It is an exciting time to be an annuity broker. Not only is auto-enrolment creating upwards of seven million more potential new customers – we also have Labour calling for annuity brokers’ services to be made available to every retiree in the land.
Annuity Bureau at JLT director Richard Williams is hopeful we may only be a few steps away from a future where everyone gets access to proper guidance on their at-retirement choices.
“We would love to see the default position become the open market option, where retirees are guided towards a panel of selected, vetted brokerages,” says Williams, in reference to the recent amendment to the Pensions Bill filed by Labour pensions shadow minister Gregg McClymont MP.
Growth in annuity brokerage services available to top end employers has been fast in recent years, with 69 per cent of FTSE100 companies now offering access to one, compared to 50 per cent a year ago, according to a recent Towers Watson report.
It is this model – a guided execution-only brokerage service that has been vetted by a trusted body – that McClymont wants to see offered to schemes of all sizes.
Not surprisingly Williams wholeheartedly supports the amendment, noting that while larger companies may be delivering brokerage support to retirees, smaller employers and schemes have been slower to take them up. He points to the NAPF’s recent report on, Supporting Savers At Retirement, which identified some employers and trustees not feeling comfortable about pushing their members towards an annuity broking service for fear of crossing a line that could leave them open to regulatory action if something were to go wrong.
“When we are sat down in front of trustees we do find they want to do something for retiring members, but they don’t want to step over a mark because they are worried about regulatory reprisals,” he says.
“Most members get good outcomes through going through a broker. So we need some regulatory response that says there will be no reprisals against employers and trustees that do point retirees in that direction, and we need some signposting of where people can go to get good guidance on at-retirement choices,” he says.
JLT has moved to address this caution from employers and trustees by packaging up an at-retirement service, called Road to Retirement, that offers communications, seminars and pre-retirement packs, as well as a three-tier brokerages service. That service offers pure online execution-only tool-based purchasing, telephone-guided execution-only help and full advice for those that want it.
Making something like this available to everyone seems like a no-brainer. But Williams does see some potential flaws that would need to be ironed out.
“If trustees did end up picking someone who is taking large amounts of commission out of the pot then that would be a problem. But that is why the idea is to have a panel of vetted providers that have been pre-approved as operating to certain standards,” he says, adding that The Annuity Bureau at JLT would obviously want to form part of such a panel, whether it was established and overseen by the Department for Work and Pensions or the NAPF.
Williams also points out there is still going to be some considerable debate still to be had about what standards would be required for membership of this panel, not just in terms of the annuity advice given and the charges levied, but also in terms of the extent of the brokerage’s other advisory capabilities.
“I wouldn’t want to see people getting on the panel who were only able to offer non-advised sales. You would need them to be able to offer both non-advised and the ability to give a full advice service in the event that the individual’s circumstances merit it. Otherwise the broker could have a tendency to steer people away from full advice when that might be the best option for them,” he says.
Williams points to the fact that just because someone has a small pot, it does not mean drawdown will not still be suitable for them, particularly where people have DB benefits built up already that will, with state pension, deliver enough income to support their basic needs.
“Drawdown is very flexible and can work for the family in terms of inheritance tax, so it would be wrong to overlook it,” he says. “Online annuity tools do not offer advice, so firms need to be able to offer the full suite of services to make sure they do not run people down the route of annuities when they should be getting something more,” he says.
He notes the irony that policymakers and pressure groups are suddenly so enthusiastic about the benefits annuity brokers can bring to retirees’ DC outcomes, when the only reason such a quick fix is available is because they are still allowed to take commission. But he points out that for all the good advice and guidance it may facilitate in the at-retirement space, commission is still something that carries reputational risk for intermediaries and providers.
“Hargreaves Lansdown has been hauled over the coals for the commission it has taken,” he says, pointing to the criticism the firm received for taking 3.5 per cent commission through its enhanced annuity finder tool, launched in April. “We cap ours – we could get 3.5 per cent for enhanced annuities but we cap it at 2.5 per cent and rebate it back in. For standard annuities our cap is 1.6 per cent, with the balance rebated back in,” he says, adding that a fixed-fee option is also available to trustees.
But he makes the point that JLT’s strong presence in the trust-based world makes their cost of acquisition of clients considerably lower than the likes of Hargreaves who are competing in the retail consumer space.
“Those people taking the maximum are having to pay to get the clients. Pay per click charges can range anywhere up to £18 a time for annuity customers. There are even cases of people offering free Kindles to get people to sign up for their annuity broking service,” he says.
Williams sees an annuity market heading towards becoming possibly completely underwritten. “You have niche players like Partnership and Just Retirement underwriting individually, that puts pressure on the others. And we have Scottish Widows coming in, and pressure from the likes of LV and MGM Advantage, although we have not been helped by gilt rates.”
But he predicts even bigger changes in the at-retirement market in the coming years. With gilt yields putting so much pressure on annuity rates, albeit with a slight recent respite, and the long-term increase in DC pots, Williams sees an increased role for drawdown going forward. Given JLT’s huge presence in workplace – it is one of the four biggest workplace pensions consultancies in the country – it has a large number of clients whose employees are set to build up considerable DC pension pots.
While employee benefits consultancies are currently happy to watch most of these potential clients walk out of the door at retirement, JLT looks well positioned to maintain many of them given its acquisition of the Annuity Bureau and the Alexander Forbes Consultants & Actuaries business back in 2012.
Williams hints at a vision that could even see drawdown come within the realms of what it is acceptable to deliver to retirees en masse in an execution-only environment in the way that enhanced and other annuities are at the moment.
“Income drawdown can be the right route, particularly if you are putting off buying an annuity for 10 years or so, as long as people are aware of the investment risks. The problem is that a lot of the insured products out there at the moment are very costly, whereas you can achieve the same thing in a Sipp very cheaply,” he says.
So given buying an annuity carries the risk of missing out of market performance, and the fact that most experts believe locking into gilts in your 50s or early 60s is a sub-optimal way to invest, are we all being too cautious by not promoting drawdown in the same execution-only environment as annuities, provided the right checks and balances are in place?
“We look at the market and see Hargreaves has the Vantage Sipp and the Wealth 150 fund list. And there is Andy Bell’s online Sipp, which is a cost-effective way to invest. We are looking to produce something in this space that would give retirees a retirement guided portfolio. Obviously you need to make sure the person buying it is aware of the pitfalls and has the capacity to handle the loss. We aren’t quite there yet but we see this area as having potential,” he says.
With DC assets predicted to overtake those in DB any time within the next three or four years, cracking the guided retirement investment proposition has to be a proposition. Williams wants JLT to be part of that.
About Richard Williams
Started his career at Guardian Royal Exchange in 1989
Set up own advisory firm in 1992, which was merged through the M&E network into a regional firm. Joined JLT in 2009.
Williams is a chartered financial planner. He moved across to the annuity bureau and derisking team following its acquisition in October 2012. He sits on the wealth management executive of JLT Benefit Solutions.