The Financial Conduct Authority has proposed that for existing contract-based personal pensions, including workplace personal pensions, exit charges will be capped at 1 per cent of the value of a member’s pot.
The regulator’s consultation paper on capping early exit pension charges also stated firms will not be able to apply any exit charge for personal pension contracts entered into after the proposed new rules come into force.
The document explained it had considered a cap at 0 per cent but this would not materially increase the benefit (number of additional exits), but the impact on firms would be significantly greater, while a cap at 2 per cent would have offered significantly less protection from the deterrent effect of the charge.
It did however propose to cap early exit charges at 0 per cent of existing member’s policy value in new contracts entered into after the rules come into force.
The FCA will be given both the power and duty to cap exit fees by parliament, once the relevant section in the Bank of England and Financial Services Act 2016 comes into force.
This aims to ensure consumers can access the government’s pension reforms easily and affordably.
Separately, the Department for Work & Pensions will today (26 May) announce its consultation on capping early exit charges for members of occupational pension schemes, which will run for a period of 12 weeks.
The paper looked at the impact on firms, estimating the lost revenue as a result of these factors over a four-year period directly following the implementation of the cap.
“We recognise that costs could continue beyond this period for some firms. Where this is the case, firms may need to take this into account in their business planning,” stated the paper.
“While we recognize that firms may also experience revenue losses in respect of other charges attached to these policies, we consider these to be of only minimal significance.”
| Impacts for the industry | ||||
| Cap level | (% of exiting member’s policy value) | |||
| 0% | 1% | 2% | 5% | |
| Loss of revenue (£m) – base case | 104 | 65 | 34 | 10 |
| Loss of revenue (£m) – range | 74-143 | 46-89 | 24-46 | 7-14 |
| Implementation costs (£m) | 17 | 17 | 17 | 14 |
The regulator also noted costs of implementation firms raised in terms of updating literature and communication documents, training operational and contact centre staff, and preparing questions and answers for client-facing departments.
“Other costs include introducing changes to policy administration software systems, and updating internal model valuation and projections,” the FCA admitted.
While some providers will experience a negligible loss from the changes, others could experience a more significant monetary loss, stated the regulator, although it added analysis suggests the sums in question are unlikely to be significant enough to result in market exit.
“This non-uniformity is an important feature, as it implies that providers will find it difficult to recover losses through price rises - since, if they did so, other firms with lower costs may undercut and win business” stated the paper, adding this may be regarded as a positive competition effect.
“While we do not consider it very likely that firms will make general price rises to compensate for a cap, responses to the measure are inherently hard to predict.”
Last July, HM Treasury launched a consultation concerning barriers consumers may encounter when seeking to access their pension savings under the new freedoms – including early exit penalties.
The Treasury published its response at the start of this year, concluding significant numbers of individuals currently face early exit charges at a level that presents “a real barrier to accessing” pension freedoms.
While many in the industry welcomes the cap upon its announcement, many stakeholders questioned the wider impact and exactly what level it would be set at.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the cap does not go far enough.
He said a 1 per cent cap was something of a victory for corporate vested interests.
Mr McPhail said: “We hope that the cap can be brought up to a zero tolerance of exit barriers in due course.”
peter.walker@ft.com
