The recent announcement from the ABI that they were introducing a code of conduct changing the way their members handled maturing pension policies was met with indifference by most of the people who saw it.
The recent announcement from the ABI that it was introducing a code of conduct changing the way their members handled maturing pension policies was met with indifference by most of the people who saw it.
On the one hand, policyholders who have persisted in ignoring the open market option for more than 20 years since it was introduced with personal pensions were apathetic. On the other, advisers who understand the OMO market knew that the ABI really wants to promote the OMO about as much as turkeys want to vote for Christmas.
Those who follow the annuity market will know that these days the best rates are generally provided by as few as four or five insurers. Gone are the days when composite insurers would dip into the market for cash-flow reasons, or small insurers would find that they had been left at the top of the market after others had reduced rates while their actuary was on holiday. So for the vast majority of ABI members, growth in use of the OMO would actually result in them losing business to the few who offer competitive rates.
Looking at the FSA annuity tables (someone has to, but I suspect it is not people with maturing policies), it is clear that some of the country’s leading personal pension providers make no attempt to compete with the best annuity providers, with rates more than 15 per cent below the best available.
But proper use of the OMO goes beyond not sending application forms to retiring policyholders and referring vaguely to an open market option. A leading impaired life annuity provider has claimed that more than 50 per cent of annuitants could qualify for an enhanced rate on the grounds of ill health or lifestyle issues.
Smokers will always get enhanced rates, as will those who drink heavily, and the code will require ABI members who do not offer such rates to alert policyholders to their existence.
Underwritten rates can increase the income payable by as much as 75 per cent. This is a specialist market and most providers cannot afford to offer enhanced rates for those in poor health. I have no problem with this, but those who do not offer ill health rates should not only tell their customers that they exist, they should provide an indication of just how valuable they could be.
However, the issue of who offers the best rates is only part of the ‘at retirement’ issue. There is also the question of the shape of an annuity. If a male of 65 incorrectly believes he will only live for 10 years, then he will not include inflation protection on his annuity. And why are so many annuities bought on a single life basis? The simple answer is that adding a widow’s pension and inflation protection reduces the initial income significantly.
When I was younger, the Readers Digest used to offer prizewinners a choice of an immediate lump-sum or income for life. The actuarial value of the income for life was about five times the value of the lump-sum, but I understand that more than 90 per cent of winners opted for the lump-sum. People usually underestimate their life expectancy by as much as 30 per cent, and so higher income now looks better than higher future income.
I once asked at a conference why the ABI allowed those members who do not want annuity business to offer it .Sadly most people know someone who died within two or three years of retiring, but comparatively few people knew Henry Allingham. Henry died in 2009, having received his state pension for 48 years and instalments of an annuity purchased at age 60 for 53 years.
Legislation
The government is talking of introducing legislation to deal with small pots, which do not qualify for trivial commutation, and a number of providers have suggested ways in which they could handle these profitably – frequently by completely ignoring the options available to their policyholders. Certainly it is difficult for most IFAs to cover costs on an annuity with a purchase price below £30,000. But we have recently seen the emergence of a number of mechanised services which are able to provide the best rates for a variety of different annuity shapes, and these need to be encouraged.
A real innovation would be for the ABI to require their members to issue a simple statement to maturing policyholders along the following lines:
“Your policy is due to mature in six months and the estimated maturity value is £XX,000. While we are able to offer you an annuity with this money our rates are likely to be lower than you can get elsewhere.
“We therefore believe you should contact the XYZ annuity service who will be able to quote you the best rate available for your circumstances. Please note that if you are a smoker or have a medical condition you will qualify for a higher pension and XYZ will enable you to get more income every year for the rest of your life.”
In the past, companies such as Allied Dunbar/Zurich and Skandia referred maturing policyholders to a leading annuity provider, in recognition that their rates were uncompetitive. I understand that they received some sort of payment from the annuity provider in return for the introduction, and I can see no reason why the XYZ annuity service should not pay some sort of introducer’s fee to providers. At the end of the day the policyholder would get advice and a better rate and that is what we all want to see.
I once asked at a conference why the ABI allowed those members who do not want annuity business to offer it at all. Effectively if a company’s rates are 15 per cent below the best in the market what is their message?
“We do not expect business from those who have pensions with other companies, but we want to reward our loyal policyholders with significantly reduced income for the rest of their lives.”
Remarkably, I thought, the actuary from one leading insurer which at the time generally offered rates about 15 per cent to 20 per cent below the best available, answered my question. She said that they did want to write annuity business, but only on a profitable basis. She went on to say that some of their customers had saved with them for many years and wanted to stay with them.
This last comment really got to me. She seemed to believe that someone who had invested with her company for long enough to build up a fund of, say, £60,000 at age 65 would be happy to take about £3300 a year of income from them, when they could instead get £3800 a year from a larger insurer.
A 65-year-old man has a life expectancy of about 24 years, so the decision not to use the OMO might cost him £12,000 over his remaining lifetime.
If her company had to tell the policyholder that he could get all this extra money by going elsewhere, I wonder whether the loyalty would be shown towards her company or instead towards his wife and family.
While I do not think that the ABI will ever give its support to an initiative aimed at taking business away from the majority of its members, I do think that it could be persuaded to go further towards treating its customers fairly; after all the FSA’s treating customers fairly applies just as much to providers as it does to IFAs.
David Trenner is technical director at retirement income specialists Intelligent Pensions
