OpinionFeb 21 2014

Omo erratic

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It is often said a person is more likely to leave their spouse than their bank. Although that fact is most often wheeled out as part of an appeal imploring them to switch banks, so it might have been so effective as to no longer be true. Maybe people were so staggered they listened and changed their banks in droves. More likely they haven’t though. People largely don’t listen.

This is the chief reason pension providers continue to enjoy a baffling level of unquestioning loyalty from savers. The problems with the annuities market have been well known for as long as I have been a financial journalist; the retiring masses refuse to exercise the open-market option - despite the obvious and demonstrable benefits of doing so, and however much they are nudged by the powers that be.

A year ago, in one of its first initiatives, the FCA began a review into the annuities market. The recently published first findings of that review are that people aren’t shopping around; those that don’t could do better by shopping around; those with small pots have limited options; and people are not aware of the option of taking enhanced annuities.

Forgive me if I have misunderstood, but aren’t these the problems that prompted the review in the first place? Do we need a review into a problem to tell us there is a problem? Shouldn’t it go some way towards suggesting solutions?

Instead, the FCA has used this review to confirm what the entire industry already knew. And then used those findings as evidence that we need another review.

To be fair, the numbers do make depressing reading. Of the 420,000 who take out an annuity every year, 168,000 (40 per cent) do not bother to shop around, while 134,400 of these would be better off if they did.

What’s really depressing is that those numbers are not as bleak as I expected. They even represent an improvement of sorts on where we were a decade ago. Still, it is pretty clear something needs to be done. But it was clear a year ago. That’s why we had the review.

Anyway, the FCA’s findings also identified a lack of competition in the annuities market. To me the issue is more the general public’s inability or unwillingness to look at what competition is out there, settling instead for the provider they have stuck with unquestioningly throughout their working lives. I suppose, given the regulator thinks there’s a lack of competition, the general public can’t really be blamed for failing to find it either.

While the review has been ongoing, we have seen new initiatives designed to address the problems, notably from the ABI and Pica. These are all steps in the right direction, arming the public with all the information they need, but we still haven’t successfully tackled the issue of making the public take in that information.

People are terrified by things they don’t understand - and the average person’s general understanding of personal finance, never mind the intricacies of retirement planning, is basic at best.

As part of its drive to embed itself into the public’s conscience, Nest introduced a plain speaking campaign a couple of years ago. Recognising that the general public was alienated by a lot of the terminology around pensions, the government-backed auto-enrolment scheme sought to do away with jargon. In Nest’s own communications, the very term ‘annuity’ was banned in favour of ‘retirement income’.

It is encouraging to see the FCA talk about the issue of small pots rather than ‘trivial commutation’, but the industry as a whole should realise that long words do not make them seem clever; instead, they make their policyholders feel stupid.

Every issue identified in the review would be tackled effectively by the imposition of advice. I have argued before that anybody at retirement should be forced to undergo a brief chat with a financial adviser before they can do anything with their pensions savings. This could be paid for from a pooled pot of contributions from all providers. Simpler language around pensions would make that chat easier to understand for the policyholder, and make them better informed and equipped to get the best retirement income possible.

I know deciding that now would deprive the regulator of its interminable review. Sadly the FCA seems to be more interested in being seen to act, rather than being seen to achieve.