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We’ve Got It Covered March 30, 2014

Posted by Audit Monkey in The Joy & Pain of Internal Audit, The State of the British Nation.
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I will confess that I’ve lost interest in the blog. When one spends all day trying to understand what the hell is going (in terms of systems) on particular job, putting up with anal trainees and pedantic supervisors, I don’t fancy blogging about auditing of an evening. However, I will make an exception tonight.

Certain things do make me laugh and the current goings-on in the UK life assurance industry are tickling me at the moment. Last week, the Chancellor, announced changes to the annuity rules. An annuity is a simple product, for the consumer at least. When you retire, you pay a lump sum to your Insurer from your pension pot in return for regular income until you decease. However, Gideon has decided to loosen the rules over annuities. Being life assurance, it’s abit complex, but in short, annuitants will be given access to their fund (pension pot) to do as they see fit. Previously, you had to buy an annuity whether you liked it or not.

The first funny. I believe the government didn’t consult the Pensions Industry on this proposed change! The share price of the two main firms who specialise in annuity products, Just Retirements and Partnership, bombed. Even more amusing is The Telegraph reported that the CEO of Just Retirements was in a meeting while the Chancellor was delivering his Budget speech and had to be disturbed to be told the grim news. ‘Hello?’ Surely most CEO’s would watch the Budget to assess any impact on their firms? Governance failure number one.

The second funny. On last Thursday (thereabouts), The Telegraph broke the story that the Regulator (FCA) was going to review the so-called ‘zombie funds’ managed by the Life Assurers for possible mis-selling and lack of fair treatment of customers. (Zoomie funds are basically closed books of business; policyholders are effectively locked into through their pension scheme). The CEO’s of the major Life Assurers must have thought ‘yeah, annuities, can cope with the changes there as we’ve still got the legacy and current book of business – we’re laughin’!’ But no, the share-price of the large Insurers have taken a hit. The Regulator has come into justifiable criticism, especially from the CEO of Legal & General, as it has become a ‘market maker’ rather than remaining neutral. So governance failure number two, the Regulator crosses the independence line.

The third funny. The FCA review of the ‘zoombie funds’ will involve 30m policies, and some will date back to the 1970’s. The main issue is the levying of unduly high exit fees on closed schemes to benefit new schemes. I laugh as this will be a large knot to unpick. While I agree, that continuous management charges on individual pensions where the individual has ceased to make contributions are unfair (like my pension with L&G), pension firms make their money by charging fees. There seems to be a common misconception among the public and the Regulator, that these firms are doing it on a ‘not for profit’ basis, and taking a bath on profit so the consumer gets the product buckshee. Er, no.

The wider issue, whether it is fair to charge exit-fees and how much these should be, starts to become rather philosophical. Part of the issue is if consumers chop and change pension schemes, hence providers, there is an associated admin cost for the firms in question, and like everything in business, you can wind up in a position where a firm is selling a product, servicing the product but not covering costs.

The second related problem is that proving cross subsidiary from zoombie funds to new schemes is going to a tough one. The original individuals who designed the schemes have probably long since gone, along with a fair chunk of the policyholders, and the original terms were agreed years ago. The scheme actuaries will probably have a handle on what’s going on but the locating the original paperwork may be bind!

To bring this full circle. I find it amusing that the government wants to liberalise the annuity industry but has probably killed it by giving consumers more choice. Also, I thought the whole idea of an annuity was to provide an income until one deceased, not for immediate consumption or gratification. There has to be some discipline, otherwise it will be merry hell for the Insurers to manage their businesses. However, the funniest thing is, on one hand, the government wants to treat consumers as mature, financially sophisticated adults in deciding what to do with their pension pot, while on the other hand, the Regulator, wants to treat consumers as idiots for signing up under unfair terms. My reading is probably too simplistic but the tension does exist.


1. itmonkey101 - March 31, 2014

Annuity rates have been so poor that the insurers have brought it upon themselves. When the rate is no better than draw down over 25 years (not including interest on your investments) then action has to be taken. The whole finance industry is fraudulent designed to take money off consumers and pay the finance masters of the universe huge bonuses.
For once they got a bloody nose. Good on you, Gideon!

2. Audit Monkey - March 31, 2014

I think the phrase you are looking for is ‘the value of your investments may go up as well as down’. That used to be the usual caveat. As for wealth management, from what I’ve seen from my audit work, I think alot of it is simply hot air and BS.

3. Audit Monkey - March 31, 2014

The problem is people are living longer, so this buggers up the old mordity assumptions and hits the annuity rates.

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