The introduction of the code for members of the Association of British Insurers was the culmination of years of pressure from various consumer, government and industry sources concerned that millions of people were being short-changed when converting their pension into an income stream.
Last year the retirement income market exceeded a record £15bn, a number that is expected to keep increasing as the population ages and more people reach retirement needing to convert pension pots to income. The ABI’s figures show that financial intermediaries have a good foothold into this market, accounting for nearly £10bn of that money compared to non-intermediated sales of a little over £4bn.
However these figures are skewed by the wealthy few who can afford advisers. Four-fifths of pension savers have pension pots of less than £50,000 and the biggest difficulty – and arguably the biggest opportunity for intermediaries – is to find economic and profitable ways to deliver advice to this majority at a complex time in their lives.
This money is the bedrock of people’s retirement finances and they simply cannot afford to make poor decisions. The open market option gives consumers the right to take their pension pot to an external provider. Yet since its introduction in 1978 there has been a steady stream of research and studies showing that many people were consistently missing out on hundreds, or even thousands of pounds, of extra income each year by taking the annuity offer from their own pension company rather than shopping around.
A recent report by the National Association of Pension Funds and the Pensions Institute did not to pull its punches. It said: “Millions of private-sector workers saving for their retirement are stuck with a hugely unfair and opaque annuity system which lops up to £1bn off pension incomes every year.” The report uncovered evidence of “sharp practice and murky pricing” in the annuity market that put unsuspecting customers at a huge disadvantage.
While the problem has been around for years, the need to tackle it has become more urgent. The baby boomers began to retire in 2010 and during the next 40 years the number of pensioners is expected to rise by one-third. They face an environment where increases in life expectancy are depressing annuity returns and pushing back the state pension age. Innovation in the market has also made the market more complex, with standard annuities just one among a number of competing options that include impaired and enhanced annuities, fixed-term and investment-linked annuities, and a variety of income drawdown strategies.
It is estimated that the 6m people who currently have defined contribution pension arrangements could be joined by an additional 5m to 8m low to median income earners due to the introduction of auto-enrolment. There is little sense encouraging people to build up pensions without helping them deploy that money intelligently at retirement.
The new code – which, it should be noted, does not extend to the 2.5m members of trust-based occupational pensions schemes – seeks to remove some of the obstacles, address some of the information asymmetry, and improve customers’ confidence to search for the right pension. ABI member pension companies will need to contact customers between five and two years before retirement to introduce the need to make decisions. As selected retirement age nears, ‘wake-up’ and ‘follow-up’ packs must be sent to emphasise, in jargon-free language, the importance of making active decisions.
These must include information about combining small pots and shopping around, not just highlighting the best rate but the need to choose the right options to provide for dependants and to protect against inflation, plus the potential higher income available for lifestyle factors or medical factors that may result in an enhanced annuity income.
Last year, of those people purchasing from their existing provider, less than five in every 100 purchased enhanced annuities, a far lower proportion than those buying through intermediaries. Going forward, providers must highlight where they do not offer enhanced annuities and signpost customers towards other sources of advice and information.
These pension companies will no longer be able to send annuity application forms until after contact with the customer and a number of key mandatory questions have been answered, including making them aware of any risk resulting from the answers. A personalised illustration must be provided to the customer before the sale of an annuity is completed, again highlighting the potential benefits of shopping around.
Of course there have been initiatives before to try to boost OMO take-up, some of which have led to temporary gains. The real key is to get each pensioner, for who this is likely to be a one-off purchase in an unknown market, to understand the value of seeking professional help.
The new code recognises this and customer material must include links to sources of information such as the Money Advice Service and Pensions Advisory Service. The role that professional intermediaries play in delivering good outcomes to consumers is also acknowledged and the code makes provision for “a suitable directory of specialist retirement income advisers” to be added once available.
The Pension Income Choice Association has been mobilising a number of industry groups to arrange for the directory to be built and intermediaries should follow its progress and get involved at the earliest opportunity.
The intermediary directory will be a searchable database and a direct point of contact for anyone seeking professional help. It has the potential to become the shop window for all those approaching retirement, available online with clear information and easily accessible information about what advice and guidance is on offer from each intermediary. Those appearing on the database must conform to the ABI code on the sales process, such as the mandatory questions about the client’s personal circumstances, their lifestyles and any health issues.
While the code should stimulate demand for advice, intermediaries will still face competition for the clients they want from each other, from direct providers and also increasingly from major high street players such as the Nationwide which has already set up an annuity service.
Intermediaries are in a good position to benefit from the shift of the annuity market away from single-solution standard annuity rates towards more personalised solutions that are medically underwritten and perhaps blend a number of retirement options. Technology is obviously playing a key role in opening up the market and bringing cost-effective solutions to a wider range of consumers. The ability to collect information, search for quotes and complete administration electronically will reduce time and costs. Yet the large sums of money, the time scales and the irreversibility of the decisions will make the majority of people seek out the reassurance of expertise and experience rather than being happy to click and buy online.
In the coming months there will be a great deal of scrutiny on whether the code is succeeding in delivering improved outcomes for those people entering retirement. The ABI is monitoring effectiveness of the code and has promised to review its impact after one year. As part of its commitment to greater transparency it is also set to publish annuity rate tables allowing for better comparisons, an area the FSA is also scrutinising. The code is definitely a step in the right direction and this is one story that is set to run and run.
Stephen Lowe is group external affairs and customer insight director for Just Retirement
Key points
Last year the retirement income market exceeded a record £15bn, a number that is expected to keep increasing as the population ages and more people reach retirement.
Pension companies will no longer be able to send annuity application forms until after there is contact with the customer and a number of key mandatory questions have been answered.
Intermediaries are in a good position to benefit from the shift of the annuity market away from single-solution standard annuity rates towards more personalised solutions.
