Friends Life sparks shake up of work-based pensions

Friends Life is to reduce its charges for deferred members of its pension scheme plans, following criticism from the former Office of Fair Trading and DWP about industry-wide exorbitant charges for pension scheme members.

The insurance and pensions provider subsidiary of Resolution said it will offer all its active member discount (AMD) schemes the chance to move to a single charge at the current active member rate with immediate effect.

Providers make most of their margin from defined contribution pension schemes from members once they leave a company's employment when it is common practice to arbitrarily raise the changes born by the deferred member, while active members pay less.

The 2013 OFT report into workplace savings estimated that there are approximately 10,000 schemes in the UK that currently use an active member discount, which includes some 13% of Group Personal Pension schemes.

Friends jumped the gun before the AMCs are banned in April 2016, but it is no more guilty than the next insurance company - indeed, probably less, as it cut down on this practice before its rivals. The announcement is good publicity, particularly if it forces rivals who have greater exposure to this practice to follow suit, as well as stabilising Friends' own market.

Confidence

All members within Friends' affected schemes, whether active or deferred, will pay the current active member charge (AMC), subject to a minimum of 0.35%. It means that employers with Friends schemes can be confident of where their members stand and will not need to switch policies.

"We have already started working with a number of our clients who proactively wished to move to a flat charge structure, at the active member rate, and we are now extending this offer to all of our clients with an AMD scheme," said Colin Williams, managing director, Corporate Benefits at Friends Life.

"Due to the quality of our AMD portfolio and our relatively limited exposure we can make these changes for the benefit of our customers without a material financial impact on our business. We are aware that many AMD schemes in the market are on higher AMC terms and we are happy to consider offering a single AMC solution to schemes that wish to future proof ahead of the ban... If all pension providers take the same stance as Friends Life, there will be a large number of members that stand to benefit."

Laith Khalaf, head of corporate research at Hargreaves Lansdown, said that more insurers are likely to follow in re-pricing their schemes to take account of the new rules recently announced by the DWP. This is the beginning a huge shake-up of workplace pensions, as providers and advisers adjust to a world where there are no Active Members Discounts, no default fund charges above 0.75%, and no commission.

A key point however is that Friends Life has only dropped Active Member Discounts for "future" deferred members, essentially anyone who leaves a workplace scheme from now on.

This underlines the need for the FCA's newest inquiry into products sold between the 1970s and 2000, which will cover excessive charging but whose remit has been a political hot potato regarding what measures may be retrospective. Legacy schemes are those which the OFT identified as being most at risk of having high charges, and they hold some £30 billion of assets.

Investors in Resolution will take a while to work though the implications of this technical change. The shares rose by 0.6% by lunchtime to 280.50p.