The NAPF/Pensions Institute report into the annuitisation process raises issues so serious that only a complete overhaul of the system can truly clear the air.
That report, Treating DC Scheme Members Fairly In Retirement?, raises some extremely serious charges against the annuitisation process. Rate manipulation, lack of transparency, dual pricing and a reliance on apathy that is collectively costing pensioners around £1bn a year through poorer rates. That the report has to admit neither it nor the FSA is in a position to get to the bottom of some of the more serious allegations is a cause for concern.
The report leaves us with tantalising suggestions of the bad things done by annuity providers. Sadly, the report has to concede it is unable to prove these allegations and, under current legislation, there is no point hoping the FSA is going to do so either. This is because the Financial Services and Markets Act prohibits the regulator from publishing provider-specific data, were it to collect the data. The Pensions Institute is right therefore to propose amending FSMA to allow the FSA to find out what is going on in annuity pricing.
But the drive for transparency should not stop there. You could be forgiven for thinking that the level of take-up of the open market option has been a subject of debate for years.
But it transpires that the ABI has never had accurate figures for the number of people buying an annuity on the open market. Yes it has figures for the proportion of people switching provider at annuity purchase but it turns out this includes those switching under blanket deals between holding pension providers that do not offer annuities and annuity providers.
The proportion of people switching provider has, according to the ABI, increased from 35 per cent in 2008 to 46 per cent in the last year. But these figures include annuities put in place through tie-ups such as those between Skandia and Legal & General and between Royal London and Prudential. In fact, most annuity specialists detect a reduction in the number of clients actively taking their pension pot to a different provider.
The FSA has surveyed Omo take-up from time to time but surely it is within the capability of the ABI to give us a figure on an ongoing basis. Maybe this job is so important that the Government or regulator should be doing it. Of course, the need to accurately monitor success disappears if defaulting to the Omo becomes the norm.
The NAPF should be applauded for backing the report although its membership is not entirely blameless in the whole sorry story of poor annuity choices.
It appears that many trustees are letting down their members just as much as the insurers, even though they might be expected to do more.
Trustees’ only regulatory obligation is to give members a leaflet from The Pensions Regulator about the Omo, even though scheme members might think trustees’ fiduciary duty to act in the best interests of the scheme beneficiaries runs to making sure they get a good deal. There is nothing to stop trustees from making sure the Omo is the default in the schemes they run, yet many do not take such an approach.
The annuity market is set to double in the next few years. The Government or the regulator needs to take a deep look at exactly what is happening inside annuity providers and if that means changes to the FSMA, then so be it. Hundreds of thousands of pensioners each year have the right to know.
John Greenwood is editor of Corporate Adviser