Employers that have put in place annuity brokering services for their defined contribution scheme members have been called upon to rip up or review these set-ups to make sure they are giving savers an adequate view of the market.
Gilt yields languishing at historic lows over the past five years have kept annuities expensive, which strengthened the hand of the chancellor in the March Budget to reduce the market’s stranglehold on new retirees.
Case study: Royal Mail
Last year, Royal Mail's scheme secretary Elizabeth Byrne told the National Association of Pension Funds' defined contribution conference about its decision to default members into an annuity brokering service to get better value. Only one scheme member decided against it.
The Royal Mail's DC plan website, under the headline, 'Turning your pension savings into income', informs members that "most people" take their pension savings using a lifetime annuity. On another page it says that drawdown is an alternative, but one that is "generally more suitable" for those with pension funds worth more than £50,000.
The employer declined to comment on whether it would be reviewing this service in the light of the Budget reforms.
Over that period, some employers and schemes have sought to help scheme members get value in the market by offering an annuity brokering service, often set up with an external provider, to ensure people get the best deal possible.
Research released by Towers Watson earlier this year found 29 per cent of schemes had implemented these services in the three years to that point, and a further 20 per cent planned to offer it over the next three years.
Industry experts have said these arrangements may not stand up to scrutiny in a post-Budget environment, and risk pushing people down the road of buying an annuity if it is seen as encouraged by the company.
Jonathan Watts-Lay, director at employee wealth management services company Wealth at Work, said employers need to make sure their staff understand the “whole range of options” before them, adding that some of the brokering deals do not even provide a full view of the market.
He added: “You should not be putting in place for your employees one type of solution which is only a limited part of the market.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, which provides an open market option service, agreed that employers could not “pre-judge” the necessity of an annuity for members.
“A lot of those annuity brokering deals that have been set up are going to have to be unwound and undone.”
At this month’s National Association of Pension Funds’ conference, employer representatives bemoaned the lack of clear detail they could give to members ahead of April.
Pension schemes typically send out a retirement pack to their members, setting out their options, six months before retirement – making it difficult for current managers to provide guidance to post-April retirees.
But pensions minister Steve Webb made it clear the government would not go after employers whose communications were out of step with the post-April environment, saying: “You can’t obey a law that doesn’t exist.”
