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‘Lay down letter of the law on Omo’

Leading pension campaigners and advisers are calling for annuity sales to be regulated to increase income for pensioners.

The call comes after the Department for Work and Pensions published more damning research into provider literature on the open market option, after FSA research released in May found that 40 per cent of material failed to meet regulatory requirements.

The DWP found that much of the information consumers receive from providers is misleading and confusing. It is expected to recommend a clearer and more timely provision of information from providers, including a single document explaining key decisions and need for independent financial advice.

Pension campaigner Ros Altmann says there has been a regulatory failure in the annuity market and the sales process should be regulated. She says: “The Government and the FSA know that people do not know what an annuity is. Once you have bought it, you can never change it. All you have to do is tick the box. What kind of regulation is this? Annuities are not being regulated as they should.”

Altmann says she cannot understand why the Government is refusing to tackle the issue and that nothing has moved on in the last six years. She says: “The Government has always bowed to insurance company pressure. The insurance companies are doing very well out of the current system. It is cheaper and easier for companies to be carrying on as they are.

“It was 2002 when I was trying to get this sorted out and nothing has changed. Why should we trust them now?”

Altmann suggests putting a prohibition on selling an annuity to anyone who has not been asked the right questions. She says four or five questions should be asked before a customer can buy an annuity. For example: “Would I qualify for an enhanced rate?” and “Do I want to protect my retirement income from inflation?”

She says around 450,000 consumers will annuitise this year alone and the FSA should regulate annuities due to the importance of the issue.

Altmann says: “Lord Turner could do this as an easy win. The FSA should introduce standard forms and wording so that people understand the process. This has to be regulated as a separate transaction. They have regulated the sales process too much for the pension savings process but have nothing in place for the annuity sales process.”

The Association of British Insurers released a new code of conduct for insurers last week which includes new template wording with a headline reading: “Please read this letter carefully. By shopping around, you may improve the income you receive in retirement.”

But the problem many commentators have with this is that it is a voluntary code of practice which insurers are not obliged to follow.

Hargreaves Lansdown pensions analyst Nigel Callaghan says the new template wording is a step in the right direction but the ABI should take it further by removing peripheral considerations and just focusing on the key messages.

Callaghan says: “It seems to me that this is a halfway house. If the ABI was to recommend that insurers just focus on the key message that using the Omo could increase your retirement income, that would be fantastic. If the rest of the information is included, is that really going to vastly increase take up of the Omo?”

The FSA’s recent research into annuities and the open market option found that 40 per cent of wake-up letters are failing its minimum standards and there is a 20 per cent difference between the best and worst annuity rates.

Callaghan says these two facts prove that the current system is not working.

He says: “Insurers are preying on consumers’ apathy and confusion. This is not necessarily a simple issue to rectify but as long as people are making an informed choice, then that is OK. We would not expect to see 100 per cent take-up of Omo but if it was increased from 39 to 60 per cent within 12 to 18 months, then it would be a fantastic achievement.”

Richard Jacobs Pension & Trustee Services director Richard Jacobs says companies often do not send out wake-up letters far enough in advance.

He believes consumers often do not think they have time to investigate other retirement income options, so they just tick the box and send back the form.

He believes it is imperative that customers are directed towards the Omo in plenty of time before they retire and they should only be advised by a whole of market adviser.

However, Jacobs says simply changing the wording of the letters and sending them out earlier will not solve the problem.

He says: “The vast majority of clients – I would say over 90 per cent – do not read the letters. Ticking a box is too easy. Everyone is coming up with the same solution and so we do need to do something radical.”

Jacobs says one of the main problems is that the people who need advice most are being left out in the cold because it is not in the interest of insurance companies or advisers to go through the process of looking at all the options.

He is wary about using increased remuneration as an incentive but says it might work, especially at the lower end of the market where pension pots are very small.

Living Time is running a campaign entitled Offer More Options which is inviting opinions from advisers, providers and commentators. Sales and marketing director Dave Harris says for many people, retirement is the single biggest investment decision of their lives.

He says according to the ABI, about 93 per cent of retirees buying an income stream – about 400,000 individuals with £11bn in pension savings – opted for a lifetime annuity in 2007.

Harris says the FSA is focusing too heavily on promoting the purchase of lifetime annuities in early retirement when this may not be the right option for them. He says: “The industry should be working hard to break this fixation with buying lifetime annuities at the point of retirement, it is outdated and outmoded in the 21st Century. The new middle market has opened up new flexible options for retirees and unsecured pensions are no longer just for the affluent.”

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