Government plans to cap early exit charges for members of occupational schemes have been backed by the Tax Incentivised Savings Association.
The plans were unveiled in May this year, when the government announced its consultation on removing costly pension exit fees. The consultation closed last week.
It looked at the impact on firms, estimating the lost revenue following the implementation of a cap.
Tisa, in its consultation response to the government consultation, stated it believes early exit charges are in the main a throwback to insurance contract designs “predicated on the illusion of retrieving up front commissions slowly over the term of the contract”.
However, the trade association noted in reality these were paid out immediately and could not be recouped after the first two years.
Tisa also agreed with the research the Department for Work and Pensions had undertaken which showed this type of charge had not featured in contracts sold by the mainstream providers over the last 20-25 years.
This means the population with any contract impacted is declining rapidly through natural maturity.
As such, the trade association believes setting the cap at 1 per cent will have little resonance with scheme members impacted as they had little understanding of the charges mechanisms in the first place and would see any per cent charge as arbitrary.
Tisa welcomed the consultation but added the proposed new rules raise the “oddity” that once over 55 a policyholder can transfer to a new provider with a capped penalty, “whether or not they are taking benefits”, whereas the 54 year old will still suffer an uncapped deduction.
Elsewhere, the response tackled the issue of market value adjustments (MVAs), which the government was considering making exempt from the early pension exit charges.
Tisa’s response stated that the organisation agrees in principle MVA’s are not an early exit charge, although poor communication of the way with-profits bonus mechanisms work and a lack in managing expectations historically has led many members to think that bonus allocations are “irreversible entitlements”.
Adrian Boulding, policy strategy director at Tisa said of early exit charges on occupational schemes: “This type of charge has not been featured in products sold by mainstream providers for the last 20-25 years.
“Consequently, setting the cap at 1 per cent will have little resonance with the customers impacted as they had little understanding of the charges mechanisms in the first place and would see any percentage charge as arbitrary, at best.”
Alan Chan, director at London-based IFS Wealth and Pensions said: “It is true that many people do not understand percentages and prefer things to be expressed in monetary terms. However, I would argue a combination of both would probably be most ideal, e.g. ‘the lower of…1 per cent or £200’, or something similar.
“This is because a fixed charge approach is quite often more expensive for those with smaller pension funds. For instance, if the charge cap is set at £200, this is the equivalent of a 2 per cent charge on a pension fund of £10,000. This is quite clearly worse than the proposed 1 per cent cap.
“On the other hand, £200 on a pension fund of £100,000 is only 0.2 per cent.”
ruth.gillbe@ft.com
