Unfortunately, a minority of salesmen engaged in mis-selling, often attracted by the inducement of commission rather than the best interests of their client.
Not surprisingly, the consumer took a dim view of this and the regulator stepped in to deliver the retail distribution review (RDR) which included the abolition of commission and an improvement in the qualifications and professional standing of the advice industry.
Now, of course, we recognise the problems of commission and that RDR has done much to improve the transparency of both product and adviser charging. But it is worth remembering that in the days before RDR, without the good and honest salesman (the vast majority) who earned commission for doing a decent and honest job, many people would not have the pensions they have built up today as they would not have been sold on the idea of long-term savings at an early stage.
The costs of setting up a long-term product – including the sales commission to the adviser – would have been borne by the customer at the start of the plan.
But sending out a statement on the first policy anniversary showing that little or nothing has been invested does not encourage the customer to make any future savings, so, instead, the provider used a notional allocation of units to show a higher ‘face value’ of the policy. This would usually be the value paid on death but not on early termination or surrender of the plan.
So the concept of ‘back-end loading’ was introduced to give customers something which made for easier reading, while reflecting a notional recovery of charges over the lifetime of the plan. This made it appear that the costs were spread over the full term of the policy.
Logically, if the policy is terminated prematurely, then the surrender value (or more typically, transfer value) must reflect the costs actually incurred by applying a deduction to the current face value. The existence of this ‘early surrender penalty’ should always be recorded on the policy document and should also have been clear in the illustration that was given to the customer before buying the product.
The value at any point in time would therefore be the notional or face value adjusted for the initial and ongoing costs. What could be argued is that annual statements of the plan value were misleading by not stating the surrender value more clearly and/or alongside the notional or face value.
