Helen Morrissey looks at the formation of the Pensions Income Choice Association and asks how it aims to increase peoples' awareness of their retirement income options
For many people the most important part of planning for retirement is ensuring they have saved enough money to keep them in a reasonable level of comfort. However, what people often overlook is what needs to be done with that savings pot once income needs to be taken from it.
Retirees have a huge array of options available to them depending on their needs. These can include:
- Annuities which offer a guaranteed income for life.
- Enhanced annuities for those with health conditions.
- Inflation linked annuities for those looking to mitigate the effect of inflation over time.
- Income drawdown which enable retirees to remain invested in the market for longer.
- Variable annuities look to offer a middle way by offering a level of guarantee with some degree of market upside.
However, despite the plethora of options available, research suggests that people are not exercising their choices and, more often than not, automatically take the annuity offered to them by their pension provider.
While there has been various industry initiatives aimed at increasing take up of the open market option (OMO), none have made any real impact and take up remains at around one-third of retirees. It is clear that something more needs to be done if people are to engage more in their retirement income decisions.
The Pensions Income Choice Association
It would now seem that decisive action could soon be coming in the form of a new industry group which aims to raise awareness about retirement income options. The Pensions Income Choice Association (PICA) was formed in July by independent consultant David Dunn, MGM Advantage director Craig Fazzini-Jones, Partnership's head of retirement products Phil Brown and Living Time¹s marketing director Steve Lowe. Hargreaves Lansdown¹s head of pensions research Tom McPhail then stepped on board as interim chairman and the group has since been joined by LV='s head of annuities Matt Trott and Bluefin director David Tildesley. The group¹s managing board was completed in September with the inclusion of Aegon¹s head of annuity sales Mark Cardy.
"We have seen initiatives by the ABI as well as programmes from industry providers such as Living Time and Just Retirement all aimed at increasing take up of the OMO but we still are not seeing a huge increase in take up," says the group's interim chairman Tom McPhail. "We need to look to build some real momentum behind this issue and get more people shopping round."
The challenge that the group is facing is certainly a daunting one with industry figures demonstrating that the vast majority of people still do not revise their options at retirement.
"If you look at the ABI figures for Q2 2009 you will see that 75,546 annuities were purchased from the pension provider out of a total of 117,882 transactions this equates to 64%," says LV='s head of annuities Matt Trott.
"While there may well be very valid reasons why a retiree may stay with their pension provider you have to ask whether all of these people are getting the right income product. You also have to ask if all of these people understand what they need to do to get the best deal and where they need to go to get it." McPhail continues saying that the issue could potentially get worse with the introduction of personal accounts in 2012 as auto-enrolment does nothing to reduce people¹s apathy towards retirement saving.
"The introduction of personal accounts means that the stakes are being raised," he says. "At the moment the system is inefficient in that people are overlooking their options. How much worse will that become when auto-enrolment comes in? The issue is already significant and looks set to get worse if we do not do something."
What impact can the group make?
However, given that other initiatives have failed to make any real impact on OMO take up rates, how will PICA seek to make a difference? According to one member the secret to PICA will be in its collective approach.
"The open market option is a real religion for Living Time and we have been able to sign up over 1000 advisers to our Offer More Options campaign," says Living Time's marketing director Steve Lowe. "However, while we recognised that we were making progress we needed help to move further forward. After talking to organisations like Partnership and MGM Advantage, we realised that they were also focused on helping people make more informed retirement decisions. We decided that by working together we could shake the market up more."
The group's work also aims to go beyond that done by other initiatives which have often focused solely on the annuity market.
"We really need to look beyond the annuity market if we are to improve the situation," says Trott. "So far no one has really looked at the market holistically and asked how people research alternatives such as income drawdown and variable annuities. We need to look at the customer's perspective and try and realise what the barriers are to them adopting alternatives to the conventional annuity."
What is PICA aiming to do?
Now that the initial management board has been put in place the group is now working in earnest to address the issues currently blighting the decumulation market. According to Fazzini-Jones the aim is to keep the initial management board as it is but to also appoint an advisory board made up of providers, advisers, pension scheme trustees and other interested parties.
"Things are going really well and I feel the group is making real progress," he says. "When we first launched the group I was concerned people may not want to get involved but we have been amazed by the amount of interest we have received."
The group is meeting on a fortnightly basis and is currently working on a white paper which will be used to help the group move the decumulation debate forward on a political level.
"We are aiming to put together a white paper and put forward suggestions as to how we can bring around a step change in behaviour and increase customer engagement," says McPhail. "We will then take it to the advisory group and get their input into it. We hope to complete the document in Q4 and we can then use this information for lobbying purposes."
However, Living Time's Lowe is quick to point out that the recommendations contained in the white paper should offer constructive solutions rather than going over old ground.
"The problems with decumulation have been defined many times but so far no one has come up with any concrete solutions," says Lowe. "In our white paper we hope to put forward real practical solutions to the issues around raising awareness and hopefully we can move forward from there. Some of it should be quite straightforward for instance demonstrating the uplift in income that comes from purchasing an enhanced annuity should be an easy sell.
"However, the harder issues should come around areas like the impact of inflation or the inclusion of spouse's benefits."
PICA is preparing itself for a busy time ahead but how will it measure its success? According to Fazzini-Jones it will be a tricky task.
"Initially the group did discuss metric targets, for instance an increase in OMO take up rates would be a clear marker of success," he says.
"However, we are also looking to achieve success in some areas that will be more difficult to measure. We need to get this information into the hands of consumers and help them realise that they do have options and help them to make more active choices concerning their retirement income. If we can get people to realise that they do not have to accept what they are offered from their pension provider, they need to look at the options and choose the best option for them then that will be a real success for the group."
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