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Ins and outs

In recent years, some insurers with pension books have decided that providing a pension annuity for maturing policy-holders is not for them and have taken the decision to outsource. The reasons for this are manifold but key to the decision-making process is the longevity and investment risk and the capital requirements of the insurer.

From a customer perspective, a lack of appetite for annuity provision means that their host insurer’s rates are often uncompetitive comp-ared with those available in the wider market.

Annuity outsourcing in its simplest form is the host insurer replacing itself with another provider solely for the provision of annuities for its maturing pension customers. In some cases, the insurer may want to completely divest itself of all annuity liabilities by transferring the existing book of pension annuitants as well. To keep it simple and to reflect the insurer’s existing processes, the tender process normally selects one provider rather than a panel of different providers with different products. The selection process itself is often lengthy and complex but this does mean that the chosen annuity provider is one that is better placed to offer an attractive annuity proposition to the insurer’s customers.

The new annuity provider is invariably a specialist in this field and, for the maturing pension customers, it can be a very positive move as they have confidence that their pension income is provided by a company that delivers better value all round.

In the lead-up to retirement, the normal regulated warm-up process takes place where the host insurer’s customers will be informed of the choices they have at retirement, including the open market option. They will be advised of the alternative product options available, including enhanced and investment-linked annuities as well as the option to seek independent financial advice.

Annuity outsourcing has been criticised by some as flying in the face of treating customers fairly and impeding Omo uptake but with the same regulations and options at retirement, is this really the case? There is, however, a very important and valuable upside, in that the annuity default rates offered are more competitive so, from a customer perspective, is there really a downside? Without outsourcing, the alternative is that customers continue to be offered poorer rates from their host provider.

It would be wonderful if we lived in utopia where everyone used the Omo and shopped around at retirement but human nature can be unpredictable and illogical and some customers opt not to shop around. At least annuity outsourcing means that those host insurer customers who decide to stay put are at least able to secure a better future pension income than would have been possible otherwise.

Tim Gosden is head of annuity product develop- ment at Legal & General



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