How good would it feel to have the power to instantly boost the size of a retiree’s pension fund by an extra five or 10 per cent at the point of retirement? Imagine the difference that extra money could make to a pensioner’s standard of living over the course of several decades.
While giving people more money is not going to happen, it is possible to generate the same effect by making sure those using their pension fund to buy regular income find the very best deal they can rather than accepting a poorer rate from their own pension company.
When the FCA did the sums in a thematic review back in 2014 it found that eight out of 10 retirees could have received a higher income by shopping around and switching.
The regulator laid out final details of one of its “remedies” to this problem in last week’s policy statement on implementing information prompts in the annuity market.
Rather than mentioning a higher income might be available, from next March pension providers will have to display to their customers the highest income available on the open market in pounds and pence in an effort to encourage them to seek it out and switch.
Job done? Well not quite.
Enhanced annuities escape the net
Some of us in the industry are disappointed because the original review highlighted the fact that those with the most to gain from shopping around were the ones missing out on enhanced annuities. While more than nine out of 10 could have gained more annual income, about two-thirds of them were missing out on 5 to 10 per cent extra annual income and one-fifth could have received even more.
In our response to the consultation on retirement market prompts we suggested that allowing comparisons based only on standard rates could actually discourage more shopping around. Feeding poor information into a process is likely to produce nonsensical or perverse results – a concept nicely captured by the term “GIGO” or “garbage in, garbage out”.
This is the scenario if we encourage people to make potentially irreversible decisions based on standard annuity rates when they should be getting a higher, in some cases much higher, income by shopping around. Each year, tens of thousands of people could fail to secure much-needed regular income that will last as long as they do.
Allowing comparisons based only on standard rates could actually discourage more shopping around.
Advisers are increasingly using personalised underwriting to ensure clients get the right information on which to make informed decisions. Underwriting has become more sophisticated to the point that everybody “qualifies” for a personalised rate, reflecting their own unique circumstances, while technology has made it more cost-effective and faster to gather the information.
By stating that enforcing minimum underwriting standards for annuity comparisons from next year would “impose a disproportionate cost burden on providers”, the FCA is putting a higher priority on minimising costs to providers rather than ensuring good outcomes for consumers. It lets providers, who should be taking steps to understand their customers and to treat them fairly, off the hook.
It also flies in the face of recent experience where many players in the industry are already implementing broking services and shifting over to personalised underwriting, driven by technological progress and the desire to ensure customers do get the best outcome. While it does not want to see any backsliding, the FCA has missed a chance to reinforce the forward momentum while promoting competition and innovation.
It is a stumble rather than a step forward. Even so, that is no excuse for the rest of the industry not to keep pushing in the direction we know is right.
Stephen Lowe is group communications director at Just