In December the ABI launched a consultation into improving the shopping around process for retirement income. Helen Morrissey asks whether the proposed processes go far enough to solve this issue.
Improving the shopping around process for a retirement income has been one of the major issues facing the at-retirement market. In December the Association of British Insurers (ABI) launched an industry consultation into how this can achieved. The consultation follows on from the ABI's announcement in September that a code of conduct would be put in place. This includes members removing annuity application forms from wake up packs as a means of encouraging people to go on to the open market to find an appropriate product.
The consultation, which runs until Feb 2012, will get industry opinion on the code of conduct including:
• All communication with customers must include a standard statement on the first page about the benefits of shopping around
• Illustrations of possible annuities given by the provider which have not been asked for by the customer must follow strict rules to ensure options are comparable and include a very clear statement about the benefits of enhanced annuities due to medical conditions even if the provider does not offer the product
• Providers' sales processes must take customers through the key questions they should consider when buying an annuity.
"I think the outcome we would like from this process is for shopping around to become the norm and a decision that is treated in a similar way as the decision to shop around for car insurance," says the ABI's assistant director of retirement savings Yvonne Braun. "We want people to have increased knowledge about the products that are out there and what needs to be done. We want to see people get the most from their retirement income, especially in these difficult times."
The consultation has by and large been welcomed by the industry. Fidelity's head of proposition, DC and workplace savings, Richard Parkin says: "While we don't have shopping around as the default option as yet I think this consultation has moved forward further that it was originally intended to in terms of highlighting the benefits of enhanced annuities and ensuring providers give people the necessary information they need to shop around."
He continues: "It has introduced a prescribed sales process that needs to be followed when people come to buy a retirement income. In essence you can re-arrange literature as much as you like - it will still be a difficult process to get people to engage in. This process ensures anyone undergoing an annuity purchase needs to be asked about issues such as their dependant status, need for increasing income as well as basic information about their health. This gives the adviser more information to work with. Even if the pension provider does not provide an enhanced annuity, they still need to highlight them to their customers."
What are the potential issues
However, while the consultation has been received positively some issues do remain. The issue of providers sending unsolicited annuity quotes to customers has been highlighted by several providers concerned they may result in customers making inappropriate choices.
"When it comes to annuity purchase people will tend to tick the box with the highest starting income which tends to be the single life, non-escalating annuity," says Fidelity's Parkin. "By sending unsolicited illustrations you are effectively showing someone a number before you know anything about their circumstances - you can't show someone a product without first understanding what they need. We need to take people through a process of talking about generic rates before going into more detail about appropriate product choices. I can't see what providers would have against such a process except that it may prove complicated to remove these quotes from their literature. While such a process should be relatively straightforward for many providers it may be more of an issue for those with large legacy books."
Intelligent Pensions' technical director, David Trenner agrees providers should be encouraged to help customers make comparisons between different products on the market and how their pension provider compares. Differences between provider rates can amount to more than 15% and equate to a sizeable difference in retirement income.
"You can't just send customers 24 pages of literature that says we are offering you this amount and if you want to see if you can get more then you will need to go see an adviser," he says. "Instead the ABI needs to say to providers that they must give the client quotes for the top three providers in the market. So for instance it could say something along the lines of ‘we can offer you this rate but the top three rates in the market are offered by these companies.' Even if the provider does not offer enhanced annuities then they should still show the top three enhanced quotes."
Gallagher Benefit Consulting director Stuart Grennan agrees more can be done to help customers make appropriate comparisons between different products: "It would be good if the provider could refer the customer to a portal whereby they can compare different provider quotes. I hope the insurance companies will get their acts together as we need to provide people with access to market rates rather than just those from the pension provider. We need to help them gauge whether their pension provider is offering them a competitive annuity rate."
The ABI has commissioned research into the effect unsolicited annuity quotes can have and says the results will have an impact on how the code develops.
"Right now we don't know what impact unsolicited quotes have on client behaviour which is why we have commissioned the research," says Braun. "We need to know more about whether they help or hinder the decision making decision and once we have this data we can make an informed decision on how to proceed."
Another issue highlighted by the industry is how the whole issue is to be policed - how can we make sure that the right questions are being asked?The ABI's Braun says compliance will be monitored according to an annually signed declaration from each company stating they are complying with the code. What else can be done to make sure the process is properly carried out?
Living Time's marketing director Stuart Wilson says: "Compliance issues are the crux of the matter and again I think the pension passport idea put forward by PICA can help here as it takes you through a defined process and by the end of it both the adviser and client can prove certain questions have been asked and this provides an audit trail. As it stands providers could just tuck information away at the back of the wake up pack and so we need to ensure the process is properly policed."
However, for many the issue of unsolicited illustrations is just part of a wider issue that needs to be tackled. According to Axa Wealth's head of pensions Mike Morrison customers need to understand more about the different options available before being able to make an informed decision about their retirement income.
"I'm caught between the PICA argument that says shopping around should be the default and the fact that many people still don't understand the options," he says. "Shopping around is good news for those with sufficient funds but if they don't understand the process then what benefit are they getting? We need the build in an education process first and also start asking straight questions of people about their retirement income needs because if people don't know what they are meant to be looking for then how can they find it?"
Braun accepts this lack of education is an issue that needs to be dealt with: "This is very much why the Government's open market options group is dealing with organisations like The Money Advice Service and I feel they will play an important role in this," she says. "As people approach retirement they have to have access to good information and the press also has a role to play. I think awareness has already started to grow but we need to make more of a concerted effort to increase it further."
So the ABI will gather industry responses before finalising the code of conduct in March. However, what is clear is that while putting a defined process in place will undoubtedly go some way towards improving peoples' shopping around experience there is still a long way to go in terms of educating people about the different options. While ABI has made real progress towards solving the whole issue of shopping around it is important to realise that this is only part of the solution as it currently stands.
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