Helen Morrissey talks to Hargreaves Lansdown's head of pensions Tom McPhail about the challenges facing the retirement income market and how the Pensions Income Choice Association is trying to meet them.
What are the key challenges facing people trying to shop around for a retirement income?
We want to get people shopping around and to do that, we have to make sure that the process works properly. For instance, many services do not provide access to income drawdown. In addition, users are not being asked if they wish to consolidate pension pots or if they want to do trivial commutation. These are all important questions.
A lot of the ideas we have been pushing out at the Pensions Income Choice Association (PICA) work. The customer journey towards retirement should mean that by the time people hit their 50s, they are receiving messages along the lines of: "Today, your pension pot would buy you an income of £X".
This gives people a ballpark figure of how they are positioned for retirement and what they can do to improve things if need be.
When and how people draw an income is completely down to them, but they need help to do it properly. I would advocate getting rid of pension wake-up packs and instead issuing people with a pensions passport with all the relevant information that people need to shop around for a retirement income.
We need to be signposting people towards services such as the Money Advice Service and The Pensions Advisory Service so people know where to go if they need guidance. They also need to be signposted towards advice should they need it.
I don't dispute providers' right to sell you another product at retirement – it just needs to be done on an open market basis. They need to be able to line up with everyone else and compete for the business.
nything that circumvents that process means that people are unlikely to get a good deal. This is, and always has been, about developing a strong competitive market. After that, we need to be looking at what standards are in place for brokers.
This could mean looking more closely at the size of the panels they refer to, for instance, and making sure they highlight issues such as trivial commutation to their clients.
With regards to trivial commutation, I think we need to make it simpler, more intuitive and then more people will make use of it. As it currently stands, we don't know how many people are using it and we don't know if it is being used effectively.
PICA launched its adviser directory. How are things going with that?
I'm really pleased with how things have been going so far. We identified the market need for such a service and looked closely at the different solutions that could be offered.
We have been able to create something that is not dependent on either consumers or intermediaries having to pay to access the directory, and this is an achievement to be proud of.
So far, 1,100 intermediaries have engaged and more than 500 businesses are now listed on the directory. We have good geographical coverage and plenty of information about the businesses listed in terms of the scope of their proposition, whether they offer advised/non-advised services and the size of panel they use.
We have set minimum standards based on the Association of British Insurers' (ABI) code of conduct, and users will be asked whether they have things such as guaranteed annuity rates in place; do they want single or joint life; inflation-proofing; or if they qualify for trivial commutation. It is by no means a finished job, but it is at least a start.
In terms of the panel size, we ask that participants cover at least 75% of the open market. We did initially get some negative feedback concerning some of the wording on the site and so we went back and changed it.
We have had several thousand searches done on the site already. I think it will be something that builds slowly and it is great to see the ABI is already signposting to us. But ideally, I would like to see details of the directory included in wake-up packs and on life company websites.
This will take time, but we have to get life companies to signpost to the directory if we are to really help as many people shop around as possible. We will be working with the ABI to see how we can make this happen.
Do you think there really is a will to change among product providers in terms of encouraging customers to shop around?
Some companies will do this more easily than others and I think we will see the market start to polarise. Many do already support the PICA objectives, but then there are other life companies out there who are happy with the status quo.
Things are changing and we recently had the results of the Financial Conduct Authority's (FCA) thematic review. I think the days of life companies putting forward uncompetitive annuity rates are coming to an end.
While I don't think the FCA will tell providers with poor value products that they can't sell them, it does want to develop a more active, competitive marketplace. So as a result, those with poor value products will struggle.
Looking ahead, the FCA could look at putting minimum standards in place in terms of shopping around. This falls in with the broader line work they did on annuity comparison websites, where they flagged up areas that were not working so well for consumers.
When customers do decide to shop around, they need a service that is clear, efficient and fit for purpose. The FCA was right to highlight this issue, but we need to remember that before customers get to this point, we have to have people actually shopping around to begin with. It needs to bring all the different threads together.
For instance, it can't insist that everyone takes advice. For those clients with pension pots of £50,000 or less, you just can't insist that they take advice. The average fee to deal with a £10,000 pot is about £400, so at this end of the market fees are looking pretty steep. I think the development of non-advised services is the way forward and we need to ensure decent processes are put in place.
What does a good non-advised service look like in your opinion?
It is not easy to do non-advised well. We need to have resources available to develop the necessary helpdesk support, develop educational videos, etc. We also need to realise that everyone will need to talk to someone at some point during the journey so that support needs to be in place.
Staff need to be trained and it all costs money (maybe not as much as providing full advice, but it is still a decent amount). We need to keep costs at a reasonable level and that is a big challenge to be worked through. Looking beyond that, there is the extra issue of whether services need to look beyond annuities as they are not the right solution for everyone.
More thought needs to be given to whether services need to be developed to help people do income drawdown or trivial commutation. There is a lot of complexity, but I think we can get there in the end.
What are your objectives for the coming year?
There is still a lot that needs to be done – making trivial commutation less complicated is important. We will continue to push for a more fundamental review of how the open market option works. The process needs to be changed and that is going to take some time, but until we do this we can't progress further. In addition, we will continue to work on expanding the directory.
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