This is one of the issues raised with Conservative peer and minister for welfare reform, Lord (David) Freud who was asked by the new pension minister, Baroness (Ros) Altmann, whether a charges cap was necessary.
Lord Freud said: “We are going to see how the market develops. It has only been going for two months and, if it looks appropriate, we will introduce charge caps.” He added: “We are meeting the industry and working with them to make sure they do produce the right level of charging and we are able to monitor that. We already have transparency in the accumulation phase and, if there is a necessity in the decumulation phase, we will do it.”
This is not a new debate as last October the prime minister suggested he would be prepared to take action in this area, but that the market would first be given a chance to work and that a charge cap might be unnecessary.
He told the BBC’s Moneybox Programme: “If the competition doesn’t work, and I believe it will, we’ll make sure that charges aren’t excessive.” Similarly, Baroness Altmann’s predecessor, Steve Webb, had told the Observer that “there could be a time when you look at charges and cap them. But I don’t know what the right charge is for a drawdown service at the moment”.
From my personal perspective it is not a surprise that drawdown products have yet to adapt. Historically, they were the solution for sophisticated and high net-worth individuals,who were happy to pay an IFA to manage the accumulation and decumulation strategy for them. As a result, they were relatively expensive both to manage professionally, and with respect to the often more sophisticated investment solutions that sat behind them.
It is naïve to assume that now that the market is not just for the high net-worth, the solution is as simple as to expect all providers to just offer decumulation with virtually no additional costs. A different model is now needed which enables the flexibilities, but at a workable cost.
It is also wrong to assume that providers should be able to offer defined benefit transfers on a zero cost basis – and immediately – as there are costs that should not be borne by the scheme and risk management implications.
However, for defined contribution schemes the costs should be minimal and there should be no reason why a transfer cannot be sorted within days – subject to appropriate checks for fraud/ liberation scams.
