Fiona Murphy takes a closer look at ABI proposals to publish annuity rates.
Customers are keenly aware poor transparency is a problem in airline fees, insurance deals, phone tariffs and energy bills. Annuities are no different. Enabling greater transparency has been a goal in the industry for some time. The Association of British Insurers (ABI) recently strengthened its commitment by announcing a consultation.
The ABI has said "providers must submit valid annuity rates, for a set of notional customers on a given day in a regular survey for publication."
The details include:
• A survey of ABI members every two months asking what rates would have been on a particular day for a set of notional customers
• These will be published in a central place - discussions are under way to decide if this will be on the trade body's website or a separate hub
• Brief information about each ABI member will be published
ABI says this could be used for customers to see where their provider fits into the wider retirement market. Or customers who have received a personalised quote can use it as a comparison guide.
It is not intended to be a best-buy table and should not be used as a proxy for shopping around. The published rates will not be tailored to customer's individual circumstances. Added to that, they will go out of date quickly.
Stephen Gay, ABI's director of life, savings and protection says: "Buying an annuity is one of the most important financial decisions people make and shopping around for the right one can make a significant difference to people's retirement income.
"Making the market more transparent is a further step in helping people with this decision. We want to get this right so are launching a consultation on our plans and welcome feedback from a wide range of stakeholders and insurance companies."
The pensions industry has broadly welcomed the move, agreeing it is a step in the right direction as part of the ABI's focus on improving communication and outcomes.
An open market?
Timothy Gosden, head of annuity product development and marketing at Legal& General says it will mean a more open market.
"If you look on comparison tables, you'll find the rates of competitive annuity providers. They're generally the companies that are active externally, such as L&G, Aviva and Canada Life.
"There are companies who do not publish their rates and offer an internal rate only. They're not actively promoting their annuity contract for people shopping around; they're only offering it to their maturing pensions customers. And so the objective of the transparency, which is part of the wider ABI code, means all companies who offer an annuity must publish their rates.
"If you're with one of these less visible companies, you will be able to see how your rate compares with more competitive providers. That's a great thing. As well as standard annuity rates, there will be enhanced rates so people will be able to see the potential uplift they can get. A big advantage is raising awareness of companies whose rates are not on comparison tables."
So far, so positive, but could any unintended consequences result from the changes? David Trenner, technical director at Intelligent Pensions warns about price manipulation, drawing a comparison to publication of mortgage endowments in the past.
"The average mortgage was a 25 year mortgage. When they declared their bonuses, the insurance companies made sure the 25 year term got the best possible deal. It meant they would look good in surveys although most people don't keep a mortgage endowment for 25 years.
With annuities certain key rates will be published where the insurance company looks good. The obvious one is male 65, single. The danger is if you can produce a figure for that age that looks competitive and the client actually is 66 and the wife is five years younger, the rate is the usual rubbish some of the companies are quoting."
Gosden disagrees: "The ABI's going to include an element of randomness in this. They could be asking for rates at different times. It is possible providers will try to manipulate rates but the ABI has introduced a number of measures. They're still debating on that now, to make it difficult if not impossible for providers to manipulate."
Meanwhile, Alan Higham, director of Retirement Angels is a fierce critic of the proposals.
He says: "I think it's dangerous. Let's draw an analogy with [energy prices] where people worry about transparency and honesty of prices. [That industry said] we're going to gather fictitious examples of gas and energy prices from households from two months ago; publish them as a table and give them to the customer to make them aware of what the rates generally were two months ago. If for example, Eon came top, you'll move there, but they aren't top now. They might have been for that particular example on that particular day, two months ago. It's daft to quote rates that are not relevant. What possible use is that for consumers?
He continues: "It's useful for well-informed pension experts looking at this in a broader context but 99% of consumers don't come under that category. It will cause a great deal of confusion and I think many will feel disappointed that rates they were quoted don't exist."
Higham is cynical about who the proposals are for. He argues insurance companies will benefit from customer confusion, price matching and new providers unlikely to enter the market.
Trenner agrees: "I've held the view the ABI has a big conflict of interest here. If you're offering competitive rates, you're one of five companies and if you're not you're still one of the ABI members. You don't join a trade body to publicise your rates are rubbish."
Higham also believes advisers will be affected: "Financial advisers will have to explain to customers the rate they're quoting is the right rate. Customers won't believe them. They'll say it was on the ABI's website. Can you imagine a small broker trying to put itself up against the ABI?"
However, Graeme Riddoch, sales and marketing director at The Open Market Annuity Service says: "Anything that gets more information out there and raises visibility of the issue is good, but there's more to think about.
Enhanced rates can't be published easily. The other issue is that someone looks at the best buy table, looks at the best rate, and goes straight to that provider.
"So it may not be the optimum outcome. What it also misses, which is just as important, is the shape of the annuity. So yes, it is a move forward, publishing rates is great, but we need to ensure it doesn't trigger the wrong kind of behaviour with people flooding direct to providers, potentially missing the best rate, and not getting the right support to select the right options."
Centralised publication of annuity rates should be a good thing in a market accused of being opaque and difficult to navigate.
However, it is another matter to encourage engagement. Providers and retirement specialists must not forget the ultimate goal of encouraging customers to shop around for the right product. Inertia will reign if customers simply fall for what looks like the best deal. It could lead to problems down the line as annuitants are tied to unsuitable contracts. Added to that, customers could feel overwhelmed by too much information, particularly if they do not take advice.
Despite poor annuity performance, rates should be the final piece of the puzzle, not the focus. While the rest of the ABI code should tackle this, industry must respond as such to the consultation.
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