Work and Pensions CommitteeWritten evidence submitted by Phoenix Group

Introduction

Phoenix Group is the UK’s largest consolidator of closed life assurance funds. The group has £72.1 billion assets under management and serves more than six million policyholders.

This response is based on our recent submission to the Department of Work and Pensions consultation “Meeting future workplace pension challenges: improving transfer and dealing with small pension pots”.

In this response we focus primarily on the Government’s proposals for managing small pots, though inevitably provide information on the wider remit of the inquiry as a result.

(i) Overview

Phoenix Group supports the Government’s ambition to take action to ensure the future pensions system works in the interests of individuals to help them achieve a decent standard of living. Automatic enrolment has the potential to fundamentally improve our pension provision in the UK and to begin to tackle the savings gap in the UK. Phoenix Group shares the Government’s concern not to see the benefits of automatic enrolment undermined by a situation where people are unable to consolidate their small pension pots and achieve a decent annuity. We welcome the DWP’s recognition that the system of small pots needs to change to avoid the outcome of numerous small and inactive pension pots.

We think the guiding principles for reform the Government has identified for individuals, schemes and employers are the right ones. Any reform must, in addition to passing the test of promoting good retirement outcomes and engagement with savings, ease administrative burdens, be efficient and be sustainable. In practical terms adhering to these principles must reasonably minimise the costs to schemes and employers and produce a durable arrangement which will work in the long run, giving certainty to schemes and employers.

Whilst the issue of small pots across all areas of pension provision needs to be addressed, there are clearly two separate problems to consider: the small pots likely to be created by the introduction of automatic enrolment and the small pots already in existence.

We believe, for this issue, a “one size” solution does not fit all; auto-enrolled business is a simpler problem to resolve but the pension pots already in existence need far more consideration.

For legacy business, of which Phoenix can be called an “expert”, the aggregator scheme is the optimum solution which best fits the guiding principles of reform for the individual, employer, schemes and the Government. However, in order for this reform to work we support the DWP’s view that it is essential that transfers to an aggregator scheme should only be undertaken with policyholder consent, and we would further suggest that this consent be on the basis of appropriate advice and information. Any auto-transfer aggregation could result in a material loss to policyholders through a loss of guaranteed maturity values and annuity rates.

Whilst we do not transact in this area, we also believe the aggregator option is the best solution for auto-enrolled pension business. For this new pension provision we feel that auto-transfer could work as this business will be simpler and more suited to a common scheme.

Of the two alternative ideas offered by the Department for Work and Pensions, smaller scale reforms to the transfer system through changes to the current voluntary system are insufficient to deal with the scale of the problem. Measures such as providing more information to encourage transfers, requiring schemes to accept all transfers or greater standardisation would not overcome the problem of customer inertia.

Likewise, the most ambitious reform of creating a portability system which follows the employee from job to job is impractical. Providers should not be forced to accept transfers from other schemes; instead they should be given the option to set up a specific aggregator scheme which supports their business model.

(ii) About Phoenix Group

Phoenix Group is the UK’s largest consolidator of closed life assurance funds. The group has £72.1 billion assets under management and serves more than six million policyholders. The Phoenix Group of companies can trace its history back to 1782, with the foundation of Phoenix Life Assurance. The modern day group was founded in 1990 when Pearl was acquired by the Australian financial giant AMP and in 2003, Pearl, NPI and London Life de-merged from AMP to become part of a new UK company, HHG. In April 2005, Pearl Group Limited was acquired by Sun Capital Partners and TDR Capital from HHG. In March 2006, Pearl Group Limited created an in-house asset and risk management business, Axial (now renamed Ignis Asset Management). In May 2008, Pearl Group Limited acquired the Resolution plc companies (Phoenix Life Limited, Scottish Provident Limited, Scottish Mutual Assurance Limited & Resolution Asset Management).

In September 2009, Pearl Group (formerly Liberty Acquisition Holdings (International) Company) became the ultimate holding company of the Pearl Group of companies. On 15 March 2010, Pearl Group changed its name to Phoenix Group Holdings. Phoenix Group Holdings has a Premium Listing on the London Stock Exchange, and is a member of the FTSE 250 index.

(iii) Overview of activity

Six million policyholders and £72.1 billion of assets under management.

Over 100 heritage brands under the Phoenix Group banner including Britannic, Scottish Mutual, Pearl and London Life.

Almost seven million policies in force across the Group including:

Nearly 2.25 million pensions, of which 500,000 have a guaranteed annuity rate available at maturity.

Nearly 700,000 annuities in payment.

We have a high proportion of customers with smaller pension pots so have a unique perspective on the pension industry:

Across our two main life offices, the average matured pension pot with a Phoenix Life customer is £17k (against an industry average of £28k).

20% of our customers use the current triviality ruling—which means they can cash in their entire pension pot (subject to tax) if it’s worth less than £18k and the only pension pot they hold.

A. The Government’s Proposals for Managing Small Pension Pots

(a) It is difficult to give a completely accurate picture of the scale of the problem of small pension pots but we do know from recent research we undertook amongst our annuity customers that one sixth had a pension pot worth less than £5,000 and 19% had four pots or more. We also know that under the Unclaimed Assets Register (UAR), where consumers can locate lost financial products, there is £400 million unclaimed in life and pension plans—much of which will be small policies including pensions.

(b) We believe that barriers, both supply side and demand, and also transactional costs are real impediments to transfer. As we state elsewhere in this response, one of the additional barriers is the potential loss of a guaranteed annuity rate and maturity value if they are forced to transfer an older pension contract.

(c) Whilst we agree that any changes would be helpful, we do not believe that smaller scale reforms to the transfer system through changes to the current system are sufficient to deal with the scale of the problem of reducing the number of small pension pots.

(d) We are pleased the DWP has raised the issue of dormant pension pots, in connection with the small pots problem and making it easier for people to locate them. In order for a consolidated system to function effectively an improved system must be put in place first to allow policyholders to locate dormant pension pots. The Unclaimed Assets Register shows there is £400 million unclaimed in life and pension plans—much of which will be small policies. We believe there needs to be a better system than the UAR to find these. The current system requires policyholders to pay a fee, regardless of the success. We believe this is a disincentive to using it.

A simpler solution, funded via a success fee, would be more attractive providing it has the support of the entire pension industry. By way of an illustration, the ABI’s (Association of British Insurers) Origo Options initiative has been very successful in significantly reducing the time taken to transfer pension monies between providers. A similar system, with the cooperation of the entire industry, could be developed by the ABI or another body for locating lost assets.

(e) We believe that an aggregator scheme for small pots is the optimum solution which provides the best fit with the guiding principles for the reform. It will help avoid the policyholder being excluded from some of the options available to holders of larger pension pots such as some rates on the open market and drawdown products. This reform is sufficiently bold to overcome customer inertia and also offers a practical solution for providers as they can opt into offering an aggregator scheme.

For new auto enrolled business we believe the best option is auto transfer to these aggregator schemes. However, for existing business, as older pension contracts often have terms and conditions built in which can significantly benefit the pension policyholder, we believe it is unlikely that any receiving aggregator scheme would be able to honour these terms in today’s market and the policyholder would lose out. It would also be wrong to assume that all holders of small pension pots are not engaged with their pension, many policyholders would want to be involved in the process of transfer. In fact, recent research commissioned amongst Phoenix pension policyholders found that 25% would not want to combine their pension pots, even if the option was available. Therefore, it would be detrimental to the policyholder if this pension business was to be auto transferred to an aggregator scheme without their consent, and we would further suggest that this consent be on the basis of appropriate advice and information.

We have outlined some examples below of where the policyholder could miss out in an auto transfer process:

Guaranteed maturity values:

Many with-profits pension policies provide a guaranteed value at maturity. Whatever happens to markets and interest rates, this amount is guaranteed by the pension provider. If the pension was transferred before the maturity date, a surrender value would be payable into the aggregator scheme but there would be no guarantee that this would then grow to exceed the guaranteed value that has been given up. There could be a significant risk that the policyholder would be worse off.

Guaranteed annuity rates:

Many pension policies may also have a guaranteed annuity rate—which allows the policyholder to convert the maturity value into a pension at a guaranteed rate. For example, it is estimated that hundreds of thousands of policyholders have a guaranteed annuity in the industry and we know that approximately 20% of our pension policyholders have a guaranteed annuity rate in force—around 500,000 policies.

This guaranteed rate is far higher than is available on the open market today for healthy lives. A guaranteed annuity rate was a fairly common feature in pension policies issued during the 1980s, and were provided at a time when interest rates were much higher than they are today, and life expectancy was much shorter. For example, the rate guaranteed under some older Phoenix Life pension plans is £1 per annum pension for each £10 of maturity proceeds at age 65, giving an effective yield of 10% per annum. Current annuity rates for a healthy male life are around 5.5% to 6%. A guaranteed annuity rate is often an option that is only exercisable at specified contractual dates, and would be lost on transfer out to another arrangement.

B. Conclusions

Phoenix Group welcomes the Government ambition to develop a more effective system for managing small pension pots. As our response demonstrates, we believe that there is a preferred way forward for the Government to take. This is, in summary:

Any reform must, in addition to passing the test of promoting good retirement outcomes and engagement with savings, ease administrative burdens, be efficient and be sustainable.

Of the three proposed reforms set out by the Government in the DWP consultation paper, Phoenix Group strongly believe that the aggregator scheme is the optimum solution, on the crucial proviso that transfers to the aggregator scheme for legacy business be undertaken with policyholder consent (and preferably some form of advice or independent information). This consumer safeguard is essential to protect the policyholders’ interests and also to maintain confidence in the reforms the Government is trying to deliver.

We welcome the Committee’s inquiry and its focus on the Government’s proposals for managing small pension pots.

16 April 2012

Prepared 11th February 2013