The annuities industry has come under increasing fire from all corners of the industry – but there are concrete steps that pension professionals can take to help members get value at retirement.
For some within the industry the nub of the problem is members not being given the guidance they need to explore the range of annuity products on the market.
Comment: Schemes must offer a helping hand
Engagement is the problem and the opportunity. Large numbers of retirees accept the first annuity offer without shopping around, and the challenge for occupational schemes is to overcome that inertia.
The regulator has pushed the issue up the agenda and expanded its guidance to encourage schemes to put in place earlier and better retirement communications and a formal shopping around process to help members optimise their pension income.
This must take into account the financial capability of a wide cross-section of members, especially those with small pension pots. Industry research suggests 45 per cent of scheme members need some generic help to ensure they are making appropriate decisions, and 40 per cent need a full advisory service.
Only about 15 per cent of members are confident and able to make an informed decision on an execution-only basis, and even then the process needs sanity checks to ensure they haven’t missed the potential for individually underwritten annuities offering enhanced rates.
Experience and research shows us that professional expertise in the form of a specialist retirement intermediary such as an adviser or broker is key to helping members get better outcomes. Trustees and employers need to do all they can to promote confidence in these services so retirees get the helping hand they need.
Stephen Lowe is group external affairs and customer insight director at Just Retirement
For the full comment, download the entire feature in our free iPad app
“Not all schemes have access to a broker or professional financial advice, so many people get poor choice,” says Stephen Lowe, customer insight director at enhanced annuity provider Just Retirement.
Not enough members are encouraged to take up enhanced annuities, which pay out a higher level of annuity income to people expected to live for a shorter amount of time due to health or lifestyle factors, he argues.
“Giving access to these is crucial because it can make the difference between many thousands of pounds in retirement income,” Lowe adds.
Research by the National Association of Pension Funds and Cass Business School into the annuity market found that failure to shop around for a better deal can wipe 30 per cent off members’ annual pension income, and in some cases up to 50 per cent.
However, others believe there should be more focus on making savers aware of various retirement options, such as income drawdown.
“The whole reform agenda has been on shopping around, but if they’re shopping around for the wrong product, that is still not a good outcome,” says independent pensions consultant Ros Altmann.
“Because rates have fallen so much, it’s quite likely that you [will] have to live well into your 90s until you get good value,” she adds.
Proposed market reforms
One of the criticisms of annuities currently offered is they do not have the flexibility to match changes in members’ circumstances, such as quality of health.
In recent remarks, pensions minister Steve Webb proposed the introduction of tradeable annuities, which would enable members to switch annuity provider.
However, critics have said this could result in the cost of buying an annuity increasing as insurers build-in the cost of members switching provider when circumstances are most favourable to them.
“Insurance companies will assume that guarantees are done at the most beneficial time for the member,” says James Auty, head of JLT Employee Benefits’ Annuity Bureau.
During a recent parliamentary debate on reforming the annuity market, David Mowat MP told attendees the solution to making the annuities market more competitive would be for the government to offer an annuity product.
“We have a national savings organisation in Glasgow who offer interest rates as governments sell gilts [to] people. [I can see no reason] why an organisation like that cannot offer annuities in the same way,” said Mowat.
A Nest-like annuity product would help return the market’s focus back to the customers’ interest, proponents insist. “That would throw down the gauntlet to the market and up its value,” says Altmann.
But others doubt this would provide a sufficient solution to getting savers better value once they reach retirement.
“What he is suggesting would take many, many years to come to market and I am not convinced it would result in a better outcome,” says Lowe.
“We believe the way of achieving good outcomes is to make shopping around the default for everyone in a pension,” he adds.
Getting value for your members
Schemes should make members more aware of their right to the open market option, rather than simply defaulting to the annuity offered by their pension provider.
“Trustees should put in place a device so when a member reaches retirement they get access to someone who can help them shop around the market,” says Lowe.
The Pensions Regulator should make it mandatory for schemes to make people aware of the benefits of shopping around, just as the Association of British Insurers compels its members to do, he adds.
The regulator and the government should also work out rules to mandate annuity providers to make it clear to members what they are buying, says Altmann.
“A big problem is that annuities are a unique financial product but they’re not regulated with the seriousness they deserve,” she says.
Since educating members about their ‘at retirement’ options is key to helping them get the best value product to suit their needs, experts say it is the duty of trustees to better communicate with members about this.
Schemes should start gently, communicating with members around five years before they reach retirement, perhaps through having a series of seminars with employees, says Auty.
Members should also be made aware the types of pension their fund can buy, he says.
“[Trustees should] get them to eventually look at quotations and what lifestyle they want to have as a pensioner,” Auty adds.
