Jeff Prestridge: Dysfunctional annuities are biggest scandal

Doesn’t time fly, particularly when you are enjoying yourself? It seems no more than a few years or so ago when I was working at The Sunday Telegraph and someone called Stuart Bayliss rang to tell me that we should talk pension annuities.

In fact, it is more than 20 years since I took that call and as we all know a lot has happened in the personal finance world since then – mis-selling scandals of epic proportions, regulatory failure on a monumental scale and of course the slow strangulation of the independent finance advice sector.

Unfortunately, the world of pension annuities has changed little (the Association of British Insurers will hate me for saying this but it’s a fact). Bar the welcome development of enhanced or impaired life annuities, unwelcome crashing annuity rates and the establishment of a few more companies specialising in annuity advice (too few in my estimation), the pensions annuities market remains largely dysfunctional to this day.

In its own way, it remains one of the personal finance industry’s longest-standing scandals, not as dramatic as payment protection insurance mis-selling but more devastating in terms of the impact it has on elderly people’s finances. After all, a pension annuity purchase cannot be unwound so its impact on a purchaser’s financial well-being stays with them until death and often beyond – 30 years and more.

Back to Mr Bayliss. To this day, he remains one of my all-time personal finance heroes – along with Alan Steel of financial adviser Alan Steel Asset Management in sunny downtown Linlithgow in West Lothian (yes, I am joking when I say ‘sunny’ – it always rains in Linlithgow) who, like Mr Bayliss, has also always had strong views on the dysfunctionality of the pension annuities market.

Mr Bayliss opened my eyes, hitherto focused on everything to do with unit trusts, to the world of pension annuities and in particular the open market option – the right for people to shop around with their pension pots to purchase a best-fit annuity. Since our fateful meeting, I have never looked back. I have probably written more articles on the benefits of the open market option than on any other personal finance issue. It is such simple, good personal finance advice and a joy to write about (who says all personal finance journalists are only interested in negative stories?)

I mention all this because the personal finance industry continues to grapple/fiddle (unsuccessfully) with the open market option. Or as Stephen Womack, my personal finance colleague at Financial Mail recently expertly put it: “Hundreds of thousands of people risk an impoverished retirement while the financial services industry dithers over finding better ways to help turn pension savings into an income.” It is a statement that could have been (and has been) made at any time over the past 20 years. Hopefully, it is a statement that will not have to be made again in the future.

This Friday, the ABI will end consultation on its latest plan to improve the pension annuity process. This involves a new code of conduct for annuity sales aimed at encouraging more people to utilise the open market option route and also to contemplate the various annuity choices available to them.

By choices, I mean the right to purchase an annuity that provides financial protection for a spouse, or one that offers a rising income to counter the impact of rising inflation, or an annuity that takes into account a purchaser’s medical history. And of course, we must not forget the with profits annuity, new-style temporary annuities and income drawdown.

If the code is introduced in its proposed form, insurers will be required to issue (consumer friendly) standard letters setting out customers’ choices at retirement. Firms will also have to stress that by going elsewhere a customer could (should) get a better annuity deal. More importantly, insurers will no longer be allowed to make it easy for customers to purchase an annuity direct from themselves by simply requiring them to tick a box. This, hopefully, will bring a halt to the ‘misbuying’ of annuities – annuities that are either rank bad value for money or inappropriate.

The ABI says its new annuities code will be ready by March although it will not come fully into force until March next year. As Yvonne Braun, head of savings and retirement for the ABI, said: “The one-year deadline for implementing the code is a maximum. I would hope that those companies who pride themselves on customer service will do it more quickly. We are very keen to see real change on the ground.”

Of course, the new ABI code is a welcome step in ensuring more people end up with best-fit pension annuities. After all, it is a financial disgrace that only 44 per cent of savers switched to a better annuity (used the open market option) in the second quarter of last year. Apologists argue this is a massive improvement on what went before (for example, 35 per cent shopped around in the second quarter of 2009).

I see it differently. Some 56 per cent of savers are currently not shopping around. Even if you acknowledge that a few per cent of savers do not need to look elsewhere because they own the right to attractive guaranteed annuity rates, the annuities market continues to fail consumers.

Consumerists (I among them) would like the financial services industry to go further. Some argue for making the open market option the default retirement option. Others such as Alan Higham, the impressive chairman of annuity adviser Retirement Angels, believes consumers need to be told in pounds and pence the cost of making the wrong annuity decision.

He said: “We need to tell someone with £40,000 in their pension: ‘This £40,000 is your life savings. You have to make the decision on how to turn it into an income. The difference between a good and bad decision could be £8000 over your lifetime. If you are in any doubt, seek some advice.’

“You can fit that message on one side of paper. If such a statement came from an organisation such as the department for work and pensions, all the better.”

We have yet to reach open market option nirvana. Maybe we never will, despite Mr Bayliss’s best efforts.

Jeff Prestridge is Personal Finance Editor of the Financial Mail on Sunday