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Lawson defends providers over OMO

The figures show the open market option is succeeding.

Last week, Money Marketing reported the Government was planning to crack down on perceived failings of the annuity open market option.

Yet far from failing, I doubt whether there is a market for any UK financial product where such a high proportion of consumers make such informed choices.

Recent ABI research revealed 67 per cent of people buying an annuity shopped around before buying. And before the shouts of “they would say that, wouldn’t they?” ring out, this result is identical to a 2008 FSA survey.

That leaves 33 per cent who did not shop around. Why not? One blindingly obvious reason is that over 20 per cent of customers purchased their annuity with less than £5,000. The minimum purchase price for any open market annuity is £5,000, leaving these customers with no choice but to take an annuity from their existing pension provider.

So we can conclude that out of every 100 people, 67 of the 80 that could shop around did so, with only 13 failing to shop around.

But the figure that some commentators focus on is the 32 per cent that actually buy their annuity from another provider. This is their “evidence” that the market is not working.

It seems logical to me that many people who shop around are happy to stay with the incumbent provider. I shop around every year for my car and home insurance, yet often stay put for one of three reasons – I am already with the cheapest insurer; even if I can get a lower price, the saving is not enough to make it worth the hassle of moving; and, although I can get a cheaper quote from an unknown insurer I prefer to buy from a big brand I trust.

The ABI research backs this up, confirming that around half of the people who shop around but buy from their current provider do so because they offer the best price.

In most cases, they are not making ill-informed decisions. The research found that 55 of the 67 who shopped around took advice or received information from a professional financial adviser.

How can such a successful market be painted as an abject failure?

There seems to be constant calls for the Omo to be made the default. Although the advice rate is already high, at 55 per cent of all those making an annuity buying decision, I think it unlikely this will increase markedly. Over a third of customers have £10,000 or less to buy their annuity. Good quality advisers know they cannot offer a proper advice service for £150 or less.

Tens of thousands of people with small pots, who advisers cannot commercially afford to serve, and who are currently guided through the process by the provider they have saved with, will have to work it out for themselves.

No doubt, new annuity choice services will spring up that do not offer regulated advice, but tell people to buy an annuity from their current provider. Will they provide a better customer experience than the existing provider? I very much doubt it.

A proper debate is needed before we go further down this track to ensure we achieve the best outcome for customers.

John Lawson is head of pensions policy at Standard Life

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Well done John – you have the nail on the head

    I have been saying for a long time that the problem is not as bad as reported

    Obviously I will argue that everyone should use the Open Market Option but the problem is over over egged by those with a vested interest in selling more annuities

  2. This is one provider which received the lion’s share of its pension business from IFAs, many of whome were still around (at the last count) to ensure that their clients received the best advice possible. Hardly a representative for policymakers to use when planning ahead.

  3. To be blunt with both John and Billy – who cares if the problem is not as bad a reported, that’s not the point. What has anybody but a provider desperate to hang on to money got to fear from OMO being the default position?

  4. There isn’t enough space to list why this market is so inefficient – I find it unbelievable anybody would suggest good outcomes are being achieved for most customers. An Independent macro-economic assessment by Oxford Economics at the end of 2009 found customers could improve their outcomes by over £3Bn by improving the shopping around process. Do we really believe customers shop around and then say ill forsake those many thousands of pounds – its a little different to £30 on an annual motor insurance policy.
    Anyway – wood for trees springs to mind, we need to take this up a level. The Open Market Option (should be more aptly called the ONE market option) facilitates shopping around for one retirement income solution – a lifetime annuity and it amplifies a focus purely on RATE. There are now over 10 retirement income choices available to advisers and their clients – the question we need to address is why do most people (9 out of 10) end up in one category often with inappropriate options selected – this is not informed purchasing in many cases? Often its ticking a box to get an income as quickly as possible because the thought of working through a sleep well at night pack that’s 30+ pages long is too overwhelming. The opportunity is to get customers first into the most appropriate retirement income solution with features that meet their changing needs – and OMO doesn’t do that – its not compulsory OMO being called for but compulsory shopping around for shape then rate. This is not an efficient market that delivers great outcomes for customers – we all have to be more ambitious to deliver a better solution and stop believing what exists is good enough.

  5. David Trenner - Intelligent Pensions 2nd September 2010 at 5:06 pm

    John, You manipulate the statistics as well as any politician!

    At a time when people are making a serious effort to look after small pots, you seem happy to leave less wealthy policyholders on the scrapheap.

    For people who bought their pensions with ‘good’ pension companies like Scot Eq, Scottish Widows or Friends Provident, not using the OMO will cost them 15-20% of the income they could currently get from the likes of Aviva or Canada Life. They will lose even more if they qualify for an impaired life rate.

    Not saving a fiver on your car insurance is a bit different from giving up hundreds of pounds a year for 25 or 30 years!

    The ABI is happy for companies to tell policyholders they ‘might get more’ using the OMO, when they should be saying ‘we do not offer competitive rates, so go to an IFA to get a much bigger pension’.

    Until cynical insurers stop ripping off loyal customers we should shout long and loud for proper regulation of the annuity market. You might be treating Standard Life policyholders fairly (as long as they do not smoke or have health issues) but what about your friends down the road at the Widows and Equitable????

  6. This guy is right when he says many clients don’t think the marginal improvement is worth all the aggravation of buying elsewhere. It’s about time the FSA made the ceding scheme provide a service standard that enabled the movement of funds to an alternative annuity provider quick and painless, instead of teh situation now when it can take months to get switch the money to another annuity provider.

    That said, a lot of the problem is the huge amount of red tape and other ‘hoops and hurdles’ which the FSA and HMRC have put in place to thwart advisers and their clients from carrying out what otherwise would be a simple job.

    Then add the ever-increasing regulatory costs and the need to produce 30 page suitability letters for a ‘pot’ of £5k – it’s a wonder that OMO is used as frequently as it is.

  7. I wasn’t sure if Mr Lawson was being disingenuous or merely displaying the ignorance of one who is an employee of a single firm. First of all Standard Life itself could do a great deal to clean up its own act. Their contact literature, when one approaches retirement (and I speak from personal experience) is a very heavy tome with an awful lot of paperwork. It assumes that you have made up your mind to retire as the heading is “You are due to retire, now is the time to decide”. Indeed sometimes customers have decided not to take benefits at the original NRD. The one useful piece is they give you the value of the fund on the first page. Then it goes on to provide a whole load of absolutely useless piffle and it’s only until you get to Page 5 that there is mention of the Open Market Option. In that paragraph it still punts for it’s own ends by telling people they combine their other pensions with Standard Life, but nowhere does it say they need to consult an independent financial adviser. It assumes on Page 7 that you contribute regular premiums. It doesn’t take into account that many people only contribute single premiums and may well wish to leave this particular fund where it is. All this goes on for 9 pages accompanied by what they call a guide with pretty pictures and much of the content is both confusing and irrelevant. In all a further 19 pages of not very much. Then you get the Key Facts document – another cardboard edition of some 7 pages. Do they really think that customer’s are going to read all 35 pages (most of it rubbish) and even if they do get through it all, by the time they get to the end they have probably lost the will to live.

    In his article he states that 20% of customers purchase their Annuities with less than £5,000. That may well be the case but how does he know that they didn’t have other Pension arrangements in place as well and could have amalgamated and had a fund 10 times, or even more than that magnitude which could have qualified quite easily for a decent open market option? He takes the common view of those employed by insurance companies, that nobody has other arrangements, which of course they do.

    So in essence Mr Lawson, there is an awful lot wrong with the way that the members of the ABI treat and deal with the open market option and a great deal of room for improvement. It is precisely this self satisfied attitude that has disadvantaged so many clients for so long.

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