Pica acting chairman and Hargreaves Lansdown head of pensions research Tom McPhail says: “You will struggle to argue against our fundamental proposal that shopping around must become the default option. After that, it is merely a case of working out the mechanics of the process.”
But it is the mechanics of the process that are causing the problems. Due to the complexity of the annuity market, the amount of work needed to advise on relatively small amounts of money mean it is financially not worthwhile for many IFAs to consider small pension funds.
Ample Financial Services managing director Colin Parkin says: “We hardly ever deal with clients with a pot of less than £50,000. The problem is that the cost of giving advice to them would negate any difference because it is such a small amount for us to work on. On a fee basis, you would only have to do a few hours’ work to negate anything they would make.”
One solution could be the creation of specialist brokers who can generate economies of scale through referrals.
Rockingham Retirement has created such a proposition with its Annuity Clearing House. It offers IFAs the chance to refer small pots to ACH, which earns them the same amount of commission as if they were to spend the time on the pension themselves.
Managing director Steve Hunt says: “I think IFAs will have to refer the business in future. They would not get out of bed for funds of £20,000 or less as it is but when personal accounts come in by 2015 you are going to have little pots of £3,000 or £4,000 and, on a commission basis, that is about £50 to the IFA for what could be a considerable amount of work. The ACH has been set up to address this problem.”
Hunt says he expects many other similar businesses to emerge after the retail distribution review to cope with the increased demand personal accounts will bring.
He says: “A lot will try and copy this but it is a hugely complicated market in terms of the infrastructure. Creating technology systems to deal with conventional annuities is fine but when you start bringing in other factors such as impaired, enhanced or with-profits, the waters start to get muddy.”
LV= head of pensions Ray Chinn says a new approach is needed and providers and advisers must work together to solve the problem.
He says: “Advisers have a role to play, providers have a role to play and I think the Government can get involved. There is an onus on us all to help provide education and signpost where people can go to learn about the choices.”
The RDR poses an additional future complication for annuities. If it is difficult to make business of this size pay under the current regulations, the changes to remuneration brought in by the review will make it even harder. If commission is banned and factoring ruled out then, no matter what the size of the pension, the advice will demand a fee.
McPhail says: “The majority of people will not want to write out a cheque for financial advice. I am confident that, for 90 per cent of the population, regulated, independent advice will not be avail- able to them in 2012.”
As a result, Pica argues that the industry must take another look at the RDR. McPhail says the regulator needs to consider efficient alternatives to full independent advice, whether that is simplified advice or non-advised sales supported by good quality information.
But the question of remuneration remains a tricky one. McPhail says: “How that takes places and how the distributor gets paid, through commission or otherwise, I would not like to hazard a guess.”
But, as Parkin says, until a solution is found, consumers will continue to lose out. “The current regulatory criteria mean it is too big a task for IFAs to create a proposition that would be able to viably handle enough low-level pensions to make money. But the little pot-holders of £15,000 or £20,000 are just buying their annuities straight from the providers, not even thinking about open market options. Right now they are getting screwed left, right and centre – this is a disaster waiting to happen.”