Talking Head: Is the government overstepping the mark with its challenge of the exit penalties imposed on those taking advantage of the pension flexibilities, asks the PMI's Tim Middleton.
The inference seems clear. Not content with having provided new choices, the government expects members to exercise them too.
Market friction arising from exit penalties is clearly perceived as a problem that warrants an immediate response.
Not content with having provided new choices, the government expects members to exercise them too
On one level, governmental zeal is to be applauded. There are longstanding complaints (and some measure of recognition) that the industry lacks transparency over its charging structures, and a formal investigation into what many have described as ‘sharp practice’ is long overdue.
However, it is pertinent to ask why such an investigation should suddenly become an urgent requirement.
A fair charge?
Exit penalties are a longstanding issue. The application of market value adjustments when members transferred out of with-profits funds was particularly controversial during the Equitable Life debacle at the beginning of the century.
Dilution levies applied to property fund withdrawals are another well-known issue. The current focus is largely a legacy of pre-retail distribution review commission structures.
It is somewhat surprising that a zealous free-marketeer like George Osborne should be advocating active intervention in the operation of the market
However, while the full range of possible exit charges may appear unfair, they formed part of the original contract when policies were first effected. It is fair to ask if members should now be permitted to select against providers when requesting a transfer.
On an ideological level, it is somewhat surprising that a zealous free-marketeer like George Osborne should be advocating active intervention in the operation of the market; this does not seem consistent with the government’s views on rent controls or the fixing of energy prices.
Moving DC pensions to a post-annuitisation model has been controversial.
Shifting the emphasis towards cash rather than lifetime income streams will create widespread exposure to longevity risk and, given the extent to which individuals underestimate their own life expectancy, is a significant risk.
Perhaps the most telling lesson is from Australia: after providing the example of a system without annuitisation, Australia is now considering the introduction of a ‘minimum income requirement’.
Over the longer term, the UK may simply be at an unfamiliar stage of an ongoing cycle.
Tim Middleton is technical lead at the Pensions Management Institute
