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When the Government launched its annuity consultation this month we were surprised. Surprised that the Government demonstrated it understood the many complex issues surrounding the provision of financial services to the retirement community and surprised that most of the national press comment was hostile.

What does the Govern-ment say that is so offensive? It makes its objective, quite properly in my opinion, the provision of increased secure retirement income for the growing number of people who reach retirement age.

The timing could not be more relevant. In 1999, 12.2 million people (20.4 per cent of the population) were over 60 and by 2021 16.2 million people will be over 65 (27 per cent), according to statistics from Help the Aged & Care of Elderly People Market Survey 2001 Laing & Buisson.

This means there are a lot of people who are either starting to think about their pensions, close to drawing them or having to buy an annuity.

It also sends a strong signal to standing committee A which will review David Curry&#39s Pensions Annuities (Amendment) Bill. It emphasises that the Government&#39s focus is to provide a secure retirement product for the many and not be distracted by the many schemes which on the surface look attractive but which in reality only benefit the few.

We believe that the Gov-ernment raised three very important issues.

First, the open market option has to be transparent. At present, by not shopping around for the best annuity rate, at least two-thirds of people unconsciously choose to have a lower income on retirement for the rest of their lives. Up to 40 per cent of people at retirement could qualify for an enhanced annuity on the basis of health or lifestyle. This could improve their income by up to 14 per cent and even as much as 30 per cent.

We make this point, not just because we have been campaigning for greater awareness of the open market option for more than two years, but because we believe the wish to tear down the entire annuity structure before enabling annuities to perform as effectively as they can is perverse. We are expecting the FSA to announce the results of its consultation on the Omo soon.

Second, the recognition by the Government in the consultation paper that income fund withdrawal or drawdown (the only option if compulsory annuitisation is removed) is only “suitable for people with large pension funds”.

Some providers will only offer it to people with funds of £250,000 or more to make sure their customers can cope with fluctuations in income and capital reflecting investment performance” (s72 Modernising Annuities, February 2002).

It is important to be aware of the risk involved in income fund withdrawal. Its ability to produce significant returns is dependent on a complex range of factors from interest rates, equity and gilt market rates and mortality drag.

This means that in the last three years, because of depreciating markets and reducing interest rates, many annuitants would have seen returns which are higher than those who have selected income fund withdrawal.

I believe it is important to focus on the shortcomings of income fund withdrawal if reformers are genuinely interested in having a measured and open debate about retirement planning and change.

Third, an acceptance that rules how annuities have to be innovated have to be changed to reflect 21st Century real-ities, where people over 60 are healthier, living for longer and want to have a flexible phased retirement. It is no longer the case that someone at 60 can be given a gold watch and left to retire quietly – their expectations and ability to provide a valuable contribution to business and the community is a reality of the 21st century.

As Economic Secretary Ruth Kelly said: “It is time to bring the annuity market up to date and improve competition within it. We want people to have choice, flexibility, transparency and control. Better informed customers can make much better choices.”

Not only does she make a point which must be close to the hearts of all professional financial services companies but it also emphasises the need for well informed debate for the consumer.

This brings me to my surprise at the negative coverage in the consumer press.

Rather than considering the issues underpinning annuity reform, many broadsheets have given platforms to annuity reform campaigners without challenging the issues that their proposals raise for many people approaching retirement.

I suspect this has been driven by the idea that many readers have limited interest in annuities. To focus on a hostile response, irrespective of the credibility of the campaigners, is far more newsworthy than supporting an informed initiative. In this way I suppose good news is no news.

This is a pity as authoritative organisations, such as the ABI, have spent significant time and effort to understand how annuity reform can succeed.

In the article, Reforming Annuities: Big Bang or Softly, Softly? the ABI makes the point that it is unlikely that any of the principal reform proposals will be acceptable to the Treasury because they fail to address priority Govern-ment concerns as they do not meet its standards for being revenue-neutral and being effective for everyone.

The ABI&#39s two points are very important. First, concerning being revenue-neutral, the Treasury website warns that the proposed options would cost the Exchequer a considerable sum.

An example of an option which is not revenue-neutral is David Curry&#39s private member&#39s bill, in which he proposes a minimum level of income to be annuitised, above income support levels, while the balance of the fund is made available to the investor at their discretion. This means that the minimum income level must increase with the RPI.

Unlike level annuities favoured by the majority of pensions, compulsion to take an RPI-linked annuity will inevitably result in an increase in the take up of the minimum income guarantee earlier in retirement.

This cost is met by the Exchequer. The additional cost to the Exchequer caused by the disparity between average earnings indices (the rate at which the minimum income guarantee increases) and the RPI (the rate at which an annuity increases) would bring tears to the eyes of even the staunchest Chancellor.

The second point, which should be even more self evident, is that retirement provision must meet the needs of the many and provide security throughout retirement. Most options for reform do not meet this and must fail.

I believe the Government&#39s consultation on these counts must be seen as a success for the many.


Smile Invest – Growth

Tuesday 26 February, 2002 Type: Portfolio management Aim: Growth by investing in UK growth funds Minimum investment: Lump sum £250 Investment split: Choice of ABN Amro UK growth, Artemis UK growth, Fidelity special situations, HSBC UK income and growth Income facility: Yes Charges: Initial 1.375%, annual 1.38% Commission: None Contact:

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