When I first ventured into the world of personal pensions I was a naive 30-something journalist – a condition some readers might feel has not changed greatly, despite my advancing years.
Be that as it may, our profession is meant to consist of cynical swine. Moreover, by the time I started paying into my first non-occupational scheme I had some background in personal finance journalism.
Even then, I still fell for the prevailing provider propaganda at the time, which suggested those of us who took personal pensions in the early 1990s and paid in roughly 15 per cent of our gross incomes would probably be able to retire at 55.
In the decades that followed, I have learned the hard way that any assumption of stopping work at 55 was a pipe dream. While we won’t be living in penury, I’m likely to be still annoying readers for some time to come.
Yet until a year or so ago, when I started receiving letters from providers telling me what my likely pension would be if I did follow through on that chosen retirement date, I never sought to change that default date.
The result is that I now have personal experience of how providers behave when they contact you near to your selected retirement date and offer the option of converting a pension into an annuity.
The reality is that as far as open-market options are concerned, the present system is a bad joke. Yes, for reasonably sophisticated investors able to read through several pages of information, the possibility of shopping around for an annuity is always referred to in the information sent out by providers.
But in every case I have come across – and I have now received four or five letters from different providers offering me guidance on what to do about my personal pension pot – that option is mentioned almost as an afterthought.
Having seen this documentation, it is easy to see how consumers might miss out on potentially improved annuity terms by shopping around.
I totally agree with Robert Reid’s recent comments, that terms such as “open market option” are confusing and need to be made much simpler.
And if one draws the conclusion implied in the recent FCA review, to the effect that, as Money Marketing reported, “a review of 10 firms’ annuity books found business sold to existing customers is more profitable than business sold through the open market option”, there is a definite potential for an industry-wide investigation into misselling by providers.
Which leaves me wondering why it is that both the FCA and pension providers appear to be moving so slowly on this issue. To announce a 12-month review of the market, as the FCA has done, means it is putting the onus on the personal pensions industry to reform itself in the meantime.
If I were the regulator, at the very least I might also be asking what steps the industry will be taking to compensate those who have lost out as a result of its current practices.
After all, if that were not the case, it is hard to imagine why the regulator would do nothing to stop many thousands of elderly pension savers being significantly disadvantaged while it spends the next 12 months reviewing what has become blindingly obvious over several years.
This is in addition to tens of thousands who have lost out in the past decade due to what the FCA has said is a material incentive for providers to “prevent consumers from shopping around”.
For those of us who have been writing about personal finance issues over the past couple of decades, this has the look of a PPI scandal in the making.
Lest anyone has forgotten, journalists such as myself were writing about the misselling of PPI cover for years before the issue was finally investigated following a super-complaint by Citizens’ Advice in 2005.
Even then, it was a couple more years before consumer websites such as MoneySavingExpert started to promote the use of template letters to claim compensation for mis-sold PPI.
The tidal wave of claims began in 2009 and only now appears to be slowing. As we now know, the likely £20bn final compensation bill for PPI is likely to dwarf even the amount paid out in the pensions misselling scandal.
In the case of annuities, while the actual scale of individual loss may be smaller, the cost of carrying out any review is likely to be much higher.
If I were a pension provider right now, I would be desperate to address this issue before Martin Lewis, the Daily Mail and the Daily Telegraph’s money sections really get their teeth into the annuities scandal and a new tsunami of complaints floods into the FOS.
My guess is the providers won’t: heads in the sand and bums in the air has been the industry’s favourite position for decades. Why change now?
Nic Cicutti can be contacted at firstname.lastname@example.org