From Special Report: At Retirement - May 2012
The quiet revolution
Those who follow the annuity market know that today the best rates are only provided by as few as four or five insurers and proper use of the OMO is a rare find
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.