Nigel Barlow explains why the wake-up letter alone is not enough
Despite a high degree of attention being paid to the matter since the publication of CP106 in 2001, take up of the Open Market Option (OMO) has remained stubbornly below 40% of policies and, in the first quarter of this year, was only slightly more than a third of all policies.
Over the past year, HM Treasury, DWP and the FSA have reviewed the working of the market and have taken action to improve outcomes for customers. This activity still has some way to go and we are hopeful that the long-term result will see some improvement in the overall level of shopping around.
Larger funds tend to shop around and the average external fund is around £38,000 compared with £25,500 for the conventional market as a whole. As a result almost 50% of the money in this market does find its way to another provider. 90% of this is dealt with by an IFA. 69% of funds using an IFA go to another provider.
Abandon wake-up letters
Just Retirement has called for the abandonment of the pension wake-up letter a move which may seem to go against the principle of increasing take-up of the Open Market Option. We have recommended its replacement by a much clearer series of communications between providers and customers starting at an earlier point in the pre-retirement process.
This is based on the results of a focus group study conducted by Bdifferent in June this year which, among other things, demonstrated the following:
- Those planning for retirement generally wished they had done more financial planning at an earlier stage.
- Those without an adviser had little idea of what to do.
- There was confusion about the meaning of the term annuity.
- The majority have no awareness of the need to make a decision on their income until they receive a letter a few months before retirement.
- They are unpleasantly surprised to receive a letter in the post that contains too much information, jargon and requires a decision with such a tight deadline.
Some simply hand over the decision to their adviser, but others find it very difficult to know what to do and DWP research has shown the perception that advice will be too expensive is common. Having had little involvement with their pension in the few years before retirement, people have no idea how to go about taking a pension away from the existing provider and were left guessing that they could, possibly, look on the internet. Unfortunately if they were to do this, they often do not know what they would be comparing.
This issue is the subject of comment in the recent Work and Pensions Committee report: Tackling Pensioner Poverty in which Age Concern and Help the Aged explained that people do not understand the choices they have to make about annuities. Indeed people do not even know the difference between a level annuity and an escalating annuity.
When faced with current provider wake-up letters and support packs, confusion abounds along with a feeling that providers do not care about their customers. Interestingly, commutation was interpreted to mean the right to shop around whereas awareness of open market option was very low.
On the positive side, response to the draft produced by the ABI was more enthusiastic and people felt more enlightened having read this letter.
All respondents would have preferred to have a series of communications, explaining their options more clearly and starting at a very much earlier stage in the process.
From the research it is clear there is significant scope for improvement in the wake-up letters by offering up sufficient information in the right format to increase the propensity to take action. In no way should moves to improve the quality of communications in this respect be hindered or belittled. It is also clear, however, that many people reach retirement regretting their lack of planning and, whatever the quality of information they receive at the time, requiring more time to make a decision and more guidance to help them do so.
At present, the maturing pension market amounts to over £14 billion per year and the loss of income from not shopping around is worth around £500 million. We are at the beginning of a large wave of retirement, even allowing for increasing numbers of deferrals over the next 10 years. If the proportion of those shopping around does not increase, the effective loss will be much greater every year.
Communications on pensions may not be fully read by all members of schemes at all times but a structured effort to raise awareness over a longer period before retirement should, gradually, engage a greater proportion of members and result in a greater understanding of what is to be done at retirement, including recognition of the alternatives to a guaranteed lifetime income.
This should recast the wake-up letter as an integral feature of a communication process that starts perhaps five or even 10 years before retirement and, through a series of better decisions, leads to significantly better pensions once work finishes.
Nigel Barlow is head of research at Just Retirement
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