Personal Pension  

Five key takeaways from exit charges consultation

Five key takeaways from exit charges consultation

Earlier today the government published its consultation into whether exit charges could be cut or capped for those looking to access their pensions early, asking the industry for views on its three proposed courses of action.

FTAdviser has dug deeper into the document to unearth five other key points of interest:

1. Take the survey.

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Alongside the consultation paper, the Treasury launched an online survey to ask pensioners and industry experts how to remove other barriers that may be stopping people enjoying the benefits of increased flexibility over their pension pot.

Running for the same 12 week period and forming part of the government’s response, it asks for the experiences of people transferring their pension from one scheme to another, including whether they have faced any fees for leaving early.

2. Regulators also hard at work.

Mentioned several times in the consultation is the fact that the Financial Conduct Authority and The Pensions Regulator are also carrying out a comprehensive evidence gathering exercise on the existing processes for pension transfers and any exit fees members might incur for.

Both regulators are also gathering evidence on how the advice requirement for safeguarded (DB) benefits is being applied and how this interacts with schemes and providers’ decisions on requiring advice.

“The government appreciates that there may be circumstances when individual schemes and providers may require independent advice in relation to a particular product,” read the paper.

“However, the government does not want such requirements to become a barrier to accessing products and therefore wishes to avoid the situation where schemes and providers may feel forced to require advice where it is not necessary.”

3. Defining exit penalties.

The consultation admitted that there is no single working definition, either in legislation or used by the regulators, to cover the various fees and charges commonly perceived as ‘exit penalties’.

This is partly because they can arise from a number of things, including administrative costs to the provider, other charges related to the divestment of certain assets, and the recovery of an initial commission payment previously paid to an adviser.

The government made clear that any option which could cut across existing contractual property rights, such as a statutory cap on exit fees, would represent a significant step, adding that “any such measure should only be taken as a proportionate means of achieving a legitimate objective in accordance with the public interest”.

4. Investment deductions.

Alongside the broad umbrella of ‘administrative costs’, the government pointed out that exit charges may be conflated with deductions to projected investment value.

Market value adjustments (MVAs), sometimes referred to as market value reductions, take the form of an adjustment to the underlying value of a person’s rights in a with-profit fund contract when that individual leaves the scheme before their selected retirement date.

The consultation considered that providers’ rationale for applying MVAs in the case of personal pension schemes is to ensure that remaining investors in a scheme are not disadvantaged by the exiting member where investments are pooled, adding that “there is also an argument that, since customers are signing up to a long-term contract, early exits can disrupt insurers’ long-term pricing models”.