The decumulation market is set to become one of the hottest topics in pension circles. This interest partly stems from the fact it is a booming market. In 2006, 400,000 annuity policies were set up worth £9bn. And Watson Wyatt has predicted this could increase to £14bn in 2012. But the interest also comes from the Government’s involvement in the market and how it sees it evolving.
Last December, the Treasury issued a report called The Annuities Market. The report concluded that annuities were priced fairly. This may surprise some, given the fall in annuity incomes in recent years. But the Treasury rightly judged the current position against current economic conditions and rising longevity.
However, the Government is worried about the differences in annuity rates between providers. It is generally accepted that some people can improve their retirement income if they take an open market option and buy their annuity with a different provider. The Government is concerned that not enough people are doing this and believes it is because they do not have the right information.
The Treasury and the Department for Work and Pensions have set up a review to investigate this. Its aim is to increase the number of people exercising their open market option from the current level of about a third. It also wants to people to make informed choices about annuities and to increase the number getting the best rate for their given choice of annuity.
So far so good. But this review may be based on a passing glance at the market rather than a thorough investigation. For example, how providers pitch their pricing competitively in the annuity market is complex. Clearly, not all providers can be competitive at all ages, genders and, even possibly, postcodes. Different providers will have different long-term strategies around customer segmentation, including considering expected volume of cases.
Hopefully, the review will take this into consideration.
The review could come up with a range of solutions. However, it is likely a number of them will tackle the amount and type of information people receive as they approach retirement. Taking a step back, it is clear people already receive a great deal of information in the retirement packs all providers send out. If they want to find out more about the annuity market in general, there are a host of information websites and newspaper articles covering the basics.
Arguably, there is action we can all take to improve the information on offer to consumers. The industry, both advisers and providers, needs to work with the Government bodies to make this information more focused and more relevant. But it is not enough to tackle just the supply side alone. People have the information to hand, but a lot of them choose not to use it.
Those with an adviser will benefit greatly from their guidance through the various retirement income choices, explaining terms and the decisions to be made, and also taking on the mechanics of any open market option. But this is imperfect at present, partly because not everyone seeks an adviser’s help but also because advisers cannot serve the whole market.
There is clearly a financial capability issue here. We need to make sure people have the knowledge to understand this is a difficult decision and one they may need help with. How people make choices about their retirement income may be one that falls naturally into the arena of generic advice. The Government must join up this annuity review with the FSA’s financial capability work and the Thoresen review of generic financial advice.
As well as tackling the level and nature of information given at retirement, I also hope the review considers the retirement income market as a whole. The annuities paper in December welcomed industry innovation in mid-market solutions, which sit somewhere between an annuity and income drawdown. It is highly encouraging to see that the Government favours the development of new products and recognises that a healthy competitive market can deliver value and ideas.
The annuities review must now focus on building this innovation and delivering consumer solutions rather than introducing restrictive measures that stifle competition.
Rachel Vahey is head of pension development at Aegon