Jeff Salway: Escape route from '˜closed' life products

Scottish Widows, part of Lloyds Banking Group, is among six firms facing Financial Conduct Authority scrutiny. Picture: Lisa Ferguson

Pension and endowment investors trapped in ‘closed’ life products are to be given an escape route after the City watchdog warned insurers over their poor treatment of long-standing customers.

Edinburgh-based Scottish Widows, part of Lloyds Banking Group, is among six firms facing Financial  Conduct Authority (FCA) scrutiny over the treatment of customers holding ‘legacy’ policies. Insurance giants Old Mutual and Prudential are also being investigated, alongside Abbey Life, Countrywide and Police Mutual.

Disciplinary action could follow if the FCA believes those firms failed to treat customers fairly, raising the prospect of compensation payments. It will also consider capping or removing exit charges and other penalties charged by closed book insurers.

Closed-book policies are insurance and savings products that are no longer sold, which means firms have little commercial motivation to act in the best interest of customers still holding them.

“There is still a lot of money stuck in old style life assurance and pension contracts, where policyholders are paying high charges, may have limited transparency and face exit penalties if they want to get out,” said Patrick Connolly, certified financial planner at Chase de Vere.

“Providers have little financial incentive to reduce charges, especially if this will affect the returns for shareholders.”

The regulator has reviewed 11 firms with around £153 billion held in closed-book products by some 9.4 million customers. They include people with endowment policies, at an average value of £18,000, and personal pension policies averaging £23,000. Tracey McDermott, the FCA’s acting chief executive, said it was vital that customers in closed life books are “treated fairly and given the right information on an on-going basis in order to help them make important financial decisions”.

The review found significant failings in that respect. While most customers aren’t charged exit fees, many of those that did were not told about the penalties. In some cases the charges were sufficiently steep to wipe out the investment growth in the policy. Some firms had not communicated with some customers at any point while they held the products.

“This review is not about the existence of or level of charges, but about life offices not telling people about the exit charges,” said Graeme Mitchell, managing director of  Galashiels-based Lowland Financial Planning. “That is certainly wrong. Whenever you have a decision to make in life you need the facts to make an informed choice.”

The six firms singled out by the FCA are now being investigated and could face enforcement action.

So how do you know if you have policies within the remit of this investigation?

The products covered in the review were individual personal pensions (including Sipps and annuities), whole-of-life policies and endowments and investment bonds (including those held in with-profits and unit-linked plans).

These were sold in the 1980s and 1990s, although the review looks specifically at the period from 2008 to 2015.

With most endowments now matured, the investigation will primarily relate to pension policies, particularly where commission was paid on regular premiums.

The FCA’s focus is not on the way the products were sold, but on the information  provided to policyholders, communication of ongoing charges, the extent to which closed-book products remain fit for purpose and unfair or disproportionate exit charges.

“Many older products are more complicated than products available today,” said Connolly. “They may have a range of different charges and be invested in funds, such as with-profits funds, which can be very difficult for policy-holders to understand.”

Mitchell has seen plenty of evidence of poor communication with customers in closed life books.

“It does not help that whenever we ask for details from companies there is no consistency in what they produce. A standard format where they all providers had to show the same basic information would make it so much easier to make meaningful comparisons,” he said.

Exit fees on individual and workplace pensions are finally coming down, however. Scottish Widows this week announced it would no longer charge exit fees on workplace pensions, while several other firms, including Standard Life, have imposed a 5 per cent cap on all exit penalties on individual and workplace pensions.

Those measures should be extended to policies in closed books, said the FCA, which is set to introduce a cap on exit fees next year.