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Pensions industry urged to build compulsory annuity “clearing house”

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The pensions industry is facing calls to introduce an industry-wide annuity clearing house as part of radical proposals to make shopping around at retirement compulsory.

The Association of British Insurers is currently working through details of a new shopping around code of conduct for pension providers designed to increase take-up of the open market option.

Centre for Policy Studies research fellow Michael Johnson (pictured) says insurers should develop a clearing house system within which all annuity providers would participate.

Under Johnson’s proposals, a standard form would be sent to the clearing house, via the pension pot administrator, around three months from retirement detailing any health issues and the type of annuity required.

Providers would then bid for annuity business on a daily basis.

Johnson says: “This process should introduce pricing tension and, with all transaction prices being published at the end of the day, the transparency that is currently lacking.

“Individuals would then have the information they require to choose the particular annuity which best suits their needs.

“If the financial services industry fails to establish an operative annuities clearing house within two years, the coalition should itself facilitate a national annuity support and brokerage service.”

Johnson says small pension pots could be “packaged together” ahead of bidding to encourage stronger bids from providers. He says the clearing house would also create a “tailored market” for enhanced annuities.

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Another nail in the coffin for IFA’s then!

  2. “Dear Mr Johnson,

    Thank you for your proposals. Clearly a lot of thought has gone into them and they are very professionally typed.

    Unfortunately there is no money.

    Kind regards,
    Reality”

  3. Promote IFA’s as we already provide the service !!!

  4. As with all of these ideas they sound great in theory but will simply just not happen in practice due to the lack of incentive for pension pot providers and the huge amount of work and concurrent costs involved in amalgamating pensions information which is likely to make the proposition appear unprofitable to annuity providers.

    The “back-up plan” may however contain a glimmer of hope. It is unquestionable that the State will see a benefit in terms of cost savings if retirees are able to maximise the benefits they receive from their pension pots. Therefore it is in the Government’s interest to offer a solution. The solution would be to liaise with the numerous specialist retirement advisers/brokers who have both the interest in providing solutions to the above problems and the efficient process in place to offer a cost effective assistance to retirees.

  5. Good idea in theory, but in practice there would be problems administering it. Thousands of annuities are taken every day, most of which have different needs and also in some cases medical underwriting. It would grind to a halt and the people suffering would be the clients.

  6. Need a new law very soon on annuity.

    The pension annuity in the present legislation is very much in favour to the large Insurance Company, Bank and associate.

    The employee and employer paid contribution in a private pension to produce a “Pension Fund” (this part is ok).

    The point is the “Pension Fund” to whom belong? Let us see at the time to buy an annuity.

    When the employee reach the pension age and he decide to take the annuity he will louse the ownership of the pot. (I know that he can take 25% free tax, only if he buy an annuity and loose the ownership of the capital transfer it to the Insurance)

    The Insurer/Bank that has now the ownership of the pot will paid a minimal interest of the capital of the pot and gain the ownership of the pot.

    If the employee die after taken the annuity and have not had a very costly insurance (they call guaranty) the insurance keep the capital.

    The system, because the of the change of ownership of the capital, is complicate and work in favour to the Insurance/Bank Company.

    At moment the annuity interests are about 5% to 8%, therefore if someone take the pension a 65 at 5% will take 20 years to have back the capital (without interest).

    My proposal is:

    No one suppose to loose the full ownership of the capital. The pot belong to the Employee.

    I can write even more but I stop here. I assume that I have made a point.

    No employee supposed to loose the ownership of the capital. The Bank promise to paid large interest and take over the capital but in reality they paid only a small interest and gaing the capital, hoping the the employee pass way soon.

    Moreover if you are rich and have a large pot and large revenue you do not loose the pot and you do drowning down system and this way the system reasonable.

    We must sort out this annuity with new law.

  7. Yes, I like this idea, as it builds on a suggestion I made a month ago.
    There should be a “clearing house” for small pots (sounds like a disease), that is funded by those insurance companies that have a licence to deal in annuities. It should operate from a town with high unemployment and a good communication system, e.g St Helens. It should be “not for profit”. And it should have the right to do nasty things to the CEO of companies that do not complete the transfer of completed documents and money to the “clearing house” within 4 weeks of submission of completed application forms.
    Small pots are not cost effective for IFAs so I can see no reason for them getting their knickers in a twist.
    Rubbish to comments of it not working in practice. Give me the brief and I would make it work. The trick is in making sure the essential legislative structure is in place. Will there be anomalies? Probably, but the incidence is likely to be small relative to the overall market. Perfection tends to be far too costly.
    Sort out this problem quickly and cheaply, and the pension industry would improve its standing enormously.

  8. Message for advisers: please do not get overly-excited until you’ve read my short paper about the clearing house, being publishing tomorrow (Wed). It includes the suggestion that as many people do not know which type of annuity is appropriate for them, an information pack should include details of how to obtain independent advice.

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