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Pot luck

It has to be good for consumers that the FSA is finally getting its teeth into the annuity market. The regulator’s leaked report into the open market option has used empirical evidence to show what many of us have suspected for years – that life insurers are profiting through an annuity purchase process based on consumer apathy fostered through complexity and poor practice.

To find that 40 per cent of wake-up packs sent to those approaching retirement do not meet regulatory requirements has to be a concern to providers. One wonders what claim-chasers will make of the news that thousands of people every month have been buying unsuitable annuities on the basis of life office documents that are not compliant.

The FSA found that the gap between the top and bottom rates for conventional annuities is as much as 20 per cent – higher than the 15 per cent normally quoted by those pushing the Omo agenda.

A significant proportion of providers’ literature also failed to mention that shopping around could give you a higher pension income – surely the whole point of the exercise? Some providers even sought to blur matters by saying such unbelievable things as: “There is no such thing as the best rate.”

The regulator’s language in this leaked report is encouragingly strong, demand-ing that firms comply within six months or face the threat of regulatory action. What is not mentioned is the host of other areas of bad practice that pepper the annuity-buying process.

One such area is the practice of providers paying IFAs not to give best advice. This can occur where an IFA is paid commission by a life insurer if an agency still exists between them and the personal pension they sold perhaps 20 years ago comes to annuitisation and the client sticks with the home provider. That advisers receive commission for not giving such a fundamental plank of best advice as shopping around for the best annuity is a blemish to the profession and should be outlawed by the retail distribution review.

Another area where consumers need to have a clear understanding of their retirement options is in trust-based schemes.

Many trustee boards offer annuities to occupational defined-contribution scheme members purely on the basis of age and gender, without a thought to the uplifts available to them. With 24 per cent of the population being smokers, the numbers not getting the enhancements to which they could be entitled must be high, without taking into account other ailments.

I have to support the view of Hargreaves Lansdown that annuity purchase should be decoupled from the pension, with the Omo being made the starting point, not some end you can reach if you can read the hieroglyphics on a life insurer’s wake-up pack.

When you buy a pension, you do so on the basis of charges, provider service and fund choice, not on the grounds of what annuity rates they offer. These are two separate contracts and it should not be beyond the wit of the Government to create a marketplace that functions in a way that consumers can make both purchases in an informed way.

Despite the strength of the FSA’s words, I do not hold out much hope at present for any change in the annuitisation process, however worthwhile it may be, beyond stricter enforcement of the rules already in place. Six months ago, I interviewed pension minister Mike O’Brien on this subject and his response was that people have the right to make the wrong decision.

When I suggested to him that making the Omo the default option would give better outcomes to the majority of consumers, he surprised me by saying: “If you follow the logic of that argument, you would effectively be saying that you have got to go for the provider which has the biggest annuity.”

At first I thought he was agreeing with me but he then explained that he saw such a step as too great an intervention in the market for the Government to make. In other words, life insurers spent good money buying these customers so they could profit from them later in life and the Government was not about to undo that.

The Association of British Insurers can rest easy for now.

John Greenwood is editor of Corporate Adviser

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