Treasury slams contract for penalties, trust for delays

HM-Treasury-500x320.jpgThree out of 10 people trying to exercise pension freedoms have had their planning obstructed by exit penalties, with occupational scheme withdrawals taking more than twice as long as those from contract-based schemes, according to a Treasury report out yesterday.

The Treasury will legislate to place a duty on the FCA to cap early exit charges, with trust-based schemes due to fall under similar scrutiny, to come in from March 2017.

While trust-based schemes were found to be taking longer in processing transfers, contract-based schemes were more likely to contain exit penalties for customers wishing to transfer.Data collected by the FCA found that 358,000 – 9 per cent – of those able to transfer would face early charges of between 0 and 2 per cent, 165,000 (4 per cent) would face a charge of 2 per cent to 5 per cent and 147,000 (around 3-4 per cent) would face a charge of 5 per cent or more. For trust-based schemes, a survey of 226 trust-based schemes by the Pensions Regulator, suggested that 11 per cent of schemes surveyed had some form of charges for individuals exiting their pension. Further analysis revealed that around 3 per cent of scheme members would face “early exit charges” as considered for the purposes of this consultation.

Evidence gathered for the Treasury showed that for the majority of individuals transferring between FCA-regulated contract-based pensions schemes, transfers took 16 days on average, compared to 39 days for trust-based schemes. Over 40 per cent of respondents to a consumer survey carried out as part of the consultation said that they had to wait more than 91 days to receive their transfer.

Only a handful of consultation responses supported a reduction to the statutory timeframe for pension transfers, and several respondents, including consumer bodies and advisory firms, raised concerns that reducing the statutory timeframe might weaken due diligence. The Government therefore decided against taking this option forward as part of the response to this consultation.

The consumer survey found 71 per cent of respondents suggested that the process for seeking independent financial advice should be improved, whilst 14 per cent specifically mentioned the advice requirement when asked about the ways the transfer process could be improved. However, the Government says it will await the outcome of the Financial Advice Market Review before taking further action in this area.

While the Treasury noted no contractual breaches had been made by providers, it concluded that “fairness is not determined solely by reference to whether or not it was fair to include a term in a pension contract many decades ago, but also has to be looked at through the lens of these reforms, and the changes that have occurred over time”.

A Government statement says: “The Pensions Regulator will work alongside the FCA as they develop the design and level of the cap for FCA-regulated schemes to ensure that any relevant concerns with respect of trust based schemes are appropriately addressed for all consumers.

The People’s Pension director of policy & market engagement Darren Philp says: “The Government is right to expose problems with people getting hold of and transferring their money when it comes to accessing the pension freedoms. For too long, the pensions industry’s transfer process has been too cumbersome and doesn’t make it easy for members.

“Transfers need to be easy and be done in a quick and efficient way. The Government is right to look to remove barriers, but this does need to be balanced against the risk of people being ripped off through scams. The Government’s proposals are a step in the right direction, but further work is required to make it easier for people to consolidate their pots.”

AJ Bell chief executive Andy Bell says: “A formal cap on early exit charges that is consistent across providers and covered by legislation is absolutely the right decision.  This will remove the most significant barrier that currently prevents hundreds of thousands of people from accessing their pension savings under the pension freedom rules.  The only downside is that it won’t happen until March 2017.”

Hargreaves Lansdown head of pension research Nathan Long says: “Capping early exit charges will unshackle thousands, allowing them to enjoy the pension freedoms in all their glory. Research has shown that would be retirees have already had to change their plans because of punitive penalties.

The Government will also get tougher on transfer times, something which has been a thorn in the side of the retirees for years. Among the worst offenders, trust based company pension schemes will be forced into reporting their transfer performance. Transfers from these schemes currently take significantly longer and have to improve to give people a smoother, less stressful passage to retirement.”