Since the regulator started banging on about the Open Market Option almost 10 years ago, there’s been no discernible change in the proportion of people who buy their annuity from someone other than their pension provider. Something like two out of three people still simply stick with the same company when they reach retirement – the vast majority of whom have never bothered to shop around to see whether they could get a better deal elsewhere.
Industry bodies, such as the Association of British Insurers, often like to suggest that more people are now shopping around than we might think. However, they explain, the reason these consumers are all miraculously falling below the statistical radar is because they decided to stay with their existing pension provider even after shopping around. This, of course, is highly improbable. Most of the very competitive annuity providers are not massive in the pension market. So in the vast majority of cases, consumers are better off elsewhere – and in some cases, better off to the tune of as much as 30 per cent.
But what’s struck me about the OMO debate in recent years, is that there’s been very little talk about the crucial role that the corporate advisory community could be playing here. The number of people in defined contribution occupational schemes is now growing rapidly, and as a result, over the next few decades, the number of employees who are left with a DC pot to play with at retirement, is going to be enormous.
Today, many of those reaching retirement are lucky enough to still be members of DB schemes, that have long been closed to new members. For them, the OMO is only relevant when they come to vest their much smaller personal pension pots.
But in 20 years, when the vast majority of employees are vesting large DC pots, the significance of the OMO is going to be much greater.
For the moment, much of the corporate advisory market seems disinterested in this end of the spectrum. But there are great opportunities here – both for advisers and employees. Part of the problem is that as it stands, corporate advisers do relatively well out of consumers’ ignorance and apathy. Once a consultant has set up a company’s DC scheme, they’re automatically primed to receive an additional slab of commission for every scheme member who automatically rolls over into one of the pension provider’s annuities.
However, there’s much more to post-retirement planning than annuities. In many cases, members may be better off moving into a drawdown for a few years before buying an annuity – or even considering one of the newer guaranteed income products which have become popular in recent years. Advisers will not only earn better commissions for taking scheme members down this route, but they’ll also be earning their money, rather than taking their clients hard-earned money for nothing.
Advice is more crucial than ever at this time in people’s lives. But the fact that so few people are shopping around for their annuity is the proof of just how few are receiving the advice they need at this time.
Some pension fund advisers may not have the skills to serve employees’ post-retirement advice needs, but even then, there’s an opportunity to earn something extra by referring clients to a specialist.
If the FSA – and the Government for that matter – are serious about people getting a fair deal in retirement, there needs to be much greater emphasis on ensuring consumers get proper advice at this stage in their lives. While generic guidance might work for younger workers – with simpler financial needs – nothing short of face to face will do as people approach retirement. And where better to engage people than the workplace?