ABI goes boldly

14 January 2010

My regular readers will be surprised that I have positive things to say about the Association of British Insurers. But a recent publication of theirs, Time for Change: Seven proposals to improve DC pension benefits in retirement, has some bold objectives, although for me it is the practical proposals as opposed to the strategic that grabbed my interest.

The proposals look at compulsory annuitisation or alternatively secured pensions and the taxation of proceeds after the age of 75, suggesting a reduction in taxation and a move to age 80 based on the change in longevity expectations, coupled with an increase of maximum income to 120 per cent for Asp.

All these ideas are fine, although I am unsure if there is any point in having any upper age. What really got my attention was the idea of having what they termed “value protection annuities” where, on death, the balance fund can, as in unsecured pensions, be returned to their heirs.

This would have an impact on annuity rates but also give an opportunity to product designers to truly innovate. It also dovetails well with their ideas to encourage married and partnered couples to consider their joint-retirement income needs where it would be possible to amalgamate and produce a result that fits real life and not be artificially constrained as they are at present.

The ABI also raises the idea of a lifetime income guarantee but is that not just an annuity underpin? One idea I recently saw in the States was an invested annuity with a daily set guarantee. Whether that would work here is not that important in the scheme of things. What is more important is innovation and to capture the public’s imagination regarding saving. The current Government almost got there with domestic property and pensions but bottled it when they should have refined the rules, especially on liquidity needed at retirement.

The paper also addressed the issue of stranded pots by harmonising rules for occupational and contract-based DC pensions. Perhaps with a new Government, legislation will be stress-tested properly and not on the back of a fag packet approach as is current. We only have to
consider the forestalling rules’ debacle to see what happens without stress-testing.

Just as I have praised the ABI, I feel it is only right that I raise the issue as to why the Investment Management Association even exists and what value, if any, its classifications provide. I raise this as we see the Arch cru situation continue to deteriorate. Now it is very easy to be smart after the event but it is clear that either their methodology does not work or there is no effective due diligence. If IFAs are to respect classifications, they have to be robust and not subjective in all their aspects.

Now I know that the IMA will react to this earnestly, pointing to their caveats but what we need is for them to start working with ISO to develop a standard method of classification worldwide with the UK leading. As I said in my introduction, the ABI move forward when the IMA seem just to vibrate, I would welcome investment advisers’ feedback on the ISO idea. Best wishes for 2010.

Robert Reid is managing director of Syndaxi Chartered Financial Planners

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