Personal PensionJun 24 2015

Industry must offer full freedom to DC customers

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

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.

This is one of the issues raised with Conservative peer and minister for welfare reform, Lord (David) Freud who was asked by the new pension minister, Baroness (Ros) Altmann, whether a charges cap was necessary.

Lord Freud said: “We are going to see how the market develops. It has only been going for two months and, if it looks appropriate, we will introduce charge caps.” He added: “We are meeting the industry and working with them to make sure they do produce the right level of charging and we are able to monitor that. We already have transparency in the accumulation phase and, if there is a necessity in the decumulation phase, we will do it.”

This is not a new debate as last October the prime minister suggested he would be prepared to take action in this area, but that the market would first be given a chance to work and that a charge cap might be unnecessary.

He told the BBC’s Moneybox Programme: “If the competition doesn’t work, and I believe it will, we’ll make sure that charges aren’t excessive.” Similarly, Baroness Altmann’s predecessor, Steve Webb, had told the Observer that “there could be a time when you look at charges and cap them. But I don’t know what the right charge is for a drawdown service at the moment”.

From my personal perspective it is not a surprise that drawdown products have yet to adapt. Historically, they were the solution for sophisticated and high net-worth individuals,who were happy to pay an IFA to manage the accumulation and decumulation strategy for them. As a result, they were relatively expensive both to manage professionally, and with respect to the often more sophisticated investment solutions that sat behind them.

It is naïve to assume that now that the market is not just for the high net-worth, the solution is as simple as to expect all providers to just offer decumulation with virtually no additional costs. A different model is now needed which enables the flexibilities, but at a workable cost.

It is also wrong to assume that providers should be able to offer defined benefit transfers on a zero cost basis – and immediately – as there are costs that should not be borne by the scheme and risk management implications.

However, for defined contribution schemes the costs should be minimal and there should be no reason why a transfer cannot be sorted within days – subject to appropriate checks for fraud/ liberation scams.

Contrary to what some commentators are calling for, I do not think providers have to offer decumulation. It has been reported that the secretary of state for work and pensions, Iain Duncan Smith, said the government was prepared to “name and shame” firms putting up barriers to access.

While I think the phraseology of his comment was a little harsh, I completely support the fact that a provider must make it clear that all they are offering is accumulation, and there must be a very transparent set of charges, the bases of which are universally accepted, such that it allows people to compare those providers that offer only accumulation, or accumulation and decumulation.

Carte blanche imposition of charges is also likely to be unworkable, especially for people who are currently invested in illiquid funds. But this is one area that the FCA may need to review. Consumer champion Which? recently found examples of pension companies which were charging as much as 2.76 per cent a year to make regular withdrawals. However, these charges are insignificant compared to some exit penalties on certain funds.

One of my biggest concerns is small-pot pensioners, especially as we, as a business, have always tried to support their needs. As the majority of pensioners have pots of less than £30,000, it would be perverse if one of the key reasons for the new pension flexibilities was effectively prevented because most providers failed to offer this option.

I find the approach a little perverse when one of the biggest financial transactions that anyone will ever make, being the purchase of their home, has uncapped estate agents’ fees which all too often bear no resemblance to the costs incurred.

The good news is, at least initially, there seems to be a lot of competition in the drawdown market, which should help to drive down charges. However, we are also seeing areas of concern, such as unnecessary delays and charges from providers associated with transferring pensions, a lack of transparency and regulatory concerns.

What is clear, however, is that the pensions industry needs to improve its ability to service people with decumulation in a much more effective manner, as their legacy systems currently block some people from the new freedoms. The industry must embrace technology in order to improve efficiencies.

Jamie Smith-Thompson is managing director of Portal Financial

Key points

We live 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.

Competition should ensure that the market works efficiently.

It is not a surprise that drawdown products have yet to adapt.