17th December 2014 by The Harried House Hunter
There has been a huge debate, a lengthy report by a top City lawyer and acres of news print in the last nine months about a huge Financial Conduct Authority blunder, which led to massive upheavals for insurance company share prices on March 28 this year.
A report in a national newspaper, following a press briefing, suggested that pension contracts going back as long as 30 years could be reviewed and customers allowed to exit them, possibly penalty free, as part of an FCA review.
Share prices plunged and stayed plunged while the regulator huffed and puffed and missed the opportunity to clarify things swiftly. Its intention was not to open these old contracts so we were told subsequently.
The FCA senior directors now find themselves forgoing bonuses and some staff have left as the Telegraph reported this week.
And yet this morning, we read a report from the Independent Project Board set up by another regulator the Office of Fair Trading, which suggests that huge numbers of pension investors are trapped in old style pension contracts from which they cannot currently exit or not without swingeing penalties.
In a damning indictment the report finds that up to 40% of legacy money in defined contribution schemes – the pension ultimately depends on your fund’s performance – face charges above 1 per cent and some up to 3%.
Between £23.2bn and £25.8bn of assets under management out of the £67.5bn audited were exposed to charges of more than 1 per cent.
Half of this money could be exposed to charges above 1.5 per cent; between £5.6bn and £8bn to charges above 2 per cent; and around £900m to charges above 3 per cent.
The board also found that £700m is held by savers with pots of less than £10,000 and 90 per cent is held by savers that are paid-up and have stopped contributing.
Indeed, the Board also estimates that there are around 407,000 savers that have joined schemes in the last three years who could be exposed to a charge of over 1 per cent in the future. Of these, 178,000 could be exposed to charges over 2 per cent and 22,000 to charges over 3 per cent.
Some schemes are charging exit fees of more than 10 per cent.
So where is the real scandal? Where should the newspapers be devoting their acres of newsprint? Is it in a bungled FCA announcement or this astonishing catalogue of poor value and, bluntly, contempt for savers and investors?
Well, here is Mindful Money’s view.
Investors’ savings – even the most unengaged investors’ savings – should not, as a matter of course, be locked inside poor value contracts and that applies whether the firm is open to new business, or one of the closed ghost ships that continue to clutter the insurance world’s waters.
The Independent Project Board suggests that the Department for Work and Pensions and the Financial Conduct Authority look to take action by 2016, if the industry does not clean up its act. We suggest that insurers are given three months to come up with a clear plan, and strict implementation timetable, and then face a clampdown.
It is over 15 year ago that some beleaguered insurance firms – the ones which did pension business – ran aground, because they had been variously been paying too high bonuses to some policyholders, too high commission to some advisers, or took too many bets on equities given how many calls there were on their funds and the need to reserve (admittedly under a laxer regime than now).
Despite this, city analysts and newspaper pundits would often express surprise that some of these big insurance funds had more value contained within the shares and bonds they held in their life funds, than the firm’s individual share price would indicate.
Some experts suggested that financial engineering coupled with cost cutting could allow value to be extracted. These funds were, unsurprisingly, bought up by consolidators. That’s why some people’s policy statements are so confusing – your contracts have been bought and sold sometimes repeatedly by other insurers and consolidators.
This was all allowed to happen because the Government and regulator feared a repeat of Equitable Life, an insurance firm, which was barely staying afloat and had slashed pensions and other payouts because it had been run in a reckless manner.
The glib phrase for these insurers once they were reorganised, used by City pundits and City journalists, was that they “threw off cash”. Brilliant if you were an investor in their shares, absolutely terrible if you were a trapped policy holder.
Now finally, more than a decade and a half later, we may see action over these poor paying contracts, but this has been made less likely by March’s bungled FCA announcement.
Now, readers of Mindful Money, worried about this legacy pension business, should be a little careful. Front-ended charging contracts can be just that. The charges come out at the front and that may have been decades ago, and so it may make sense to stay invested now rather than cash out. There can be all manner of guarantees that it would make no sense to bust out of – guaranteed annuity rates could be sitting within these old contracts.
But what the Financial Conduct Authority really needs to do is see if some of the these eye-watering exit fees and these high charges are really in anyone’s interests.
Any insurer open for pension and investment business and charging anything like 2 or 3% on the back book doesn’t deserve to be open for business and should be named and shamed.
Standard Life has repriced all its old contracts. Firms that do so should get huge credit. Those that fail to do so should face condemnation.
As for the closed sector, if they are charging anything like 2 or 3% without justification, it is about time they got their comeuppance for ‘throwing off cash’.
We don’t doubt that in some instances contract law will get in the way. And investors should always be directed to regulated advisers to make decisions about leaving. (While old style advisers may have been part of the problem, new style advisers should be part of the solution).
But it is about time that the issue of legacy charges was cleaned up once and for all. The irony of all this debate about the previous FCA announcement is that it should have been trying to open up the back books. Bungling the announcement has only played into the hands of the big corporate PR firms who are defending the worst of the old ways on behalf of some plcs.
The FCA really needs to take action as soon as possible, though of course, it should make an official stock market announcement about its plans early in the morning.