I don’t do much writing on pensions these days, but before all the platforms stuff I was a corporate pensions dude and once you’ve been there, it never leaves you, sort of thing.
So I was fascinated to see that the issue of Active Member Discounts (AMDs) on group pensions is rearing its head again. Paul Lewis covered it briefly on Moneybox yesterday (you can find the podcast here) as a result of The Pensions Regulator expressing disapproval recently. For a bit of background you can read an excellent summary from my old colleague, the always erudite Jamie Clark here.
I was moaning about AMDs right back in 2007 on Citywire, calling them ‘paid up penalties’ and nothing’s really changed my view since then. Right from the start of the RDR, there’s been a clear view, and not an unreasonable one, that charges should at least broadly reflect work done as far as is possible within an ad valorem charging structure with its inherent flaws and cross-subsidies. Inactive or deferred GPP members don’t cost more to administer. They shouldn’t be charged more.
AMDs reflect the worst practice in our industry, inertia selling. It’s this technique that saddles people with sub-par annuity rates; that leaves them with cash ISAs at 0.001% interest rates and that gets our industry a bad name. It has nothing to do with good outcomes and everything to do with price-led product selling. Look, it’s cheap! Really cheap! Aren’t we cute? And never mind we’re screwing people who don’t work for you any more. Trebles all round!
It’s tempting to have a go at providers on this, and they were indeed where it all started. But their spread was dramatic and based on demand from IFAs who were selling the concept hard into employers. Everyone gets a bit of this on the soles of their shoes. Never forget that the genesis of these shapes was all about funding higher levels of AMC-based commission for IFAs. The stuff about low charges for active members came later.
Even Tom McPhail of the mighty Hargreaves Lansdown (who was righteously scathing about AMDs on Moneybox) admits that HL have written some of these schemes. So although Aegon stepped up bravely and took the flak on the programme with an argument that went something like, higher percentages of small pots are less than little percentages of big pots therefore AMDs are fair, an heroic piece of permeating syllogistic reasoning that’s arithmetically faultless but sadly utter mince, this sore runs wide and deep.
OK. WhatÃ¢ÂÂs done is done. AMDs are a relic of the past and need to die quickly. Any IFA that wants to set up a practice attacking these schemes and getting the deferred members out on a structured basis could do very well indeed, and it wouldn’t take much for the house of cards to fall down. Providers should remove the hiked AMCs for deferred members and take the revenue hit on the chin. It’s only right. NEST will sweep a lot of this nonsense away over time anyway.
Sub-optimal outcomes are one thing. But what really gets me is that we’ve done it again. In a rush to outmanufacture our competitor, write the next scheme, get the next bit of biz, meet the next target, we’ve shot ourselves in the foot. We’ve proved yet again that we can’t be trusted to provide fair, clear and not misleading products for people that rely on us.
Will we never learn?