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A push in the right direction

Pension Income Choice Association chairman Tom McPhail says tweaking the annuity rules and nudging people towards shopping around would help to mend a broken system.


Just over 18 months since its formation, Pension Income Choice Association chairman Tom McPhail says the problems that the organisation was set up to tackle have not gone away.

The number of people buying the wrong annuity is still in the hundreds of thousands and the industry’s answer to the problem, the open market
option, has failed to make any real impact.

McPhail says: “We all recognise that the Omo has failed. Around two-thirds of retiring investors are still not shopping around at the point of retirement. There are a myriad failures, people eligible for enhanced annuities not buying them, married couples not buying joint annuities, people not shopping around and not getting the best rate. The system is not working.”

He says the frustrating thing is that the changes needed to improve the situation are relatively minor. The work that Pica has done over the last
year and a half has identified that only relatively small changes to the way providers operate combined with a small tweak of the FSA’s conduct
of business rules are needed to change the current system.

McPhail says: “We can make a material difference through a relatively modest change, which is to nudge people towards shopping around by
removing from their wake-up packs the provision of the existing companies annuity terms, so they don’t have the easy, default solution of simply buying the first annuity that is put in front of them by their existing pensions provider -which is what most people do.”

Pica’s aims have been clear since its establishment. It wants to see the removal of the existing pension company’s annuity quote, a re-wording
of the retirement literature to properly explain the options that are open to people when they retire and the introduction of a simple summary
of their retirement benefits or pension passport to make the shopping around process simple and understandable.

McPhail says Pica’s work is firmly in line with the work being done through the Consumer Financial Education Body, which is being encouraged
by the Treasury.

“This combination of a nudge and the provision of useful information to help people make decisions is absolutely consistent with where the
Treasury is now at,” he says.

And it is also finding favour with the DWP. Pensions minister Steve Webb says he is sympathetic to the idea and the DWP in general is concerned about the problems that the wrong annuity selection can cause.

McPhail says: “We are also aware that the DWP has concerns about the welfare risk of men buying single life annuities that then end on their,
more likely, first death. We feel very strongly that what we are advocating not only makes sense but is also absolutely consistent with the Government’s agenda at the moment.”

Many advisers believe the ABI is standing in the way of the changes needed to transform the process of buying a retirement income. But McPhail says it is not even a majority of ABI members who are blocking progress.

’We have the right people round the table’ He says: “It is interesting to see that the board of Pica is predominatly made up of ABI members. So it is not even the ABI, it is a small handful of providers within the ABI that are more comfortable with the status quo.”

Towards the end of 2010, the Treasury indicated that it would consider changing legislation to force movement on the issue if it was not satisfied with the progress being made towards increasing the number of people shopping around at retirement. McPhail says this hopefully should not be necessary.

He says: “Whether it requires legislation or not, I am not sure. The Government does need to dictate that this is the outcome it now requires of the pension industry.”

What McPhail would like to see is the job of implementing the necessary changes given to the joint Treasury/DWP Omo stakeholder group.

This organisation has been in existence since 2007 and as well as representatives from the two government departments, it also has representatives from the ABI, the regulators, Age UK as well as Pica.

McPhail says they are now asking for the Treasury to task this group with implementing Pica’s proposals. If this is done, McPhail says the changes could be implemented by the end of this year and new pensioners would start to see the difference in 12 months.

He says: “What we are looking for and what we are looking to ask the Government is that they specifically task the stakeholder group to adopt
the Pica propels.

The ECJ judgment should accelerate the trend towards individual underwriting

“We have got the right people round the table, we could have everything worked through within this calendar year. We have done a lot of the
heavy lifting already. Within a 12-month timespan, you could have investors benefiting from what we propose.”

Last week’s decision on gender discrimination from the European Court of Justice has added urgency to the need to overhaul the process of buying a retirement income.

McPhail says failing to shop around is likely to reduce people’s retirement income much more than the repricing of annuities being brought
about by the court’s ruling. But he says the decision is likely to speed the move towards individual pricing for annuities and this makes the ability and the willingness to shop around for the best deal even more vital.

He says: “Given the ECJ judgment, what we are likely to see is pension providers and distributors accelerating the trend towards individualised
underwriting. The risk to individuals is if they do not take advantage of individualised underwriting and shop around, they are going to get an even
poorer deal. This ECJ judgement reinforces the imperative to get as many people as possible shopping around.”

As the occupational sector already has a regulatory requirement for occupational schemes to ensure their members get the best retirement
income, the big pension providers are the one piece of the jigsaw still missing.

McPhail says if the Government decides to get behind the issue and force some movement, he hopes not to still be talking about the issue in
another 18 months’ time.

He says: “The only thing missing is for pension providers to adopt the model we have designed – of making shopping around the default position
– and then it is job done.”

Pica aims
Pica wants to see a three-step process that all pension schemes are required to follow:

1: Focus on the choices and decisions people face at retirement and the action needed

2: Produce a “pensions passport” or personalised statement containing sufficient information for people to use to get quotations

3: A short communication requiring the member to tell the company/ trustees how the fund should be applied

Pica would like to see four other measures:

  • A requirement for employers and trustees to comply with a defined set of minimum standards (coupled with a review of the level of the tax-free allowance introduced in November 2004 to encourage employers to provide advice at retirement)
  • Expansion of FSA comparison tables to include all providers and all annuity types
  • A review of the trivial commutation limits to help people who would not otherwise be able to take advantage of these changes (because of the size of their funds) commute benefits for cash
  • Support the national rollout of money guidance so millions of people can gain access to generic financial advice


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. David Trenner - Intelligent Pensions 15th March 2011 at 9:32 am

    I strongly support what PICA stands for, and have been promoting the OMO for more than 25 years.

    I believe that the stumbling block remains the ABI. It is a trade body and its members benefit if someone does not take the OMO because they save on admin costs and retain funds, often offering income more than 15% below the best available.

    It’s no good saying to someone ‘you might get a bit more’, when you mean that they will definitely get a lot more every year for the rest of their lives!!

  2. Pension providers should only accept annuity business via an IFA. There is then an audit trail as to the options selected. Easy really.

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