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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!!

    Apologies.

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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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  • Jack Dee? Brilliant...

    You HAVE to look at consequences of the radical demands for change that we're seeing so much of. How long did it take HL analyst / PICA chairman to acknowledge the unsuitability of his "blanket OMO" demands on the small pot holders?

    People with one agenda generally stand to profit from the implementation of that agenda - and to hell with anyone else. Which means we should look VERY carefully at options and implications to make sure we don't end up in a fire instead of a frying pan.

    Another IFA (Julian ?) on another thread gave an example of an independent calc showing rates of 5.16% available - without catering for any of the risks associated with annuities. If some companies want to take more prudent risk views - surely they should be allowed to do so?

    And, in true Jack Dee style - we could make IFAs partially liable if they recommend an annuity provider which later goes bust...and see who they recommend.

    ;-)

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  • Advisers recommending only the cheapest annuity providers presumably drive the cheapest cars, wear the cheapest suits and live in the cheapest neighbourhoods?

    Somtimes cheapest isn't the best value for money or most appropriate buy. Some things are 'reassuringly expensive'.

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  • Lee

    My postings give you my name and company and if you were to go to our website it would be clear to you that annuities are a very small part of our business. Unfortunately I cannot do the same for the likes of LeeD or CynicAli.

    CA, Please explain how your company's annuity offering is reassuringly expensive. I suspect that your solvency is significantly weaker than that of Aviva or Standard Life! Fake Rolex watches are reassuringly expensive too!!

    I do not understand why John Lawson is such an opponent of the OMO, given that Standard generally offer competitive rates. All his talk of security makes we wonder if he knows something which I don't ... and who would he know about other than his own company?

    Comments like some of those above miss the difference between financial services and other products. If I spend £30k to buy a car from Lee, I cannot complain if Ali would have sold me the same model for only £25k, providing that both were fit for purpose. And neither Lee nor Ali has to give me reasons why I should have that particular model and colour.

    When selling a financial product we do have to ensure that it is suitable and we have to provide a reasons why letter. In the past I have recommended the likes of Norwich Union and Sun Alliance when they came 3rd in the table behing a company such as Sentinel or Providence Capital. I explained to my clients that although the latter two companies offered higher income they were less secure than the former two.

    And as for 'if everyone gets the best rates, all the companies will go bust" ... that would be a good argument to ban digital cameras to keep Kodak in business!

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  • David,

    I'm not an opponent of the OMO. The OMO has been around since I was a boy and I wholeheartedly support the right of customers to shop around.

    I am an even bigger supporter of customers using properly qualified and regulated IFAs (RIs) to take advice when exercising their OMO, but sadly, some customers are not economic for IFAs to deal with due to the ever-increasing cost of regulation.

    I am not a fan of annuity brokerages. These are unregulated operations which largely operate on the basis of price-driven shopping around, without helping the customer in more important decisions such as shape and type of income. They don't help the customer beyond price because the sale doesn't generate enough income to cover that cost. Some of them are good but they tend not to operate under £15,000. Apart from being unregulated, they do not even operate to a common industry code. The small customer whom the IFA cannot afford to deal with, will get a better service from their provider than they will from an annuity broker.

    What I am saying here is that annuities are not just about price. They are about price and security of that price.

    As for security, SL has £3.3bn in free assets (Insurance Groups Directive surplus), in addition to our prudent annuity reserves, making us one of the safest homes for any annuity buyer!

    David, how did you assess the security of Sentinel or Providence Capital against other insurers in the past? And if such analysis was relevant then, why isn't it now?

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  • I fear that the government will hustle through the revised FSMA with little if any regard for what either the TSC or our elected parliamentary representatives may have to say about what ought to be going into it. Look what the government has already done to pensions (despite the Conservatives' pre-election manifesto promises) and what's on its agenda for the near future. In 10 years time, maybe less, pensions will be little more than Public Sector DB schemes and, for everyone else, NEST. Not an encouraging outlook.

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  • David, what if I always recommend Perodua over BMW for your company car because it comes out top on the comparative price table? I can also recommend Primark for your suits after similar market research...

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  • I come a little late to this discussion, but I would like to go back to the headline and ask again why we cannot have proper figures.
    This is a recurring problem with most areas of finance. We have so few meaningful figures that we have little knowledge of the impact of our ramblings.
    In a recent report NAPF used the figure of 500,000 annuitants being deprived of £1bn. Okay, out with your calculators. This equates to £2,000 per pensioner. Assume each pensioner lives 20 years (65 to 85), that equate to £100 pa, before tax. For those who thirst before justice, it wouldn't even buy ½ a pint a day.
    There is little doubt that some people do not get good value for money at retirement, but is the sentiment getting in the way of reality, and therefore diverting attention away from other more productive areas. I confess that I have no idea to that answer because the necessary figures are not available.
    Make some assumptions (always good for an argument): 100% of those with a pension pot over £50,000 takes advice or is bright enough to know what to do and gets a decent deal.
    If there is any merit in that assumption we are looking mainly at pots below £50,000.
    David Trenner gave a list of 7 companies providing competitive rates (excluding enhanced annuities), and it is highly possible that many our reduced group will have a policy with one or more of those companies, so remaining with that companies won't be the worst decision in the world (and frees them from the administrative nightmare that seems to accompany transferring money between companies - now that is a scandal to address).
    I will now make a further, totally unsubstantiated, assumption that a high proportion of the remaining funs are in the £10,000 bracket. As they are not advised they have no idea they could take the cash (less tax) so they accept what is offered. Let's assume this is the Aegon figure, which equates to about £9.85 a week (ignoring any tax implications). I have read of people talking about 30% increases in income, which in this case would push the amount up to £12.80 per week. So, whilst it would be nice to ensure people did get a fair return, the improvement is not life changing. Whilst the total aggregated figure may end up in the billions, the amount for each policy could be extremely small. And this opens up the question of the cost that may be required to achieve a very modest individual improvement.
    So, whilst we have a wonderful discussion about annuity rates and corporate strength (and ignores the underpin provided by legislation) we really need to know just what the real life effect would be for any particular solution.
    And this we really do not know because we are too lazy or arrogant to provide usable figures.
    Since most companies have spent millions on computers in order to complete all this business it seems inconceivable that they cannot afford a few £s more to add a sub-routine that would send this information to the ABI, to be aggregated in a spreadsheet.
    Providing these figures may in itself suggest easy solutions to the problem of treating clients fairly. Remember that creating a solution that treats small pots fairly may generate such a cost level that it impacts on the better off. Then you have to asked whether that would be treating the better of fairly. Merely saying "they can afford it" is hardly pushing the bounds of ethical argument.
    There is a problem, but do not know the size and shape of the problem. We may be using an elephant gun to shoot a mouse; or vice versa.

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  • John, Interesting to see that you do not oppose the OMO, but the Annuity Bureaux. However I cannot accept "The small customer whom the IFA cannot afford to deal with, will get a better service from their provider than they will from an annuity broker."

    They might from the likes of Standard, Aviva, Pru and L&G, all of whom have IGD surpluses of more than £3bn, but they will not from other companies with poor rates and weak finances. The ABI has many members, many of whom make profits from selling uncompetitive annuities. I will not list them here, but I think we both know who they are!

    In the past we had the solvency margins prepared for the DTI to check - although I seem to recollect that Equitable (and NPI?) used a different method to get better results. Now we have IGD surpluses and analysis from consulting actuaries to help us.

    Glen makes some interesting points, but I think he misses the key point that £10 per week may be crucial to someone with a £30k pot, whereas
    £1000 per week may not matter to someone with £300k.

    Ali, Please read all that I have said before commenting on two sentences! Unlike you I do occasionally shop at Primark, though not for the suits I have to wear to impress snobs like you!

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