As part of a 12 week consultation looking at factors preventing access to the new pension flexibilities, the Government has identified three ways to combat high exit charges: a cap on all early exit fees; a flexible cap in certain circumstances; and a voluntary approach to restricting early exit fees and charges.
The Government said the options would be used if “clear evidence” was found of excessive early exit fees and charges across the industry as well as a sound rationale for policy action.
“Subject to the outcomes of this consultation, the government will consult on the legislative approach in a further consultation exercise,” it said. “At present, the government would also be interested in alternative policy approaches to address the issue of excessive exit fees.”
Evidence gathering
Research from the Department for Work and Pensions suggests that exit charges – fees incurred when a customer transfers out of their pension into another fund or scheme or access their pensions flexibly before a specified date – could affect as many as one in 10 savers.
Additionally, an independent review into legacy workplace schemes published in December 2014 found that roughly 7% of assets under management in legacy schemes were in schemes where savers would face charges, of which nearly 60% had exit charges of 10% or more.
The consultation, which runs alongside an “evidence gathering exercise” by The Pensions Regulator and the Financial Conduct Authority, will also examine the communication to customers of “market value adjustments” – an alteration to the underlying value of a person’s rights in a with-profit fund contract when that individual leaves early.
“The Government considers that it is important that individuals are able to access their money in order to use it in a way that suits their needs,” the Government said in the consultation.
“Although many of these individuals will face charges that represent fair and reasonable charges to cover costs, the Government believes there is a high degree of overlap between transfer fees and exit charges and in the case of the latter would like to understand, in particular, whether and why some charges may be significantly higher than others.
Engage constructively
In response to the consultation, Ben Gaukrodger, manager for savings policy at the Association of British Insurers, said no pensions sold on the market today have early exit fees and nearly nine out of 10 people making use of the pension freedoms will not face an early exit fee.
“Providers will engage constructively with this consultation so all the relevant facts and issues can be fully understood,” he said. “Many people are accessing the pension freedoms successfully, with more than £1.8bn withdrawn in the first two months.
“For those few that are encountering problems we have set out an action plan to address these issues, which is with Government and the FCA.”
He added that exit fees on older schemes are not a new penalty but reflect the cost of setting up the policy already paid by the provider.
