UK governments have a long history of applying legislative sledgehammers to crack nuts. Sometimes because the nuts make the pensions landscape appear untidy; not infrequently to satisfy ideologically driven motives.
The result is a tangled jungle that all pension providers are forced to navigate.
So we are faced with another sledgehammer, or rather two actually, because UK legislation is created in silos
Lip service is paid from time to time to the need for legislation and regulation to be ‘proportionate’. In April 2011, then Prime Minister David Cameron declared that henceforth a ‘one in, one out’ rule would apply: for every new regulation, one would be scrapped.
Optimists cheered. In July 2013 this was ramped up to ‘one in, two out’, without a shred of evidence adduced to suggest it was going to happen. Then in March this year, the government’s objective became ‘one in, three out’. The credibility gap is now the size of a canyon.
Little evidence for ‘barriers’
Now the government is determined to cap early exit charges for those members who can access their pension savings flexibly upon reaching 55, and do so before their normal pension age.
A Treasury consultation last year concluded, without much evidence, that these charges were presenting “significant barriers” to those who incurred them, deterring or even “prohibiting” them from exercising their new freedoms.
Subsequently, the government legislated to give the Financial Conduct Authority a duty to cap excessive early exit fees for members of contract-based schemes from March 31 2017, at 1 per cent of the value of benefits being taken, converted or transferred. Existing early exit charges set at less than 1 per cent may not be increased.
Few in occupational schemes face exit charges
The government has now decided it is vital to go further and ensure a fair and consistent approach across all defined contribution pensions, so that the early exit charge cap applies in the same way for members of DC occupational pension schemes as the one that is being implemented for personal pension schemes.
However, early exit charges are less common for occupational scheme members. A survey by the Pensions Regulator suggests only 3 per cent are affected – mostly members of old insured schemes where the insurance company secured the business by paying fees to advisers and expected to recoup these over the length of the contracts. Exit penalties were there to protect the initial outlay if the member decided to transfer.
Nonetheless, the Department for Work and Pensions has fallen into line, believing that action must be taken because members of trust-based occupational schemes are “effectively being prohibited” by excessive charges from accessing their pension before their selected retirement age or scheme maturity date.
The DWP considers this action proportionate even though it amounts to interference with existing contracts. In the impact assessment accompanying its recent response to the May 2016 consultation, the DWP has declared it has no intention of reviewing this policy.
More costs for the industry – and members
So we are faced with another sledgehammer, or two actually, because UK legislation is created in silos. Unfortunately, these DWP reforms are to be implemented from October 2017, rather than March 2017 as for personal pension schemes.
Equally unfortunate is the likelihood that the final DWP definition of early exit charges (to be inserted in the Pension Schemes Bill to amend the Pensions Act 2014) will differ from that in the Treasury legislation governing personal schemes (the Financial Services and Markets Act 2000).
Early exit charge cap attracts criticism and praise
Both the government and the FCA have confirmed plans to introduce caps on early exit pension charges, but authorities should take care not to actively encourage early decumulation, experts say.
Some charges are out of scope: market value adjustments to with-profits funds, for example. Charges associated with entering drawdown or taking an uncrystallised funds pension lump sum are not included in the cap either, as they would be incurred irrespective of age. Careful examination of contract documentation will be required.
It all makes for dispiriting reading: more compliance, administration and systems costs loaded onto the pensions industry. It is ironic that this latest attack on charges, which affect very few members, is bound to have a contrary effect on the cost of pensions for so many more.
Ian Neale is director at pensions intelligence provider Aries Insight
