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Why can't we have proper OMO figures?

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The FSMA needs to be changed to let the FSA probe annuities

The NAPF/Pensions Institute report into the annuitisation process raises issues so serious that only a complete overhaul of the system can truly clear the air.

That report, Treating DC Scheme Members Fairly In Retirement?, raises some extremely serious charges against the annuitisation process. Rate manipulation, lack of transparency, dual pricing and a reliance on apathy that is collectively costing pensioners around £1bn a year through poorer rates. That the report has to admit neither it nor the FSA is in a position to get to the bottom of some of the more serious allegations is a cause for concern.

The report leaves us with tantalising suggestions of the bad things done by annuity providers. Sadly, the report has to concede it is unable to prove these allegations and, under current legislation, there is no point hoping the FSA is going to do so either. This is because the Financial Services and Markets Act prohibits the regulator from publishing provider-specific data, were it to collect the data. The Pensions Institute is right therefore to propose amending FSMA to allow the FSA to find out what is going on in annuity pricing.

But the drive for transparency should not stop there. You could be forgiven for thinking that the level of take-up of the open market option has been a subject of debate for years.

But it transpires that the ABI has never had accurate figures for the number of people buying an annuity on the open market. Yes it has figures for the proportion of people switching provider at annuity purchase but it turns out this includes those switching under blanket deals between holding pension providers that do not offer annuities and annuity providers.

The proportion of people switching provider has, according to the ABI, increased from 35 per cent in 2008 to 46 per cent in the last year. But these figures include annuities put in place through tie-ups such as those between Skandia and Legal & General and between Royal London and Prudential. In fact, most annuity specialists detect a reduction in the number of clients actively taking their pension pot to a different provider.

The FSA has surveyed Omo take-up from time to time but surely it is within the capability of the ABI to give us a figure on an ongoing basis. Maybe this job is so important that the Government or regulator should be doing it. Of course, the need to accurately monitor success disappears if defaulting to the Omo becomes the norm.

The NAPF should be applauded for backing the report although its membership is not entirely blameless in the whole sorry story of poor annuity choices.

It appears that many trustees are letting down their members just as much as the insurers, even though they might be expected to do more.

Trustees’ only regulatory obligation is to give members a leaflet from The Pensions Regulator about the Omo, even though scheme members might think trustees’ fiduciary duty to act in the best interests of the scheme beneficiaries runs to making sure they get a good deal. There is nothing to stop trustees from making sure the Omo is the default in the schemes they run, yet many do not take such an approach.

The annuity market is set to double in the next few years. The Government or the regulator needs to take a deep look at exactly what is happening inside annuity providers and if that means changes to the FSMA, then so be it. Hundreds of thousands of pensioners each year have the right to know.

John Greenwood is editor of Corporate Adviser

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Readers' comments (18)

  • Good piece John!

    For years everyone seems to have assumed that the ABI would sort this out, but that would be to forget what the letters ABI stand for: the Association of British Insurers.

    In a market where up to 5 providers offer competitive rates and the rest offer rates as much as 15% - 20% below the best, the association has to protect the majority of its members, not just the 5 who are competive.

    An actuary from a large Scottish office once stood up at an Annuities and Drawdown conference and said that many of their policyholders wanted to stay with a company they had saved with for years. She seemed to think that loyalty meant that people would knowingly accept 15% less income for the rest of their lives just to be loyal.

    Since companies with poor rates do not pick up OMO business it is only their loyal customers who they rip off in this way! But this is the majority of ABI members, and this is who they must stick up for.

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  • David,

    you seem to forget that security is equally if not more important than price. With the benefit of banking hindsight, what would you rather have, a 4% interest rate from Icesave or 2% from HSBC? Annuities are no different. Buying at a lower rate from a more secure provider is a perfectly logical decision, particularly given that income is paid for 25 years.

    Do you carry out detailed due diligence on the providers you recommend? If so, you may wish to publish your findings.

    You may well point out that annuities are covered by FSCS, but only to 90% and you'd have a year of no or limited income whilst this compensation was sorted out.

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  • John

    At present Standard Life are near the top of a number of the annuity tables. For some time the other market leaders have been Aviva, Canada Life and L&G.

    This is the current table for a male aged 65 with a £50k purchase price and no add-ons: (source Aequos)

    Aviva £3070pa
    Canada Life £2965pa
    Legal & General £2942pa
    Scottish Widows £2761pa
    Standard Life £2708pa
    Prudential £2663pa
    AEGON £2560pa

    Which of these companies do you consider to be 'less secure'? Should an Aegon policyholder turn down an extra £500 p.a. because Aegon is more secure than Aviva? He could even get an extra £150 p.a. from your company which I am sure you will agree is at least as secure as Aegon!

    The days when the likes of Sentinel and Providence Capital were top of comparative tables are long gone, and your argument went with them!!

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  • Let's look at the "unintended consequences" angle, David.

    An annuity provider must back sales with capital. And lets assume the ones offering poor rates are the ones unwilling to spend capital on the products - capital neutral rates are not particularly attractive.

    If / when compulsory OMO comes in, those companies presumably won't retain business - therefore may choose to close to new business, lay off staff, cut costs, etc - constricting the market.

    This in turn means other providers will start to receive a large amount of additional new business. However those providers have a finite amount of capital. They will presumably either throttle their rates, or step away from the market when they hit their capital constraints.

    We will potentially end up with a market where no-one can afford to be competitive, therefore EVERYONE will be offering rates that are capital neutral (or close to it).

    A net effect of dragging the market down, with fewer providers to choose from is a distinct possibility.

    On the other hand, allowing providers to take calculated steps to the top of the market without risk of being flooded with business means customers have the possibility of a better rate there - IF they choose to go and get it.

    Devil's advocate, and all that.

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  • I recall Peter Quinton (and other annuity market activists) banging on about the OMO ten years ago - sad to think that despite TCF, MAS, internet info etc. nothing much seems to have changed.

    And while I agree with David that security of the provider is a factor, a low rate isn't neccessarily connected with such security (although the underlying investments would generally tend to lower the risk anyway).

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  • I replied to John, but it has not appeared. I made the point that the market leaders are actually more secure than the company in 8th place which has just posted a £33m loss.

    Lee, your comments suggest that you have a future writing scripts for the likes of Jack Dee!

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  • Oops - should have said "agree with John" not "David", in my first posting - although I also agree with David in his second posting (quoting rates).

    Confused?.....You soon will be!!


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  • David,

    How secure you are hasn't got much to do with your current annual profit (although that could be an indication of where you are heading).

    The important components of annuity security are: 1) how prudent your mortality assumptions are in relation to the people you are insuring - for example you would expect people in Kensington and Chelsea to live longer than anywhere else in the UK, and if these were your customers you would reserve accordingly 2) How prudent you assumptions are regarding asset (primarily corp bond) default 3) If you have got your annuity sums wrong, how much free capital do you have relative to all of the risks you are running (e.g. annuity risk, investment guarantees risk etc.)

    Our view at SL is that we offer a fair price to the customer whilst taking a prudent approach. Those that offer a better price than us are taking more risk.

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  • "Our view at SL is that we offer a fair price to the customer whilst taking a prudent approach. Those that offer a better price than us are taking more risk."

    But what about those who offer a worse price?

    And are you seriously saying that the likes of Aviva, Canada and L&G are weakening their solvency by offering a better price? If so .... bring on Solvency II!!

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  • David (and Peter), you are right that annuity rates and the financial strength of insurers is not correlated. There are insurers who are both weak and offer poor rates. So, there could be insurers who offer a lower price than SL who are both weaker and stronger.

    I won't comment on the financial strength of other insurers here, but you are right that Solvency II may improve the the consistency of how risk is regarded and reserved for.

    A crude way to look at the overall financial strength of listed insurers would be to compare their share prices over the last 5 years and see how they did relative to each other during the worst of the economic storm. However, this may prove difficult when looking at those who are foreign-owned or not listed

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