Schemes have been urged to provide more detailed information on annuity options to ensure retiring members get the most from their defined contribution (DC) savings
Shadow pensions minister Rachel Reeves said members need to be given information on the different types of annuities available and the questions to ask providers – alongside their telephone numbers – to help them make the correct choice.
She was joined in calling for an improved deccumulation process by annuity service providers, who championed face-to-face communication and including details of potential losses in any literature.
At the point of retirement, holders of DC benefits need to turn their accumulated assets into a form of income, with most opting for an annuity. Different types of annuities can lead to vastly different levels of income in retirement. In some cases, this could be multiple thousands of pounds a year.
Members are entitled to shop around for their annuity from a number of insurers, using the so-called open market option (OMO).
The regulator encourages trustees to emphasise to members the merit of taking financial advice, but admits there are "different levels of support" from schemes when it comes to the OMO.
Scheme managers are urged to request their employer funds external financial advice on annuities and education for their members, according to industry figures.
They should ensure the OMO is brought forward in their retirement communication, and inform members of the potential loss of failing to shop around.
Reeves said if the pensions industry as a whole did not introduce better information on the OMO, it would be down to the government to legislate for it.
“I think a lot of people aren’t aware," she said. "The industry can definitely do more – some of the more enlightened providers are looking at what they can do.”
Case study: Pennon Group Pension Scheme The DC segment of the Pennon plan is not allied to a particular insurer, so members automatically choose the OMO through provider Hargreaves Lansdown. Scheme manager Nigel Ralph said the scheme initially writes to members when they approaching retirement setting out the process. This would include an indicative quote on the pension they stand to receive, modelled on a level pension with a 50% spouse pension attached. They then pass the members details to the provider, who takes the member through their choice. He said: "When they've made their decision, we get involved again by disinvesting their funds and paying them across." |
Informed decisions
Katherine Oxenham, director at Annuity Direct, said information about shopping around for the best deal was typically buried beneath the default option at the bottom of the schemes’ retirement literature.
She said: “Managers must ensure information on the OMO is the first thing mentioned in scheme members’ retirement packs.”
Schemes could also provide links to specialist websites to help members understand the available options for their retirement income.
Employers should provide external education on annuities to scheme members, argued Tim Gosden, head of annuity product development at Legal & General.
“There’s nothing like face-to-face contact, particularly over a subject like annuities. Providers could supply it – or employee benefit consultants.”
Stephen Lowe, external affairs director at Just Retirement, said scheme managers should ensure any communications include the amount of money potentially lost by failing to do so.
A process should also be in place to prevent members from being passive, for example where a form is presented at the outset securing their retirement income and annuity choice, he added.
“A technology platform supporting administrators attain the best shape and value of retirement income product for members such as the solution provided by the open market annuity service,” he said.
