Specialist annuity advisers should form a promote a trade body to help consumers shop around and take advantage of the open market option (OMO) on annuities, claims a new report by the Pensions Institute.
Speaking at the National Association of Pension Funds (NAPF) Investment Conference in Edinburgh, Debbie Harrison, co-author of the report: “Annuities & Accessibility: How the industry can empower consumers to make rational choices” said most consumers understand the importance of shopping around and apply this to most of their purchases.
But at the moment two in three people do not use the OMO when choosing their annuity, this is because, according to Harrison, consumers build up a learning curve with property purchase, as they do with cars, holidays and other ‘big ticket’ items. But as the annuity purchase is a one-off transaction, there is no chance to learn through experience.
The report makes six recommendations to try and improve the number of people using the OMO when looking at buying their annuity. First is for specialist annuity advisers to form a trade body along similar lines to the Safe Home Income Plan (SHIP) companies which operate in the equity release area.
It suggests a specialist trade body would be able to apply strict entry criteria, and a code of conduct to solve the problem of consumers not knowing where to go for specialist advice.
According to the report, the Financial Services Authority (FSA), regulates around 5,000 IFAs which deal with savings and investments, but there are fewer than a dozen national firms which specialise in annuities, and there is no official way for consumers to find them.
Instead FSA annuity leaflets and website provide links to IFA trade bodies which provide search engines which in most cases are based on postcodes, and once a firm is found they may not be annuity specialists, which means the advice and service offered may be below the level offered by a specialist for the same price.
The report also asks for all the insurers and friendly societies which sell annuities either in the open market or to their pension customers, to list their rates in the FSA website comparative tables.
At the moment only 13 companies voluntarily publish their rates, and the report argues a full list would enable consumers to compare directly the quotes they receive from their existing provider with those of competitors which may offer an income between 20-30% higher.
Harrison says: “These two simple steps alone could transform the way consumers buy their retirement incomes. At present, while all companies must send details of the OMO to customers, the information is buried in long and complex documents, which suggest implicitly the consumer will buy direct from their current provider.”
She also points out telling people to seek independent advice is not effective because only a minority of the regulated firms which offer pensions and investment advice provide a low cost full market search, and the chance of finding a specialist through an adviser trade body with a postcode search engine is slim.
As a result the report also recommends the ‘wake-up’ information on the OMO should be clear and direct explaining the benefits in monetary terms, while a short standardised letter on the OMO should also be sent separately to clients to try and provoke an active response.
It also suggests pre-retirement literature, including those produced by providers and regulators, should include a more direct discussion of the choice between level and indexed annuities, as although level annuities may be appropriate for most people, they may only be choosing it for the short-term income, because they do not understand the basic issues.
The report goes on to recommend trustees of occupational DC schemes and employers with contract DC schemes, should hand the responsibility for an annuity purchase to specialist advisers, while employers should also be encouraged to provide generic workplace seminars and referrals on annuities using the tax-deductible £150 available for each employee per year for pensions advice.
Alastair Byrne, a Fellow of the Pensions Institute and co-author of the report, says: “The fact two-thirds of investors do not use the OMO is a result of something more than inertia. It is a paralysis which is triggered when consumers are faced with a range of complex decisions and are afraid of making a single irrevocable choice which is wrong.”
Meanwhile, The Annuity Bureau has welcomed the report, and plans to invite specialist advisers, providers, government and regulatory bodies to meet to discuss the launch of a specialist annuity trade body.
Andy Oliver, regional director of The Annuity Bureau, says the Pensions Institute has come up with six well thought out recommendations to address the lack of shopping around by consumers, all of which should be given immediate and detailed consideration by the industry.
He adds: “We welcome the recommendation for the launch of a specialist annuity advisers’ trade body, which could help to make a real difference to the take up of open market annuities and champion the consumers’ cause.”
But he says such a body would only have teeth if it was backed by the regulator and the annuity providers, and calls on the whole of the industry to join in exploring the potential for such a body.
Rachel Vahey, head of pensions development at Scottish Equitable, says it is a very complete report and broadly agrees with the majority of what the report is trying to do.
She adds: “The annuity market is only going to increase further over the next few years, especially if an NPSS is introduced, and we need to get the annuity market working in the best possible way, making it efficient. If we can do that now it will be an advantage, and the recommendations the report makes is trying to do that, and to protect the consumer, and I would agree with the broad thrust of them.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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