The new duty, introduced through legislation and to be enforced at the regulator’s discretion, will form part of the response to the government’s pension transfers and exit charges consultation.
Gillian Guy, chief executive of Citizens Advice, said many people find making decisions around their retirement finances difficult and the prospect of a “sky-high” exit charge could put them off making the choice which is best for them.
Its own research found more than two million consumers could face a pension exit fee of over £50, including almost 40,000 people who could be hit with a charge of more than £5,000.
“We would encourage the Financial Conduct Authority to set the cap at no more than £50, which is enough to cover the administrative costs for providers,” she added.
Nutmeg’s chief executive Nick Hungerford called exit charges an “unnecessary and sly” way to make money from customers that have decided to take action with their pension, which deter customers from switching to services that are better suited to them, or accessing their long-term savings.
He said: “As such they prevent effective competition in an industry that desperately needs to restore trust and they exasperate customers’ frustration that even doing the right thing results in unfair treatment by financial service providers.”
Law firm Pinsent Masons’ head of pensions Carolyn Saunders pointed out that for providers, this represents yet another change to the terms of their relationships with their consumers.
“Although not as radical as the adjustments resulting from the introduction of the pensions freedoms, it is another step along the road to making the private provision of pension products more like a public service.”
Andrew Pennie, marketing director at Intelligent Pensions, said care needs to be taken that legally binding contracts are not simply ripped up, at the detriment of those savers who are not looking to transfer.
“It is impossible to say how much impact removing excessive exit fees will have on pension freedoms and encouraging retirees to shop around for the best retirement income solution,” he continued, adding that the FCA found 58 per cent of drawdown investors and 64 per cent of annuity purchasers remained with their existing pension provider.
“These figures feel way too high and hopefully the removal of excessive exit fees will be a catalyst for more people to shop around for the best retirement solution and seek regulated advice,”said Mr Pennie.
Martin Tilley, director of technical services at Dentons Pension Management, was less than impressed by the chancellor’s changes.
“This is another example of an ill-informed government pandering to the messages from tabloid journalism. Trying to pass blame to the ‘rip off pension providers’ who are simply imposing disclosed contractually due fees when it is the client who has broken the contract by leaving the contract early.”
He accused the government of being unable to determine the difference between an exit charge and in some cases a market value adjustment, which is determined by paying out the true value of the underlying assets rather than a face value of units, as might be the case in a with profit fund.
“I’d be interested to see how the FCA are going to approach this as we enter into contract law. What I hope we don’t see is action taken that is actually more costly to implement than that which it seeks to address.”
Finally, PwC’s UK insurance leader Jonathan Howe also questioned precisely how the exit fee cap will work, suggesting that if the focus is, as stated, on “excessive charges”, the actual number of contracts affected by this announcement could be relatively small.
“For example, if the FCA placed the cap at 5 per cent of the value of a pension, less than 4 per cent of contracts would be affected. If the cap is introduced at a rate lower than 5 per cent, many more customers could benefit.
“Exit charges are more common in older-style ‘legacy’ pensions, meaning firms which have a larger proportion of legacy business will be paying close attention as details unfold.”
peter.walker@ft.com
