Issues

Drawdown Charges Scrutiny presents Disclosure challenge to providers

2 December 2015

FCA Income Drawdown charges scrutiny looks set to increase disclosure requirements says Natanje Holt, Managing Director, Dunstan Thomas

Since Pensions Freedom Day on 6th April 2015, the Government and Financial Conduct Authority (FCA) have been monitoring the retirement market with increasing intensity with a view to flushing out and stamping on any undesirable, unintended consequences of this seismic change in the at-retirement market.

Up until recently much of the attention has focused on the volume of over 55 years olds cashing out completely and levels of access to advice (or guidance). In the last week, there has been a detectable switch of focus to the new decumulation option of choice – Income Drawdown.

The FCA’s desire to know more about how these products are being sold and operated, and what charges are passed onto policy holders in drawdown (DD), is not that surprising when you look at the speed of growth of this market as annuity sales have waned.

The latest Association of British Insurers (ABI) numbers report 19,600 DD contracts were sold in Quarter 2, 2015 worth a total of £1.3bn, up from 11, 500 contracts in Q1, 2015. DD sales were virtually half that pre-Freedom Day in Q1, 2014 at 6,700 contracts. So the market is growing by both number of contracts and value at a rate of more than 50% a year on current numbers.

The main worry for the regulator is that ‘internal sales’, as a percentage of the whole market, is creeping up and now stands at 42% of all DD sales. This means that nearly half of all purchasers of DD contracts are failing to shop around for a DD offering. The second most significant concern for the FCA has to be the lack of uniformity and levels of charges by Drawdown providers.

Because we provide administration capability for many of these contracts we are able to see the profusion of charges which are currently being levied by DD contract providers. A quick investigation found 10 different charges which providers are using right now.

These are, in no particular order:
1. Transfer Out Charge – for moving from one contract to another
2. Transfer Out Charge to UK-based schemes
3. Transfers Out Charge to Overseas Schemes
4. Annuity Purchase Charge
5. Tax Free Cash Charge (in DD a member might be charged several of these as they drawdown TFC by stages)
6. Income Charge (essentially an annual DD usage fee)
7. Crystallisation Charge (as monies are drawdown)
8. Pot Depreciation Charge (taken just before the DD balance goes to zero)
9. Review Charge (for those in Capped Drawdown where pre-April 2015 DD scheme members opting to be Capped will remain if they do not exceed their stipulated maximum income allowance)
10. Death Benefit Charge

These are before you get into ‘additional designated charges’ often associated with phased drawdown.

In addition, there is little uniformity in terms of amounts charged. In a study of Transfer Out fees we conducted a little while ago, based on a sample of 54 SIPP providers, we found fee amounts varied enormously. Some charged more than £500, others charged nothing at all. The average was £161.70 per Transfer Out.

Very few providers have rationalised these charges to a point where they can be illustrated as a percentage of the value of the assets held or amounts withdrawn over a given period for the purposes of comparison or illustration. However this is what the FCA may push for once they have gathered the results of its survey on DD charges in mid-February, published its findings and acted on them.

Product providers may well have good reason for specific charges. Forcing uniformity as well as reductions of charges often stifles innovation and restricts providers’ ability to differentiate their offerings. But they will need to make a strong case now for retaining specific charges and they may need to volunteer more information about precisely what each charge pays for.

The FCA is conducting its investigation for DD charges alongside its wider Retirement Income Data analysis. It has been collecting this data (about where all at-retirement monies are now going) from providers each quarter since April.

All this data and analysis will be swept into its Retirement Outcomes Market Study due to be published next summer. We can expect several changes to follow thick and fast after that. It will be important for Drawdown scheme providers to make a strong case for retaining the charges they’ve put in place for these schemes. Increased regulatory scrutiny is inevitable as these products become the dominant at-retirement scheme for decumulation.

Natanje Holt, Managing Director Dunstan Thomas Holdings Limited.