Corporate advisers letting down DC annuitants - Pensions Institute
Corporate advisers should be doing more to improve the failing annuitisation process for workplace DC schemes that is siphoning off up to £1bn a year from members’ incomes says influential academic Dr Debbie Harrison of the Pensions Institute.
The charge comes on the publication of a damning report on the state of the annuitisation process in the group pensions market that has found evidence of price manipulation, differentials between pricing of internal and open market rates, cliff-edge rates bands affecting employee inertia and a lack of transparency around enhanced rates. The report concludes that a state-run annuity service may be the answer if outcomes cannot be improved.
The report, Treating DC Members Fairly In Retirement, commissioned by the NAPF and prepared by the Pensions Institute, has found widespread examples of poor consumer outcomes across both occupational and contract-based workplace pensions, even though the majority of these schemes have an employee benefit consultancy or corporate IFA overseeing them.
The report says despite headline figures from the industry that indicate more consumers are shopping around for their annuities, the research reveals that many of these are likely to be retail customers and that the picture for scheme members is very inconsistent.
It reported evidence from annuity advisers of differentials of up to 20 per cent between a provider’s internal rate and the open market rate, although providers said this cannot happen.
It also found evidence of manipulation of rates whereby a scheme provider adjusts downwards the internal rate, and corresponding OMO rate, where applicable, in anticipation of a substantial tranche of internal DC member funds reaching maturity.
Cliff‐edge rates bands are also being used to exploit member inertia. Even where individuals do shop around, unless they receive advice they will not know about the impact of a provider’s rate bands, which apply outside of the most commonly quotes rates of £50,000 and £100,000. This means customers miss out on the opportunity to improve their rate by retaining an extra £1 in the pension pot from the tax‐free cash allowance, and by aggregating and splitting pots, the report said.
It also claims that enhanced rates lack transparency and benchmarking with in some cases little more than an extra £1 per month being offered even though the rate was up to 15 per cent lower than the top standard rate on the open market. Enhanced rates secured through execution‐only OMO websites are likely to be ’underwriting‐light’ the report claims, meaning members secure only a percentage of the potential uplift. This is due to the fact that the enhancement is based on a simplified, rather than a full, medical questionnaire.
The report concludes that providers operating in both the scheme and annuity market benefit from retention rates of 80 to 90 per cent and therefore have little incentive to encourage customers to transfer funds to competitors. It argues that the ABI’s proposed Code of Conduct might help but the current lack of transparency facilitates high retention rates, although it notes some EBCs predict that the ’roll‐over’ market is set to change in response to increased segmentation and enhanced annuity business.
Harrison says: “Corporate IFAs and EBCs are in the strongest position to improve the annuitisation process and it is a shame that they generally haven’t done so thus far.
“The reason for this is partly to do with their business model. Some are set up to handle annuities, such as Alexander Forbes Financial Services with the Annuity Bureau and JLT with its Benpal system. Towers Watson and Mercer have only recently addressed this problem by appointing a bolt-on arrangement with an annuity adviser. But there are many that do not.
“Most of the focus in DC has been on the accumulation side of the equation. But you can talk about accumulation until you are blue in the face because it will be wasted if people do not then get the best annuity for them.
“I also find troubling a general perception in the advisory community that it is the member’s fault if they don’t get the right deal, and that they ’have to take responsibility’ for their pension. I think this is unfair.”
Joanne Segars, chief executive of the NAPF, say: “The way the market is priced and structured must become more transparent, and people need stronger support in picking the right annuity. The Government and the industry must work harder to create a clearer, fairer system that delivers better value for money.”
Otto Thoresen, Director General, ABI says: “The ABI will consider the NAPF report as input into its on-going consultation on improving the effectiveness of the open market option.
“The report has a number of factual inaccuracies and much of the evidence used appears to be anecdotal, which is misleading and unhelpful. For example, suggesting there is a pricing differential between providers’ internal rate and the rate offered on the open market contradicts the report itself which shows that where providers offer annuities on the open market, they offer the same rate internally.”