For the 95% of you invested in a modern product, you continue to benefit from lower charges.
Anyone who has been auto enrolled into their employer’s pension scheme will benefit from the regulatory charge cap of 0.75% per annum which applies to your employers chosen default investment fund. In reality, the majority of you pay less than this, and you can see the distribution of the levels of charges members pay in the next section of our report.
Around 3.5 million of you will pay less than 0.75% per annum in charges each year. However, Aviva brought to our attention this year that there are some members, around 14,000, who were invested in a workplace pension before this charge cap was introduced and retain charges higher than 1% per annum. It’s disappointing that we have only recently been made aware of these cases and have ensured Aviva will take swift action to reduce charges for these members to a maximum of 1% per annum.
We have examined how Aviva monitors the charge cap to ensure that changes to fund expenses do not take the cost of the default investment solution above the cap. For Aviva’s own default funds, this is monitored automatically and any charges in excess of 0.75% per annum are rebated back to the member. For bespoke defaults – those designed by your employer or their adviser – the levels of charge are set with a buffer of 0.05-0.1% per annum to reduce the likelihood of a breach. In some instances, this may require a fee to be paid by the employer to reduce the overall charge.
There are regular Management Information reports for all default funds to retrospectively check that the 0.75% per annum charge cap has not been breached. In the event that these bespoke funds breach the cap, excess charges will be rebated to members. We are satisfied that this process is working and that the risk is adequately managed.
Aviva has a range of products that has evolved over time. Generally speaking, older products are those which are not used for auto-enrolment and were started before 2001. Older products have features and charges which do not exist in newer products and we have sought to understand and challenge the differences. In total there are around 5% of members in older products.
In our previous reports we have reported on complex and outdated charging features which apply to older products. Over the years we have seen significant progress in reducing these charges, largely based on our challenges to Aviva. This includes the removal of monthly policy fees for most members, the removal of penalties applied when members stop contributing, and the removal of higher charging units for older policies.
We are pleased to see that Aviva has finally completed the exercise to remove all the higher charging units and exit fees for all members. Over 190,000 customers have benefited from this change including members not in our remit. This means that nobody in an older product will pay more than 1% per annum in charges. The only exception to this is for a relatively small number of members who are invested in products which could not be fixed due to the complexity of the IT systems used. Where that is the case, when a member takes benefits or retires, Aviva will calculate the level of charges above 1% per annum paid since January 2017 and reimburse these costs before paying benefits. As at the end of May 2021, 1,600 policies have been reviewed on exit of which payments were made to 730 customers with an average of £100 being reimbursed.
In our last report, we put significant weight behind a programme which had just started to look at the feasibility of moving members in older products to more modern contracts with lower charges. We were looking for this exercise to be undertaken swiftly and are aware that Aviva dedicated significant resources to these early investigations.
The FCA has stated that they would not object to members being transferred without consent provided that three criteria are met. Aviva would have to:
Many members in these older products hold investments in With Profits funds (around 35%). These funds are generally not available in modern contracts, certainly not within Aviva. Historically, these funds have provided generous returns which have outperformed the balanced managed fund (the largest fund measured by assets under management available as an alternative investment choice). While future distribution of any With Profits bonuses cannot be guaranteed, it would be extremely difficult to guarantee that these members would be better off by moving to a modern contract from an investment point of view.
10% of members have the potential to receive a loyalty bonus by continuing to invest in their existing policy. Any move to a new policy would mean that this bonus would be lost. There are also around 10% of members who hold guarantees such as a guaranteed annuity rate which provides a promised minimum rate at which the member will be able to convert their pension pot into income.
Overall, Aviva has identified 68% of members holding at least one of these features in addition to telephony support which makes a transfer without consent difficult to justify as guaranteed to be “no worse off” following transfer. Of the remainder, Aviva is actively engaged in an exercise to look at “small pots” and establish if there is anything that can be achieved for almost 300,000 customers. Aviva defines a small pot as a total investment of £3,500 or less for the purpose of this exercise, although this amount is flexible and may be increased in the future.
At the time of writing, the results of these investigations have not been completed but we hope to be able to report further in next year’s report. That leaves around 23% of customers (around 40,000 members within our remit) not holding a valuable feature, and not within the small pots exercise. We may ask Aviva to look at this portion of the membership although we appreciate that the same legal barriers and contractual considerations may still apply. As an alternative, Aviva wrote to 1,500 members identified as suitable for a transfer offering them a move to a new product but only if they provided positive consent. Only 5% responded and took up this offer.
So, in summary, the proposed customer transfer programme has proved challenging and efforts to encourage members to move to a new product have generated very low success rates. This is also reflected in the retirement journey where Aviva writes to members approaching age 55 making them aware of the availability of alternative products. The response to these campaigns generates only a 2% uptake where there is no assistance from a financial adviser, or 170 of the 8,000 members who reach their retirement date each month.
We will continue to monitor engagement in this area and challenge Aviva to continue to do as much as they can to encourage members to review their policy themselves and take advice.
The removal of exit fees means that any barrier you may have had to moving to a product with lower charges and additional features has also been removed. This could help you assess whether to consolidate your pension pots into one policy, particularly where you have a number of small pots. This is something we consider good practice, although care should be taken that you are not giving up valuable benefits like loyalty bonuses or With Profits investments which you may not be able to replace in a more modern product. Should you be considering consolidation you should seek financial advice.
We would like to see charges in older products reduce further but accept that this is both commercially and technically challenging. For the time being we have accepted the Aviva position that a maximum level of 1% per annum is acceptable and provides value for money but we will keep this under review because this has remained the maximum level deemed acceptable for some time now.
The FCA is currently considering new legislation aimed at non-workplace pensions and we will consider these new rules, expected later this year, and how they compare to the rules in relation to those products in our remit. Also, more information on charges for other pension providers should be available in July 2021 IGC reports to assist in comparisons in future years.