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Will all roads lead to Omo?

The Personal Accounts Delivery Authority’s consultation paper on how it will handle the decumulation process seems to favour the open market option for account holders. Commentators say if Omo is likely to be the default option for personal accounts, this could pave the way for it to become the default for all schemes.

The consultation paper, released last week, proposes that personal account holders nearing retirement should receive information about the Omo highlighting that this is the only way to ensure they have identified the most competitive rate and widest choice of annuity features.

Pada is predicting that a “significant” number of members will choose to secure an annuity through the Omo.

However, members who do not want to take this route will be offered a focused choice option which will point them to a panel of five or six providers which offer a limited selection of annuities. The providers on this panel will have to agree to meet certain conditions set by Pada.

Pada says the decumulation process will primarily be a self-service process to keep scheme costs low.

Annuity Direct director Stuart Bayliss says the Omo does appear to be the favoured option in the consultation paper and he has high hopes for it becoming the default option in the wider market.

Bayliss says: “I have thought for a long time that we will end up having Omo as the default. I would like to see that happen as soon as possible but I do not think it will happen until after Pada has put it in place.”

Hargreaves Lansdown pensions analyst Nigel Callaghan says it would be difficult for the Government not to make the Omo the default option for all pension schemes if it becomes the default for personal accounts. He says: “It is surprising that one part of the Government can be speaking common sense and saying Omo is a sensible thing to do while another part is not saying that.”

But Aegon head of pensions development Rachel Vahey does not think Pada is making Omo the default option.

Vahey says: “It is saying you can take an Omo option but if you cannot make a decision, there is a panel of providers you can choose from. I do not think that Omo is the default option. It is positioning both options even-handedly.”

Vahey is concerned that many members, especially those with small pension pots, will not choose the Omo route because the sum of money they will receive will be so nominal, they will not bother to make a choice.

She says: “They are not going to have made any decisions about being in personal accounts, how much they pay in and so on. If they suddenly get this information saying they can choose what type of annuity to buy and see they are only going to get £3.50 a month, they may not even make a decision. There is no point shopping around if you do not know what you want.”

Vahey wants Pada to include a provider on its panel that offers enhanced annuities and possibly other options such as postcode annuities. She believes that providers will be interested in being on the panel as long as the terms of the contract are reasonable but Standard Life head of pensions policy John Lawson disagrees. He says he cannot see providers rushing to be on the panel because of the small sums of money they will be dealing with in the first few years of the scheme.

He says: “Pada is asking providers to come in with products for pots of £2,000 and above. At present, there are only four players which offer products for consumers with £10,000 or under. Many providers are currently not prepared to play in that space. There will be no decent value coming out of it until 2030. I think Pada will have to issue long-term contracts to get providers interested.”

There are also concerns that Pada is only focusing on conventional lifetime annuities when other forms of decumulation may be more suitable for certain members.

Callaghan says it is essential that investors are given access to all forms of decumulation, especially enhanced annuities and drawdown. He says: “An annuity is not necessarily the right thing for everybody and that is all they are going to be looking at. There has got to be some kind of mechanism in there that will lead them to consider other options and not put them into an annuity. There are going to be a lot of people in there with big pension pots and an annuity will not be the right thing to do for a lot of them.”

Callaghan is also worried that the provider panel may cherrypick the business they want and will typically choose bigger pots while ignoring those with smaller pots.

He says: “Pada could get round this by putting in a series of minimum standards and saying the providers have got to offer annuity rates to all personal account holders.”

Callaghan believes it is “a fantastic opportunity” for annuity providers and thinks they will be desperate to get on to the panel.

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