFPLS. The point to be made here is that the investments are all held on a single technology driven platform, for which the valuation of investments is simple and where the administrative process is also largely technology driven.
However, the other side of the market is the full Sipp, where an even greater extension of investment flexibility is offered.
Drawing benefits
It is not uncommon for these Sipps to hold multiple bank accounts, individual collective investments, loans to unconnected third parties, commercial properties and, indeed, often combinations of the above. With an open architecture arrangement there are often few restrictions on where and with whom monies can be held. It would be impossible for a full Sipp provider to have live valuation links to all of the investment providers. So when a client wishes to draw benefits, the process requires up-to-date and accurate valuations to be pulled together from all sources before the documentation to allow benefits to be drawn can be prepared. In most cases the drawing of benefits also requires the raising of liquidity which – again as a result of the bespoke investments held by these vehicles – will require a manual process to implement.
The situation can be even more complex where a transfer away is required. In these circumstances the disposal of assets, or transfer of assets in specie, can also be administratively time consuming bearing in mind checks need to be made to ensure title is correctly moving to the new provider. The Sipp – which in these circumstances is often a trust – must then be also be properly wound up.
While these fees might run into several hundreds of pounds, they should be time-recorded and in accordance with published fee schedules. The principles of treating customers fairly should always apply and be seen to be justifiable.
Clients who wish to utilise these more wide ranging investments should understand that the administrative burden in corralling numerous different investments held within their tax wrapper when benefits and transfers away are requested is a manual process. This is significantly more time consuming than with insured or simple Sipps, thus the fee charged will be commensurate with the work involved. This should also be understood by the FCA and by the tabloid journalists creating the headlines.
Martin Tilley, director of technical services, Dentons Pension Management
