Pension providers have been receiving some very harsh press lately as a result of them either choosing not to offer the new flexibilities or reversing previous decisions. However, is it fair to castigate them quite so much?
Unfortunately, we now seem to be living in a world where the immediate government reaction when the financial services industry fails to offer what it deems reasonable, is to introduce charge caps.
I fully support the government stepping in where there is a genuine injustice, as was the case with scheme members being forced to purchase an annuity, which led to the new pension flexibilities. The insurance industry, despite having much-needed products, failed to accept transparency and certainly dragged its feet in terms of promoting consumer choice.
While it could be argued that a sledgehammer was used to crack a nut, the cause was justified: 60 per cent of people remained with their existing provider when taking out an annuity. Of those people, 80 per cent could have secured a higher income on the open market or 91 per cent who took enhanced annuities could have found a better deal elsewhere.
However, currently it is not the industry placing barriers in the way of change per se, but certain schemes and providers saying that they choose not to – or more likely cannot – adopt the changes at a cost that is reasonable to them as a business.
I have absolutely no issue with corporate defined benefit schemes opting out of any additional flexibilities. So long as they offer those members for whom it is the right decision the ability to transfer out, and that this can be done at cost, then it is entirely appropriate.
Where the issue becomes thorny is when defined contribution pension fund managers and administrators fail to adopt the new regime.
As the law currently stands, pension providers are under no legal obligation to offer full freedom to any of their customers. Since 6 April, when the new rules were introduced, a huge disparity in savers’ ability to access their money has emerged.
While some are being offered flexible and low-cost access, others are stuck in pension arrangements that will not allow them to make withdrawals. A good example being the much publicised Friends Life U-turn after it originally told customers they would be able to take money from their pension funds as often as they needed after age 55.
In the fullness of time, competition should ensure that the market works efficiently, and providers which decide not to change their business model are likely to lose clients. However, this is likely to take years to happen as many pension schemes only review their suppliers every few years.
The debate is now whether charge caps are required to stop pensioners being exploited by providers that choose not to adopt the new flexibilities and are imposing unreasonable fees to transfer or make withdrawals from their funds.
Currently, pension providers are under no legal obligation to offer full freedom to any of their customers. While some providers have been able to offer the flexibility and at a low cost, others have customers stuck in pension arrangements that will not allow them to make withdrawals.