ABI director general Otto Thoresen acknowledges that pension providers were too slow to address problems in the annuity market ahead of Chancellor George Osborne’s
dramatic overhaul of retirement income rules.
Budget reforms mean that from next April, anyone aged 55 or over will be able to take their entire pension pot as cash, taxed at their marginal rate.
In a wide-ranging interview with Money Marketing, Thoresen says providers should have reacted more quickly to the challenges facing UK savers.
He says: “Essentially, the problem with the annuity construct in an environment of extended longevity and low interest rates is that you are asking people to make a decision that is potentially going to impact them for 30 years.
“But it is not just a decision about the structure of the product and the contractual terms they agree to. It is a decision to lock in to a low-risk, bond-related investment strategy.
“If you have an economic environment such as now, you clearly have to look at how that can be done differently. Those macroeconomic issues should have been more energetically addressed earlier by the industry because, in truth, what we are going to get now is an attempt to construct, in a very short time, solutions that work for people which substantially address those problems.
“We could have identified ways to make the market more effective for more people more quickly without a complete rewrite of the rules around how retirement income works.”
The Government’s annuity market intervention can be broadly divided into two: the increased flexibility of income withdrawal rules at age 55 and the promise to provide
everyone with free, impartial, face-to-face guidance on their retirement options.
Thoresen is frustrated at the slow progress made by the Government and the Financial Conduct Authority in developing the guidance guarantee.
“The disappointment for me is, even now, we do not have a definition of what this guidance guarantee is,” he says.
“We will not just sit here and wait to develop proposals but until we sort out this easy stuff we will not be able to move the debate on to the more difficult stuff. Ill informed is probably an understatement of where we are at the moment and we need to move things on.
“I don’t think the Treasury fully thought through or understood the implications of the changes. That is why they thought the 12-month implementation period was realistic.”
Thoresen favours a simple guidance model where people are given enough basic information to understand the retirement decisions they need to make.
He says: “The industry discussion is ranging from something close to having your Miranda rights read to you by a police officer, all the way up to something close to the boundary of providing regulated advice, and in some cases steps over it.
“Both of those extremes are not realistic but in my view the solution is closer to the Miranda rights end of the spectrum.
“People need to get to a position where they know the questions to ask but advice is where you get the answers. If we can get the definition of guidance right, we can start to have serious discussions about how it should be best delivered and to what extent people will need or want regulated advice.”
Thoresen also criticises the regulator for failing to encourage new, simplified advice models.
“The regulator has been very slow to push on with thinking about how those advice models can be developed and delivered.
“That is one of the big pieces not getting talked about and not being pushed ahead quickly enough.”