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Insurers prepare to fight ‘shopping around’ default

Insurers are preparing to go into battle with the Pension Income Choice Association over proposals to make shopping around for an annuity the default option for savers.

Last week, the Association of British Insurers set out plans to remove the annuity application pack from communications sent to clients.

The ABI says the reform will put an end to inertia selling and pledges to pursue further improvements to the current system to make shopping around the “default behaviour” for investors.

But ABI members have privately indicated that the change represents a line in the sand in reform negotiations.

Standard Life head of pensions policy John Lawson says the industry has already improved shopping around rates significantly.

He says: “The level of shopping around is enormous. We have improved the process immeasurably over the last three or four years. I do not think it is clear what a compulsory Omo looks like.

How long do we have to wait before we can speak to our own customer while companies like Hargreaves Lansdown and Rockingham Retirement try to get their hands on that customer? It will be a difficult situation if the Government tries to bring in legislation saying a provider cannot speak to its own customers.”

Hargreaves Lansdown head of pensions research and Pica chairman Tom McPhail says: “I do not buy insurers’ arguments against making shopping around the default and I do not think they believe their arguments either.

“It is commercial cynicism. Ultimately, if they will not play ball and improve the process so shopping around becomes the default then the Government will have to legislate to push them to do it.”


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. David Trenner - Intelligent Pensions 6th October 2011 at 3:34 pm

    In response to the latest ABI announcement I asked if turkeys would vote for Christmas. Surprise surprise .. they won’t!

  2. “It will be a difficult situation if the Government tries to bring in legislation saying a provider cannot speak to its own customers.”

    I thought they were the customers of financial advisers who merely used their products?

    Life Offices don’t want people to talk to anyone in the hope that inertia will mean that they take benefits with them.

  3. Only 1 per cent of people who buy an annuity from their original provider purchase an enhanced annuity, yet up to 30 per cent could be eligible.

    Can Standard Life honestly say this situation is acceptable? Are they seriously happy for their customers to go into retirement on a lower annuity rate than they could potentially earn elsewhere.

    ‘Mis-selling’ comes to mind here.

  4. I’m more than happy to explain to John, yet again, how shopping around could be made the default in an efficient and effecctive way.
    It is not possible for any organisation, be they IFA or insurer to offer an investor suitable terms without first seeking from that customer certain important pieces of information, in particular relating to their health and medical history.
    We have looked at various elements of a process to achieve this, hopefully the ABI will be willing to work with us and the other interested parties to ensure that this process can be implemented.

  5. Dear JPMS, very few of the providers where people save for retirement, buy enhanced annuities from that provider, because those providers do not offer enhanced annuities. But that does not mean that our customers do not buy enhanced annuities.

    At Standard Life, we have an arrangement in place with an enhanced annuity provider and, if a customer that deals directly with us tells us that they might qualify, we refer them to that provider. In addition, the majority of our retiring customers (Sean you will be pleased to hear) use an IFA for advice. I don’t have a breakdown of what IFAs recommend (because I am not privvy to this information) to these customers but it could well be true that a sizeable proportion – maybe as many as 30% of all our retiring customers do actually buy an enhanced annuity.

    The minority of customers that purchase an annuity direct from us, or are referred to our enhanced annuity partner, have small purchase prices – the sort of level where proper IFAs – the sort that give real advice as distinct from execution only services – are unable to commercially serve the customer (which is why we are left to deal with them direct).

    Tom, you have tried to explain to me how you think this would work but to be honest, it raised more questions than it answered.

    As for serving customers, where we deal direct, we do indeed seek that important information which is how we are able to ensure that customers buy the right shape of annuity for them and where they are likely to qualify for an enhanced one, they are referrred to our enhanced annuity partner.

  6. David Trenner - Intelligent Pensions 7th October 2011 at 10:48 am

    John, It appears that Standard are trying very hard to treat their customers fairly. Can the same be said of other ABI members?

    This is the table of current rates for a male 65 with £30k for a no-frills annuity. Many companies would be below Scottish Widows if they provided rates, but they only sell annuities to existing customers (poor souls!) and are therefore excluded. Your rates (and some others) do not reflect postcode pricing which is available.

    Aviva £1888pa
    Saga £1873pa
    Legal & General £1842pa
    Canada Life £1761pa
    Standard Life £1734pa
    Prudential £1726pa .
    AEGON £1679pa
    Scottish Widows £1656pa

    How do you propose that we stop policyholders losing out by such huge amounts for the rest of their lives?

    And why criticise the likes of HL who help a lot of people to get better annuities? They cannot afford to offer a full advice service, but that does not mean they do not offer a service!

  7. Tom,

    Given that the average fund size of an annuity pot means the vast majority of customers will not have sufficient to make them financially viable for an IFA – what makes you think that cutting these people off from their providers is what they need and / or want to happen? WHo do you think will have the responsibility for gathering the important customer data and translating that into a product recommendation?

    It’s one thing purporting to represent the consumer, but given your day job at HL it’s easy to view your announcements as being somewhat biased.

    If it looks like an advert for HL, it sounds like an advert for HL and it’s done by someone who works for HL – it probably IS an advert for HL.

  8. David, I know I would say this, but I genuinely believe that we do treat our customers as fairly as we possibly can.

    I also agree with you that there are providers out there whose attitude towards their customers is not ideal and I would not try to defend what they do.

    One important aspect of the latest ABI announcement is that all insurers will agree to implement the guidance – up until now it has been voluntary. This should spread best practice to all insurers so I expect that the number of people shopping around will increase from the current 70%, and the number buying an annuity from another insurer will increase from the current average of 40% (in our case it is already higher than this as you might expect).

    A large number of the annuities we sell direct are for less than £5,000 where the customer has no choice but to buy an annuity from us. So sending them to HL, for them to send them back to us less a 1.5% commission charge would only result in the customer receiving a lower annuity rate. The other annuities we sell direct are also for low purchase prices (typically in the £5000 to £10000 range) where there is a very limited open market and where SL’s rate is often best or very competitive. Again, sending these via an exec-only broker would reduce the annuity rates due to the commission.

    The other issue is service. We think that we offer an excellent service to these customers – we help them buy the right shape of annuity (including enhanced) which I personally think is a more important decision than rate, especially when he rate differential at these purchase prices is a pound or two a month. We are not attempting to make a profit from this service.

    I wonder what sort of service an execution-only broker is offering when they would be receiving average commission of £75 – and much less in many cases? And they are trying to make a profit out of this too. Customers may end up a pound better off but with something that doesn’t suit their needs.

  9. I am a SIPP / Investment customer of Hargreaves Lansdown and they offer me the perfect service for my situation.
    As I get nearer to retirement I keep an avid / anxious eye on annuity rates which vary significantly. Because they vary significantly then the open market option should be the default. It just might encourage insurers to be more competitive.

  10. John, you stated that “we have an arrangement in place with an enhanced annuity provider and, if a customer that deals directly with us tells us that they might qualify” – surely you should be asking them? Or is that what actually happens?

  11. Yes, that’s what happens Rob. We ask them questions about their health and lifestyle habits such as smoking.

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