Dave Harris: Scheme members require more OMO information

5 November 2009 3:16 pm

Unfortunately, the simple answer is no. The review of 97 trust-based occupational pension schemes with DC benefits showed that members approaching retirement were not always presented with helpful and timely information.

While recognising that there has been a greater move to inform and educate scheme members in recent years, some 53 per cent of insured schemes and 68 per cent of uninsured schemes were considered by the Regulator to have some “scope for improvement”.^[

Around 30 per cent of schemes were in breach of the rules on retirement disclosure information, and the report highlighted ‘wake up’ packs that failed to alert members to the alternatives to lifetime annuity purchase at retirement, and which did not clearly mention the advantages of impaired/enhanced annuities.

Disturbingly, the report further highlighted that the commercial style of messages within some packs “could divert the focus from the Open Market Option and advice statements”.

Buying a lifetime annuity from the current provider is the ‘path of least resistance’ so it is perhaps not surprising that although 98 per cent of schemes mentioned OMO, only 23 per cent of members exercised their right to shop around.^[

There are two key steps to improving retirement outcomes – the first is to give people genuine choice, the second to promote professional advice.

OMO gives a limited choice, however it selects only from lifetime annuities and ignores the other options available on the market. This is reinforced by the literature provided by the pension provider, employer, trustee, Pensions Advisory Service and the Pensions Regulator. The reality is that even if every retiree exercised their OMO to get a few pounds a month more income from a lifetime annuity, over the long term many could still have benefited from an alternative approach.

These could include those who die early in retirement, those whose health fades, those whose spouses die or leave, those willing to take some investment performance risk with some of their fund, those expecting inheritances, those sceptical about tying their whole pension pot to one annuity rate at one point in time, and those with varying income needs who aren’t well served by fixed benefits.

The literature has a clear bias towards buying a lifetime annuity. OMO’s need to be reconfigured as a ‘Pension Passport’ that gives the freedom to access the best solutions from the whole market rather than funnelling people towards just one option.

This is assuming acute importance because of the changing nature of retirement – such as the growing need for people to work to a greater age – that is making people question how they structure their finances.

Should they take some benefits early, or defer with the goal of securing a higher income later? Should they commit all their funds at one time to one type of product, phase their purchase, or spread their funds across a range of products? With retirement now set to last on average 20-30 years, should they take an income but retain the flexibility to adapt it to their changing circumstances?

We believe professional advice is central to good decision making. The Regulator’s report found that 56 per cent of schemes encouraged people to take advice, but there are few incentives and take up is probably much lower. Promoting advice is an area where, the Regulator stresses, trustees can “add value” to the process.

For many people, retirement heralds the biggest investment decision of their lives and these decisions cannot be reversed once they have locked themselves into a lifetime annuity. To use the Pensions Regulator’s own words, it is about delivering “the right information and support at the right time”.

 

Living Time managing director sales and marketing Dave Harris

 

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