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Increase Omo demand and supply will follow

The question of the open market option and pension investors’ failure to use it has received widespread publicity in recent weeks.

Hargreaves Lansdown has been a leading advocate of the adoption of the Omo as the default option for maturing pensions. This has led to some criticism from insurance companies and their representatives. For example, in these pages, the usually estimable John Lawson of Standard Life accused us of “bleating”. He also argues that many pension pots are relatively small and that because the market is not geared up to accommodate them, the Omo will not work.

He is wrong and here is why. The impetus for change is increased consumer demand. If we expand demand by 200 per cent (although preferably not all at once), then supply will also expand to meet it.

If everyone exercises the Omo, then demand would indeed be expanded by around 200 per cent (because at present, only around one-third of investors exercise the Omo).

At present, there are only a handful of insurers willing to conduct Omo business for pots of less than £10,000. The lack of innovation and supply is simply a function of the lack of demand. Increase the demand and the supply will follow. There are pricing options available, too, for example, a competitive rate, but subject to a £100 admin fee.

The maturing DC pension market will grow very fast over the next few years. Is Standard Life seriously suggesting that if every pension investor shopped around, then there still would not be any insurers or brokers willing to handle the business?

By contrast, Standard Life’s answer is simply to have every insurer publish their rates, as if this will somehow magically make everything OK. I imagine that the people who came up with this idea are the same ones who thought that stakeholder pensions would fly off the shelves.

With personal accounts looming, this is the time to fix this problem. If we make the Omo the default, then the market will respond, investors will get better rates and investors will focus on buying the right shape of retirement income.

I have not yet heard a single objection to our proposals for reform that is not driven by protectionist greed on the part of the fat, complacent old guard among the personal pension providers. We can and must move forward from here.

Tom McPhail
Head of pensions research
Hargreaves Lansdown
Bristol

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