‘If it ain't broke, don't fix it' - this well known saying sums up all there is to say about the direction of the latest paper aimed at making the open market option work better.
Constant chatter about the failure of the open market option always seems to centre on differences in published market rates. Yet the truth is that these differences are wafer thin. If you don’t believe me then have a look at the FSA’s comparative tables yourself.
Using the average annuity purchase price of £25,107 and applying it to a male single life level annuity gives a lowest rate of £142 per month and a highest £151. In percentage terms, this is a 6.3% spread. In pounds per week, £2.08. Add an RPI link and the differences almost evaporate.
For the same annuity as above, but with an RPI link and the difference between top and bottom comes down to a mere 3.1% or 69p a week.
What other market do you know that works this well? A market where the difference between top and bottom is 6% or less. Consumer electricals? Nope. Home and contents insurance? Nope. Bread, cheese and milk? Nope. Mortgages? Nope. Gas and electricity? Nope. Life assurance? Nope. I can’t think of anything I’ve bought recently where I couldn’t have saved at least 10% by shopping around.
And, in case you are about to point out that the pound differences get bigger, the greater the purchase price, then bear this in mind. According to the ABI, the purchase price in two-thirds of cases is south of £20,000.
Despite this cutthroat level of competition, we are told that a third of consumers still shop around. Why would you shop around when you are unlikely to gain much?
Rather than suggesting this figure is low, as some commentators have, I think that it is astoundingly high. But there is a good reason for all this shopping around which points us in the direction of the real annuity market failure.
When you have a look at the FSA tables, you will see that there are only eight providers offering level rates to all comers. Add RPI and that number drops to six. Yet, according to a press release from Cass Business School last year, there are over 100+ annuity providers. It’s just that 92+ of them don’t seek business in the open market. As a consequence, because they don’t publish rates for all to see, it is almost impossible to compare their rates with the handful of providers taking new business in the market.
Cass reckons that improvements of 20%-30% might be achievable. This begs two questions. Should these providers (and there are some big household names among them) be allowed to remain anonymous when it comes to publishing rates? Is this treating customers fairly? In my view, all providers should publish their rates regardless of whether or not they are competing for new business in the open market.
John Lawson is head of pensions policy at Standard Life.
The views expressed in this blog are the author's own and not those of the company he represents.
Have Your Say
"John Lawson’s article is very misleading. He claims the annuity market works well and then freely admits that around 90% of providers don’t disclose information about rates. Thus his claim for an “astoundingly high” take up of the Open Market Option seems somewhat dubious.
This is consolidated by the error in reading the FSA tables: namely that the top rate available is not, as he claims, £151 but £180, an increase of 27%. In missing the “smoker” option, he goes on to exclude 16% of people in the retirement age group from a fairer deal given their circumstances.
Then in failing to mention enhancements for those with medical conditions or lifestyle factors, he excludes possibly up to 40% from getting an income that could be considerably more than the 6% increase they could receive over the income from their current provider – even at the low levels of fund he is talking about.
The providers on the FSA tables are all generally competitive most of the time, at least for certain groups of people. The tragedy is, as even Mr Lawson acknowledges, that a great many people have no access to information on how competitive their provider is and, in most cases, are unaware of the improvements available from enhanced or impaired life annuities.
Far from claiming that the market works well, the industry must once and for all get a grip and treat its customers fairly by informing them of the potential to improve their retirement income by shopping around - and by doing so through shorter, clearer “wake up letters” and guidance at the point of retirement. Surely this can’t be so difficult?"
Nigel Barlow is Technical & Commercial Manager at Just Retirement.
"There is still much to be gained by pursuing the Open Market Option, and a large number of retirees are missing out by not doing so.
In June I prepared figures for a presentation. Using the £25,000 figure that John Lawson uses, but for a woman aged 60 the top income was £128 a month; the lowest published rate was £112 a month. This doesn't take into account the smoker or enhanced rates that Nigel Barlow refers to, but is a 14% spread, which is hardly "wafer thin" (incidentally the spread was 14% at both £50,000 and £100,000).
It is correct to say that unpublished annuity rates could be much lower so the gains from shopping around could be even greater. The key point is that each retiree will know the full extent of how much they could gain only by shopping around.
My second point is that it's not all about the rate. When BoSAS gives advice to customers the first part of the process is to agree the correct shape of annuity for the customer's circumstances. Should they take a level or increasing income? Should they take a guarantee? What level of dependant's income is required, and depending on attitude to risk and fund size, would a conventional annuity be appropriate or with profits, unitised, flexible or perhaps a USP? Add smoker rates and health underwriting into the equation and there is a lot to consider.
With the standard quote issued by the ceding scheme as part of the wake-up pack, do a lot of customers understand the range of choices available to them, and how many of them end up with an annuity of the wrong shape for their circumstances? When buying an annuity at retirement the retiree has just one opportunity to determine their income for the rest of their life. Customers should be encouraged to get the best solution; this will not be achieved by putting our heads in the sand and pretending the Open Market Option is working."
Kevin Pacey is head of the Bank of Scotland Annuity Service.
John Lawson Fights Back
"I reject Nigel's assertion that I made an "error" in reading the FSA tables. I compared non-smoker rates with non-smoker rates which I believe is a fair like-for-like comparison. I am sure that the impaired life annuity market is as equally competitive as the non-smoker non-impaired annuity market.
However, the real disappointment is that both respondents chose to ignore the point I was making - a point that I thought they would have both welcomed. For the sake of clarity, I was not writing about impaired life annuities - I was making the point that a lack of competition in annuity rates existed outside of the published rates. These non-publishers include some big firms, including insurers that are wholly-owned subsidiaries of high street banks."
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