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Govt cracking down with tough line on Omo

The Government is planning to overhaul the open market option process, potentially through new regulation, and has issued a stern warning to the pension industry to clean up its act.

This week’s Money Marketing reveals that Treasury financial secretary Mark Hoban has given the industry until the end of this week to explain why so few people are accessing the Omo.

In an email to members, the ABI says the Government made its “serious appetite for wholesale reform” extremely clear in a recent meeting. It adds: “We cannot emphasise enough how serious this pressure is.”

Hoban has also requested views on whether the Omo should be made compulsory and whether a “pensions passport” – proposed by the Pension Income Choice Association – would make shopping around easier.

The ABI says its work on Omo take-up will only be “persuasive” if providers can commit to implementation dates

It warns “a best practice solution will no longer convince officials or politicians” as they can still point to examples of bad practice but it says more regulation will add complexity and costs for consumers.

A spokeswoman says: “The industry is already making changes to improve the Omo. Regulation adds extra complexity and costs which in the end will be borne by consumers.”

Pica chairman and Hargreaves Lansdown head of pensions research Tom McPhail says: “Significant reform of the Omo would be fantastic news for millions of pension investors who will find it easier to get a better income from their retirement savings.”

The number of people buying annuities from external providers has been hovering at the 35 per cent mark for years although the first half of this year saw it increase to 40 per cent.

A Treasury spokesman says: “The Government welcomes improvements that industry have made to the Open Market Option for consumers. We are currently consulting on ending the requirement to annuitise at age 75 and the consequent changes to the annuities market; changes to the Open Market will be considered alongside other policy responses as part of this.”


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There are 16 comments at the moment, we would love to hear your opinion too.

  1. I suppose getting rid of a large number of IFAs and pricing out the market Mr & Mrs Averages (uneconomic pension pot) from independent advice will really help the situation

  2. paolo standerwick 25th August 2010 at 2:38 pm

    Why doesn’t Hoban apply same logic to the flawed RDR implementation?

  3. David Trenner - Intelligent Pensions 25th August 2010 at 2:42 pm

    The ABI says: “more regulation will add complexity and costs for consumers”

    Now why am I not surprised that one of the biggest perpetuaters of the OMO rip-off is finding a reason to oppose progress.

    ABI, could you please explain how stopping insurers whose rates are more than 20% below the best from selling annuities will add costs for consumers?!

    The simple TCF solution is to say that if you do not wish to offer an annuity rate within, say, 10% of the market leader you should not be allowed to sell an annuity. What would we say to a motor trader who sold rubbish cars? How are insurers any better??

  4. 1. 3 months prior to retirement date: generic statement detailing the type of pension schemefunds available and in bold letters a recommendation to pass this on to a financial adviser (include instructions how to shop around for a financial adviser or how to do it yourself)

    2. Basic leaflet explaining options, risks and the difference in income (percentage based) anticipated for a given age for each contract; drawdown, conventional, investment linked, fixed term

    3. Simplified application process. Something along the lines of… I hereby authorise you to transfer my pension to xyz company

    4. Fines for companies that do not carry out the transfer within 7 days of instruction

    5. Fines for companies that cannot commence payment within 7 days of receiving funds unless a medical has to be obtained

    6. Fine doctors that do not respond to medical requests within 3 weeks

    7. Honour rates for a minimum period of 1 month after decrease in rate, automatically benefit from higher rate if rates improve (unlikely to improve, I know)

  5. Instead of insisting on the OMO, why not allow investors to have back 100% of their pension fund in cash to invest as they wish instead of a compulsory annuity, and then if the consumer prefers to purchase a property and receive the rental income or deposit the money in a high interest savings account (not that there any of these today) then that should be their Open Market Option – after all its their money!! Further more it should be repaid tax free especially given the appalling performance of some pension funds, the poor performance should be tax deductible like any other investment!. After all saving for retirement for the average retiree in today’s market in unlikely to get much of a pension annuity if his pot is only valued at £100 to £250,000, given today’s low interest rates and annuity rates! Giving the retirees their money back might also help boost the economy and prop up the property market prices!

    Paul Beale
    Financial Advisor

  6. But why is the government having to kick this along and not the FSA?

    I agree the OMO should be compulsory. How can buying an annuity with the provider of the maturing pension plan possibly be the best default option or anything like it?

  7. Using peoples pension funds to purchase residantial property? Surely the result will be a second buy-to-let propoerty bubble and the further transfer of property wealth to the older of us in society (making it even more difficult for the young to get on the ladder) isn’t preferable to rules that mean that some form of retirement income will be payable for life?

  8. Robert Donaldson 25th August 2010 at 4:11 pm

    If the government are so good at providing financial advice then why don’t they get on with it. Everything they have tried to do so far has failed.

    They have yet to understand that advice needs to be sold. People need to be educated about the OMO not just a pile of papers dumped through their door with a 20 page booklet to read. To me it is like reading a car service manual my eyes glaze over.

    Perhaps if it was easier to deal with Mr & Mrs Miggins with a £30K pension pot then they might get advice. But after stripping out the tax free cash we are paid very little for it and therefore it is hardly worthwhile us doing it. Certainly not when we have a liability for that advice for the rest of our days.

    Hence they get no advice and take the line of least resistance which is accept the offer from the company with whom they built up the fund in the first place.

    It is about time some of the ministers spent a day or two in the offices of an IFA to get an idea of what needs to be done.

  9. Paul Beale
    Financial Adviser

    “Instead of insisting on the OMO, why not allow investors to have back 100% of their pension fund in cash to invest as they wish instead of a compulsory annuity”

    I assume this is tongue in cheek, or what proposals do you have for those who blow the lot and come back to the state for handouts?

  10. I commend the Govt for making a decision to look at the OMO facilty and it will be interesting to see what they put in place. Surely the realities of it all though are down to a basic few facts. Policyholders who have IFA’s should (hopefully) be advised of the OMO facility by their IFA as the maturity (NRD) of their plan approaches. If benefits are taken before NRD, the IFA should still offer best advice and this includes ‘shopping around’ for the best annuity rates under OMO. Of those policyholders who do NOT have the benefit of IFA’s, they rely solely on the often poorly worded ‘blurb’ that arrives on their doormat from the holding provider.

    Some will read the figures, ignore the rest, sign on the dotted line and return the form with suitable proofs to take their pension as seen (Inertia). Others will read avidly, make a call to the provider to discuss options and then……………what happens…gosh….will the provider recommend that they use another provider for their pension income…hmm.. or will the friendly telesales adviser recommend that the policyholder contacts an equally friendly IFA for independent advice on the matter.

    Oh dear, back to square one, the policyholder does not know of a local IFA, baulks at the idea of being potentially charged a fee of any sort for their small pension pot , not to mention the hassle and time and … guessed it….decides to vest the pension with the holding provider………as that is the easier route and they want their tax free cash and income rapidly.

    But what about enhanced impaired annuities you ask – is the question of the potential for even better rates truly set out within all providers maturity packs ..hmmmm. Will the Govt tackle this as well.

    So Govt, are you listening, no matter what you try and do, you are actually battling with public inertia and the vast bulk of the population do not have IFA’s.

    To help the masses the Govt would need to compel the holding providers to quote 2 sets of figures on the maturity packs, their own annuity rates and the top providers annuity rates at the time of writing. The policy holder would then have a choice of 2 sets of boxes to tick. If the policy holder chose the alternative provider, the holding provider would be obliged to deal and sort the OMO themselves. Adding to costs, but clearing up the OMO problem overnight.

    Don’t throw this back on the public, don’t force people to seek IFA’s for small pots – suggest to the providers that they play fair and deal. After all, they have taken the plan charges for umpteen years. Payback time.

  11. Andrew Buchanan 25th August 2010 at 4:35 pm

    I agree with Mt Hoban’s sentiment. Could he, or anyone else, please explain how the application of post-RDR adviser charging rules is going to encourage people with average size pension pots (i.e. £30,000 to £40,000) to seek the help of independent financial advisers to obtain the best annuity rate (compared with the current commission system)?

  12. Dear Mr Hoban

    The first obstacle is the owner of the pension pot, often male, often wanting the highest income for himself without any thought for his spouse or family.

    The life offices are happy with this situation!

  13. Why not make it a requirement that independent financial advice has to be sought before an annuity can be purchased.

  14. Agree with stipulation that regulated advice sought before income is arranged. However in order for this to be practical Gocvernment must ensure that individual can choose to cover cost of advice from fund (either by commission or fee deduction route).

    Obviously amount of commission available from average funds may not be sufficient to cover standard fee from IFA. The admin intensive nature of annuity purchase necessitates an efficient process. Use of specialist brokers is the natural solution either through IFA referral or where pension providers make arrangements directly with such companies (on an independent basis, course!).

    With such arrangements it is essential that due diligence is conducted to ensure TCF/best advice principles are covered when such work is handed over. IFAs need to be confident that any such brokerage is regulated and whole of market (including specialist impaired life).

  15. Crazy gang IFA member 26th August 2010 at 1:40 pm

    I like Sean’s comment, ‘must seek independant financial advice’ or a disclaimer that they haven’t at the very least, That would solve everything. Simple!! Providers wouldn’t like it though would they. But when have the Government or FSA or any other public body really put consumer choice first over the interests of the Banks and Insurance companies or ever supported the IFA above the provider, not very often.

  16. It is not really a surprise that only 40% exercise the OMO for several reasons:
    1) The providers with top rates are Aviva, L&G etc. this is where much of the pension funds are held – what a lot of fuss to move provider for £1 or £2 extra per year. People could save far more by switching car insurance each year, changing who provides your gas, electricity or broadband regularly. What proportion do this?
    2) Equitable life went under through guaranteed rates – but many offices offered this to a lesser extent – people with these policies should never move.
    3) Do all providers promote the OMO – I suspect not. The big names will of course but what about the smaller ones with the poorest rates?

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