FeesJul 24 2019

Calls for exit fee comparison on legacy products

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Calls for exit fee comparison on legacy products

Pension provider Scottish Widows has called for exit charges on legacy products to be disclosed so that it is easier to determine if clients are receiving value for money.

In its response to the regulator's consultation on expanding the remit of Independent Governance Committees (IGC), Scottish Widows stated that its IGC had previously called for exit fees on legacy products to be removed and that the pension industry should be asked to disclose all legacy exit fees.

In its consultation, which closed last week (July 15), the Financial Conduct Authority had invited views on whether it should be more prescriptive in its rules and guidance on how value for money should be assessed by IGCs and what legacy pension products should be compared with when assessing value for money.

Babloo Ramamurthy, chair of Scottish Widows’ IGC, and Pete Glancy, head of policy and positioning at Scottish Widows, wrote: "In benchmarking legacy products a comparison of exit charges will be an important determinant of a customer’s ability to achieve value for money, in relation to the pension pot which they have accumulated."

Romi Savova, chief executive at PensionBee, agreed disclosure of exit fees would help IGCs identify if a client is being overcharged, while making it easier for clients to switch provider.

Ms Savova told FTAdviser: "The presence or absence of exit charges is an important consideration for consumers achieving value for money.

"IGCs are increasingly expected to help protect consumer interests in a broader sense and switching is a fundamental right in defined contribution pensions."

She added: “IGC analysis of exit fees would help inform what is out of step with the market, ultimately leading to providers reducing exit fees."

But Tim Morris, independent financial adviser at Russell & Co, does not see the value in pushing for exit fee comparison, as few providers still charge exit fees.

He said: "It is vital that any fees are clear and transparent. This is a given nowadays.

"There are very few providers who charge exit fees. For this reason, I don't see the value in collating this information. It's more important to ensure those providers who do charge a fee clearly state what it is."

In 2015, the FCA found that approximately £26bn of pension savings was potentially at risk of poor value for money and it was recommended that providers agree actions with their IGCs to reduce costs and charges per year to 1 per cent or less.

Following this it introduced a 1 per cent cap on exit charges for existing workplace pension customers over the age of 55 in 2017.

The regulator's Investment Platforms Market Study, published in March 2019, the proposed a ban on administrative exit fees on platforms.

The FCA defined exit fees as charges that are imposed by platforms and comparable firms on consumers, following a request to disinvest or to transfer their assets to a new service provider.

Typically, these fees take the form of a fixed cash amount or a percentage of the assets to be transferred out.

In its response to the FCA’s consultation on this study, PensionBee suggested that providers could bypass the proposed ban from the regulator, as the proposals do not cover so-called product-related exit fees.

The watchdog does not, at this stage, intend to extend the proposal of a ban to product-related exit fees, which include market value reductions in with-profits policies or deferred advice fees.

PensionBee has previously called for a ban on all forms of exit fees arguing they “deter people from switching when it may be in their best interests to do so”.

Ms Savova said: “Exit fees are particularly detrimental to people with smaller pension pots and to those between the ages of 40 and 55, who have an urgent need to plan for retirement. 

“Given the evidence that few providers in the pension market would continue to disproportionately benefit from exit fees at consumers’ expense, it is baffling why the FCA would consider anything but an outright ban on all forms of exit fees.”

After an analysis of 16,271 pensions in 2018, Pension Bee concluded that exit fees occur in 4 per cent of pensions. Some 98 per cent of exit fees are under £5,000 and 49 per cent of exit fees are under £100.

amy.austin@ft.com

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