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Default dynamics

Pension Income Choice Association chairman Tom McPhail talks to Gregor Watt about the aims and ambitions of the new body

What is the reason for the formation of the Pension Income Choice Association?

The system does not work – or the system does work but very imperfectly. There has been a lot of good work from the ABI, the NAPF, the FSA, the Pensions Regulator and TPAS, everybody has had a look at it and given it a bit of a kick, with mixed fortunes and success. There has been some progress but not nearly enough.

The other reason we are doing this now is because of the particular timing. The baby boom demographic bulge is about to move through into retirement so a lot of people need a better solution than is currently available. We have the launch of personal accounts, which is another reason to get the defined contribution system right now. We have got the decline of defined benefits, which is another reason to get the money purchase system right. And look at the political calendar. We are moving towards an election and there was an opportunity to talk in specific detail to policymakers and that is not there all the time.

There is also the changing nature of the annuity market, the move away from standard rates towards bespoke underwriting, postcodes, enhanced, personal underwriting. There is no default solution you can put in front of someone and know it will be right for them. Whatever the default solution, it will almost certainly be the wrong answer so it is imperative that we get people shopping around.

Has the ABI’s Options initiative done a good job so far?

Options is great. It simplifies the process of moving money through the system. Once you are in the shopping around process and you have identified that you want to move from company A to company B, Options will help that happen faster and more easily. If I had my way, every defined-contribution pension provider, every Sipp, every DC scheme, every insurance company would sign up to Options and I hope the process will come to work faster than at present.

Pica’s position is that the open market option has to become the default option for pensioners at retirement. Is this the association’s most important goal?

That is the core proposal, yes. That is the central recommendation and the one we are focusing on when we are talking to policymakers and regulators because until we do that, we don’t believe that we will be doing anything more than chipping away at the margins of the problem. Whereas if we can nudge investors’ behaviour towards seeing the shopping around process as the default, as what everybody does, then we will see meaningful increases in the use of the open market option.

Supporting that one fundamental change, there are a number of other recommen-dations that we have got such as the use of a one-page universal form to assist with the shopping around process, to get the NAPF to adopt the shopping around process as one of its quality mark tests for DC schemes, to introduce the register of IFAs who will deal with small pots of money. But the key message is make shopping around the default.

The Pica manifesto also mentions the role of occupational pension schemes and pension scheme trustees in making sure people consider their options. What else should DC schemes be doing to promote the open market option?

The Pensions Regulator has been doing some good work here. It has been reviewing trustees progress, highlighting good practice, so we are not looking to tread on their toes. We would like to see trustees adopting the same approach as we are recommending for insurance companies, which is that every single scheme member is presented with the shopping around pro- cess as the default. In principle, that should happen already but the Pensions Regulator’s latest report highlights the fact that that is not the case universally. We would like to see that adopted as best practice.

You’ve called for the establishment of a register of IFAs willing to advise on pension funds of less than £50,000 but many IFAs say this is uneconomic for them, particularly if they are charging a fee. What is the solution for this – better technology?

There is not one answer to the question. First of all, if we make the shopping around process the default, that should significantly expand the demand and that should hopefully mean that there are greater rewards available to intermediaries and annuity providers. I think technology will to some extent will come to our aid here and the likes of TPAS have been looking at online decision-making tools to help people. We do not have all the answers on that score. Some intermediary businesses such as Hargreaves Lansdown, Kerr Henderson, Rockingham and others have come up with models that either partly or wholly address this problem. A lot of the answers are already there within the industry.

You have called for a number of consumer education initiatives such as better FSA comparison tables, better money guidance and direct to consumer propositions. Is there a chance that consumers will end up with a little bit of knowledge and end up with the wrong products?

In a perfect world, every investor would get regulated advice at retirement but I don’t think anyone is pretending that is going to happen. Setting that aside, whatever we come up with has got to be better than what we have got now. The majority of the marketplace appears to be making decisions which appear not to be in their best interest. And that is about not just the rates that they are getting but about the shape of their retirement income. One of the issues we want to move on to next is the issue of death benefits. With the preponderance of pension rights held in men’s names, what are we doing to ensure their spouses are well provided for because we know the majority of annuities are set up on a single life basis. How can it be worse than where we are at now? What we are trying to do is get people the engage with the buying process and make an inf-ormed decision about what is best for them. That looks to me life a good idea.

You have called for a review of the trivial commutation rules. What level do you think this should be set at?

I am not prescriptive about that. I would like to open the debate on it and I know there will be resistance from some quarters because as soon as you start tinkering with trivial commutation there is a risk that you will be seen to encourage individuals with small pots of money just to take all the money out and blow it. I recognise that that is a hazard and it will be a challenging conversation. Nevertheless, it is part of the overall picture. If we can find a way to take some of the very small pots of money out of the annuitisation system, thereby eliminating the potentially non-profitable business both for individuals and insurance companies, if we can do that in a way that does not act to the detriment of consumers’ overall fin- ancial position, that also is a good thing.

What do you think should be the decumulation process for personal accounts?

We are in discussion with Pada. Pada have said they want to move to have a panel of providers – that in effect is limited Omo. But it comes back to the fact that there is no default annuity. Even for the most disinterested investor, you can’t decumulate your fund without making at least one of two decisions. So the default position already is that everyone has to make a choice. What we are trying to do is to make that choice as easy and as effective as possible and to try and improve that decision-making process. Pada are interested in where we are going with this, with some of the systems around how we communicate with investors. I am speculating here but they may end up adopting some of the processes from the Pension Income Choice proposals, partly to work with their existing panel and partly as an option to step away from their exiting panel, particularly where members have larger pots of money.


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