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Open season

The last few years have seen specialist annuity providers contracting directly with pension companies to provide annuities – the contention being that this offers better annuity rates.

Currently, the major annuity companies are engaged in a major marketing effort to put together the next generation of such arrangements.

The defence of something being better than nothing and that they will not be permanent is still preferred. These are more sophisticated, standard life providers offering to take business where they have been most competitive alongside an impaired or enhanced offering.

In promoting the deals

  • They say there is no such thing as a top rate, the assumption being that correct processes, hard work by advisers and guarantee periods already available in the marketplace cannot already solve the problem of rates in a falling market.

  • They say best annuity choice is not just about rate. I and other specialist advisers agree completely but their proposals are all about rate and guarantees and commission and nothing much to date has been offered by way of assistance or advice, however basic.

  • They say that the Omo is not available to funds under £40,000 but specialist advisers have already created processes where there are no minimums.

  • They say that no one would offer an Omo process at vesting but, using identical technology and processes, there are a number of truly competitive suppliers waiting to offer such services.

  • They say that, if they guarantee to be within x% of the top, then the amount gained through the top rate is so small it does not matter.

    This is outrageously patronising. Small increases matter to the pensioners who retire with small pension pots. People saying this should pay some attention to the size in pounds and pence of increases in state benefits and if they are so confident, why not agree to displaying the Omo top rate next to theirs?

    The likely effect of the deals

  • To date, one company has a useful history – with the Prudential, once these arrangements were in place, there is clear evidence that they significantly reduced their competitive position in the Omo market.

  • The commission levels paid are at least double those paid to IFAs and the income is leading pension companies to impose penalties and lack of clarity of penalties imposed by others and not made explicit in the fund values used for annuity quotations.

  • There is no incentive to encourage the real delivered improvement in pension transfer at vesting.

  • In offering Omo rates (potentially less competitive) to a book of smaller stay-put business the average quality of life being insured is lower and therefore more profitable.

    There is already evidence that the net effect of these arrangements has been to reduce consumer value. Any extension of them and particularly the involvement of all the major Omo players will almost inevitably further reduce consumer value.

    What we need is today’s solutions for the retirees of both today and tomorrow.

    The Omo can be the default option. The Omo should be provided to all at vesting. This requires all interested parties, including HM Revenue and Customs, to complete the task of enabling the Omo annuity process to be undertaken through technology. This will ensure that the only human intervention is enabling the most appropriate annuity to be purchases.

    The reduction in costs for those providing the Omo service, the pension companies and the annuity providers should enable not only a competitive and profitable reward to all participants but improved consumer value across the marketplace.

    Stuart Bayliss is a director at Annuity Direct

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