Yesterday’s publication of the government consultation on plans to curb or cap exit penalties from pension schemes has predictably got the industry talking about the right course for future policy.
As is traditional, FTAdviser has collated the most thought-provoking arguments from a variety of stakeholders to give a better picture of the debate.
Malcolm McLean, senior consultant at Barnett Waddingham.
“The consultation is very non-specific when it comes to indicating precisely what changes or further controls the government would wish to see made in relation to some of the perceived problems relating to transfers and the need for financial advice in connection with the freedoms– more a case of kicking the ball down the road pending further evidence than anything else,” he commented.
“However, on exit charges there does appear to be a determination to reduce or even eliminate these by legislation, if necessary, if the industry shows itself incapable of dealing with the issue itself.”
Mr McLean added that everyone wants scheme members to get the best value possible from their pension savings, but until that can be achieved voluntarily it is highly likely that the government will seriously consider a cap on such charges for those aged 55 or above.
Danny Cox, chartered financial planner at Hargreaves Lansdown.
“This consultation serves as a wake-up call to those providers who still think pensions born in the 1990s are fit for the 21st century,” he argued, criticising some providers for not offering the new flexibilities or making it sufficiently easy for their customers to take their money elsewhere.
“The barriers to pension freedoms need to be removed so that investors who have shopped around can move their money quickly and cheaply, without having to pay unreasonable exit penalties.
“We need a transparent and competitive retirement market where informed investors are freely able to shop around for the solutions which will suit them best.”
Chris Noon, partner at Hymans Robertson.
“Charges at retirement can wipe off a large slice of someone’s savings, however, the spotlight on fees remains too narrow,” he opined, adding that while an exit fee might take out 20 per cent in one go, annual charges on drawdown products could be substantially more than this over a 20 to 30 year retirement term.
“As average pension pots grow in size, we are likely to see more people reaching for drawdown options; putting in place a charge cap will help create a better playing field for consumers and the choices open to them.”
His colleague and another partner at the firm, Rona Train, added that the process of transferring your pension is set to change significantly in a ‘pot follows member’ world.
“Savers potentially will be hit by bid/offer spreads every time they move between schemes; they also could be out of the market for up to a week depending on the administration process. Given that people have around 11 jobs on average in their lives, these factors could seriously impact the value of their savings over a working lifetime.”
Claire Trott, head of pensions technical at Talbot and Muir.
“The consultation paper interestingly excludes MVAs [market value adjustments] and other investment deductions when looking at early exit penalties, which in my experience is usually the high ‘charges’ people are experiencing to take their benefits or transfer them out,” she pointed out.
“This may result in little need for the government to legislate to reduce exit charges for those taking their benefits early or to reconsider the scope of the consultation.”
MVAs and other investment deductions are there because of upfront charges being lower or past commission payments/additional allocation that has been given, stated Ms Trott. “If they were forcibly reduced then providers could be losing out significantly on earnings they were expecting.”
She also noted that the consultation looks at new advice requirements surrounding guaranteed annuity rates.
“There will have been a flurry of advice requirements where people have held off accessing their schemes only to find they contain safeguarded benefits and therefore needing advice they didn’t expect; it would be better to consider this aspect when things have settled a little.”
peter.walker@ft.com
