The launch of PICA's first report into raising awareness of at-retirement options has given the industry food for thought. Helen Morrissey asks how the recommendations will be taken forward
The emergence of the Pension Income Choice Association (PICA) has been well received by an industry desperate to help people become more engaged with their at-retirement options.
While there have been several provider-led initiatives aimed at raising awareness of the open market option (OMO), take up rates have remain stubbornly around the 40% level for several years.
In the recently launched report Optimising Value in Retirement PICA put forward a series of recommendations aimed at making people more aware of the options available to them. These included making OMO the default process for anyone opting to take a retirement income. The report also called for a register of advisers to be set up to provide advice to those retiring on pension pots of less than £50,000.
Retirement Planner hosted a roundtable with PICA members and industry representatives to look at the report’s findings and ask how PICA is moving the debate forward.
“The response to the report has been really good and we’ve already seen Steve Webb of the Liberal Democrats coming out in support of its recommendations,” says PICA interim-chairman Tom McPhail.
“We’ve had meetings with politicians and regulators and we are getting positive feedback. We’ve been challenged on some of the things we’ve said but it’s all been constructive and made us refine our way of thinking. For instance our key position is to make shopping around the default process. The current system doesn’t work and we need to make a step change. We’ve met some resistance against those who don’t feel we should force people to make a choice but even if you don’t make a decision you’ve still made the choice to stay with your pension provider. We just want to make the decision making process more informed.”
However, it’s important to note that PICA is not the first agency to call for reform around the OMO process. Just Retirement’s Campaign for Better Annuities has been running for more than three years while Living Time’s Offer More Options campaign also aims to raise awareness. So how is PICA adding to the debate? According to PICA member, MGM Advantage’s director of sales and marketing Aston Goodey, the power of PICA lies in the fact it represents the voice of the industry as a whole rather than just one provider.
“We’ve seen different companies doing their own campaigns and it can be easy to get things confused,” he says. “We need to come together as one voice rather than several smaller ones. If we can get the weight of all these companies together to drive change through then it will snowball.”
Just Retirement’s head of external affairs Scott Fulton endorsed the work of PICA and said it complemented the objectives of the Campaign for Better Annuities.
“Just Retirement fully endorses what PICA is doing,” he says. “It’s a space we have campaigned in and the recommendations put forward are what we would also be asking for.”
He also points to the huge communications challenge faced by the industry in engaging people with their retirement decisions.
“We are actively lobbying agencies like the ABI and the DWP to see how they can mandate engagement with the OMO and other parts of the market earlier such as at 45-50 years of age,” he says. “We disagree that it should be happening at 64.5 years – we need to be engaging with 40-year-olds instead.”
Earlier engagement in the retirement process would do much to improve many people’s prospects in retirement. Origen’s technical manager Bob Perkins says helping people to understand that they need to save more in their 40s can have a huge impact on their retirement fund which in turn will open up more options to them when it comes to taking a retirement income.
“As a business we deal with all parts of the retirement spectrum and we are working hard to offer something for everyone,” he says. “What I found staggering when reading the report was that out of 450,000 annuities purchased last year, over 400,000 were with pots of less than £50,000. That is very important and we need to get at people now who don’t understand how the pensions market works. We have to tell people they need to commit if they are going to save a decent amount of money.”
However, how should this engagement be carried out? According to McPhail the best way to raise awareness on a mass scale is through the workplace.
“We need to improve the communications process and use the economies of scale you get through the workplace to make greater use of the tax breaks available,” he says. “Even if it isn’t full regulated advice we should at least be able to give people access to some kind of helpline.”
Perkins agrees, saying the advent of personal accounts provides an ideal catalyst for some kind of public awareness campaign based on pensions.
“It’s clear that from 2012 people are going to have to make decisions,” he says. “Will they want to opt out? The majority won’t so they will have a pot of money to accumulate and decisions will need to be made. There is a real opportunity to talk to these people now about these issues.”
However, Fulton says care would need to be taken with how messages are communicated.
“The IFA community operates at a high level of communication and when it comes to dealing with people with smaller pots then many of them simply aren’t speaking the same language,” he says. “We need to look at how this communication is being delivered. If people don’t understand what the products are and what they do then we have a huge PR problem.”
According to McPhail PICA has drawn up a one page open market option enquiry form which could be issued to everyone with a DC pension. It would ask every retiree to fill in details like their postcode and partner details. They could also tick a box to say whether they smoke or not or highlight if they suffer from any medical conditions. The retiree could then use this information to shop around.
“You need to make it part of the retirement process,” he says. “Six months beforehand you are issued with a wake up letter with a simple explanation of what happens next and what your choices are. Three months later you get a personal statement saying this is your pot of money and this is what you have to shop around with, here’s a list of IFAs who can help. The final part of the process would be to ask what you want to do with that money. The emphasis would be on shopping around.”
Small pension pots
While increasing uptake of the OMO will do much to improve many people’s retirement income what about those at the lower end of the scale? The average pension pot still stands at around £27,000 and many advisers are not able to transact such business cost effectively.
As a result, many people have little choice but to stay with their pension provider. Another key recommendation of the report is to establish a register of advisers who are willing to transact these smaller cases. While McPhail says it’s an area that still needs some thought, Goodey believes it’s an important step forward.
“The key thing to recognise is that there are now advisers willing to go down to the minimum,” he says. “One objection to the OMO has been who will service the small pots but we are now seeing a number of IFAs developing systems that allow much smaller case sizes to be broked at a profit. We can now see new avenues opening up and we are seeing the market evolving quickly as people are alerted to the fact there are advisers who will deal with them.”
Perkins continues by putting forward suggestions for how advisers can be included on the list.
“Maybe in order to get on the list advisers would need to demonstrate their level of expertise in this area,” he says. “Perhaps IFAs generally haven’t gone far enough down the route of solicitors and accountants of adopting specialisms – it is becoming harder to demonstrate expertise in all aspects of retirement planning.”
However, while good progress has been made Fulton is in favour of going further. He feels the industry should be doing more to engage people on a political level to push through change.
“At the risk of annoying people we are tinkering at the edges and talking to each other rather than the people,” he says. “If you look at the pensions policies of the three main political parties there is nothing about OMO, nothing about communications. It’s all about restoring the earnings link – I’m shocked.”
However, McPhail says political engagement is high on PICA’s agenda.
“One of our objectives between now and May is to get all three major political parties to adopt reform of the OMO as policy,” he says. “The Liberal Democrats have already indicated in public they are willing to do this but we need to get the others on board.”
While the task the industry faces is both long term and difficult McPhail says that a cultural shift is possible.
“If you look at what we are seeing with auto-enrolment at the front end we are seeing an emphasis on individual responsibility,” he says. “That will percolate through public consciousness in time and I hope that what we are doing will also percolate through at the other end. I’m an optimist and I hope we will eventually end up at a point where people are more engaged at the age of 40 and are thinking about their decumulation decisions.”
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