Annuities have been thrust back into the spotlight following the financial services regulator’s recent confirmation of a thematic review into whether retirees are missing out by failing to shop around when buying their retirement incomes.
The timing is interesting, coming just a few weeks before the March 1st deadline for pension providers to comply with the Association of British Insurers’ new Code of Conduct on Retirement Choices, which is arguably the biggest reform of the annuity market since the introduction of the Open Market Option back in 1978.
The ABI has created the code to address criticism that even after 35 years, too many pension savers miss out at retirement either by poor product choice or by failing to secure the best rates.
If the market has been broken so long, is it worth fixing?
The answer is a resounding yes for at least two reasons. First, with the population ageing, more people are reaching retirement than ever before – around 400,000 will buy annuities this year and new auto-enrolment rules will see this number continue to rise.
Second, the income each pound of pension saving can buy is near historic lows so shopping around not only helps pensioners attain a higher quality of life, it also reduces poverty and the burden borne by taxpayers.
Can it be fixed?
Once again, the answer is yes. We know this because at least one part of the market is working well, specifically where professional intermediaries are providing guidance and advice to clients, helping them understand the options and make intelligent choices at a complex time of their lives.
In its 2009 report, Optimising Value In Retirement, the Pension Income Choice Association noted persistent unsatisfactory take up of the OMO and said: “The current system is failing the less well off members of our society who most need to maximise their pension savings if they are to avoid hardship in retirement.”
It pointed out professional advisers help clients make better informed decisions but admitted many found it economically challenging to offer advice with funds below £50,000.
The ABI’s new code has been created to encourage thousands more people to review their options at retirement rather than to accept only what their incumbent pension provider can offer.
It means equipping customers with relevant, timely and jargon-free information and explaining the potential benefits of shopping around. The sales process will have built-in protections and there is a requirement to achieve transparency through the publication of providers’ annuity rates.
Pension companies must start communicating these options to customers between two and five years ahead of their selected retirement date. They can no longer include an application form in the ‘wake up’ pack and they must make it clear other providers might offer better deals. In particular, more prominence must be given to enhanced annuities.
At each stage of the ABI members’ sales processes, the customer must be asked a number of mandatory questions about their particular circumstances to prompt consideration of their options. The material must highlight any applicable guaranteed annuity rate and the possibility that medical conditions or lifestyle choices may lead to a higher level of retirement income.
It must also “encourage the customer to seek further advice and/or information about the different ways in which they might be able to take their retirement income” by signposting them to useful customer resources such as the Money Advice Service and The Pensions Advisory Service and sources of financial advice.
This will include a new intermediary directory that is set to launch in the coming months.
PICA has created the momentum to develop the directory, it formed part of their original blueprint for reform alongside making shopping around the default option. However, the directory is being created with the input of many key industry stakeholders to ensure it passes the suitability and appropriateness test.
The intention is to signpost the directory in the ‘wake up’ packs sent to all the pension customers of ABI member companies approaching retirement.
As a direct contact point between consumers seeking guidance and advice and professionals who can provide it, it has the potential to become a shop window for all intermediaries who are keen to participate or expand into the multi-billion pound retirement income market.
The directory will take the format of a searchable database for consumers, enabling them to hone in on exactly the kind of service they want from FSA-registered intermediaries, allowing them to check information such as proximity, whether advice is independent or restricted, size of firm, whether the service is face to face or arms length.
Those intermediaries on the site must conform, as a minimum, to follow the ABI’s standards for the sales process, such as asking mandatory questions to uncover entry level information into the client’s personal circumstances such as health, lifestyle, marital status, existence of guaranteed annuity rates etc – something all competent intermediaries do already.
With more consumers shopping around, competition for their attention is likely to increase, perhaps drawing in new players seeking to leverage their brands or technological superiority.
High street names, supermarkets and online providers will be aware of the billions up for grabs.
Given the importance of the annuity decision, this is an area where we believe people will want to feel their interests are being looked after by someone who is knowledgeable and experienced rather than relying on an impersonal mathematical algorithm.
The challenge for intermediaries is to provide the personal touch at a competitive cost. Key differentiators will be technology to speed up processes and detailed medical underwriting providing personalised solutions.
There is a huge market opportunity for those firms who can get it right. A report last year by the National Association of Pension Funds and the Pensions Institute found that about half a million people retiring each year are being short-changed by up to £1bn from their total future pensions income. It suggested this could treble to more than £3bn over a decade as millions more are auto-enrolled into pensions.
Intermediaries are perfectly placed to help consumers overcome what that report called the “obstacles”, “sharp practice” and “murky pricing” of the annuity market.
The new ABI code is a big step forward and it is heartening to know that the regulator will be monitoring progress closely this year.
The question remains whether the code goes far enough? Around 2.5 million members of occupational trust-based defined contribution schemes will not automatically be covered by the new code but there is nothing stopping intermediaries from making sure they too do not miss out.
Steve Lowe is group external affairs and customer insight director at Just Retirement