‘Commission to the rescue in annuity market’ may not be the headline any of the political parties would want themselves associated with but a consensus appears to be emerging that commission-paid intermediaries could be the solution to the car crash that is the current at-retirement process.
It is ironic that after all the flak commission-based advisers have received from the authorities over the years, they are increasingly being seen as the solution to the biggest financial advice challenge most people will ever face.
Those that have survived RDR annihilation by hiding in the untroubled corner of the intermediary market that is the annuity sector are potential saviours of the millions of future DC retirees.
The ABI code of conduct, which is due to take effect next spring, should improve outcomes for retirees by improving the information available to them, emphasising the financial gains available to those that shop around and the removal of home provider application forms from pre-retirement mailouts.
While a welcome step, nobody expects this to lead to a situation where virtually everyone gets something approaching the right annuity for their situation. That’s good news for people like me who will still be able to get paid for writing stories about how poor value many people’s annuities are, even if I think annuities themselves can be good value. But it’s less good for the people who end up seeing out their days with the wrong annuity – and worse still for those surviving spouses who end up with nothing.
The fact is we are within touching distance of eradicating the Sunday supplement annuity-knocking open market option story at a stroke, and giving most people the retirement income they deserve. What’s more, this at-retirement Holy Grail is achievable with no outlay from government and could be put in place pretty quickly.
I’m talking about the idea of making referral to a pre-vetted independent annuity broker the default position for all DC retirees. People could choose not to take the services offered to them and opt back into their provider’s low value annuity if they want, but make the starting point that they do not.
I was first told about the idea a year ago by Dr Debbie Harrison of the Pensions Institute, at the publication of an NAPF review of the annuity market. Twelve months on, the publication of another NAPF report into annuities, Supporting DC Savers At Retirement, has prompted Labour pension shadow Gregg McClymont to call for pension schemes to be given a duty to direct their savers to the best independent annuity brokerage service available or to offer such independent brokerage services themselves.
Currently, many DC members do get access to execution-only services from brokers, regardless of fund size, because the broker has been made to agree to take all-comers.
But it is generally in the area of smaller schemes where retirees are falling through the cracks. The NAPF’s report highlights a number of barriers to smaller schemes, most notably fear of stepping over a regulatory line into advice. If the government made the OMO the default, they would not only have no reason not to act, but they would not be able to fail to act in their members’ best interests.
The NAPF says it is considering looking at a establishing a register of approved brokers, or the development of a master-brokerage. Both of these moves are steps in the right direction, but without mandatory intermediation there will still be individuals falling through the cracks.
It should not be too difficult for the government or the industry to oversee the establishment of a panel of pre-approved at-retirement specialists. Most people would be guided through an execution-only process, usually with telephone assistance, but there would need to be safeguards built in to make sure those who needed full advice got it. The different non-annuity options available would all have to be given equal weighting.
Such a project could lead to vastly improved outcomes being achieved very quickly. What’s more, the government might even see its welfare bill reduced through more cash going to funding savers’ retirements and less leaking into life office coffers.
John Greenwood is editor at Corporate Adviser