As the industry gets to grips with the ABI's code of conduct on shopping around Stephen Lowe looks at the opportunities for advisers.
March 1st was the deadline for pension companies to comply with a new code of practice to encourage more customers to shop around for the most suitable deal before buying a pension income.
It has been estimated that the half a million people retiring each year could be missing up to £1 billion of future income due to poor choices. With an ageing population, the shift to defined contribution and more recently the launch of auto-enrolment into pensions, its forecast these losses could multiply to £3 billion if not addressed.
No-one can claim this problem has crept up out of nowhere. The right for pension savers with one company to buy their annuity from another first was first introduced in 1978 although it wasn't until 2002 that pension companies were compelled to inform customers they could go elsewhere. More than a decade later - and one marked by declining annuity returns - concerns about low take-up have remained, placing the issue firmly on the political agenda.
When the Association of British Insurers unveiled its new code last year, the behind the scenes work and political desire for change was highlighted by MP Mark Hoban, the then Financial Secretary to the Treasury, who said: "The announcement today, as an outcome of the work of the OMO Review Group, is an impressive example of industry, consumer groups and Government working together with the ABI to deliver a package of measures that will help consumers."
And to show that there is no room for complacency, just a month before the Code of Conduct on Retirement Choices became binding on ABI members, the Financial Services Authority confirmed it has launched a thematic review on annuities exploring the "the risk of detriment that consumers may face as a result of not shopping around...".
Role of advisers
There is, of course, one part of the market that is acknowledged to be already working very well at delivering positive consumer outcomes. For many years, professional intermediaries have been providing advice and guidance to clients about their retirement options enabling them to make intelligent decisions.
The Pensions Income Choice Association (PICA), which spans providers, advisers and employee benefit consultants, has been among the voices calling for reform. In its 2009 report Optimising Value In Retirement, asked the question whether individualised advice was the way forward. "One obvious solution is for everyone to have access to face to face financial advice and indeed many people take exactly this route and generally make better decisions as a result."
It went on to point out that the economics of running an IFA practice means that many struggle to offer advice to people with funds of less than £50,000 which includes the majority of annuity buyers. "Certain IFAs, often those who have invested in technology to streamline their processes or redefined their business model to reduce costs, are interested in dealing with clients with small funds, but these are few and far between."
Four years on, the new ABI code has the potential to be the game changer that financial intermediaries have been looking for to kickstart a push into new areas of a retirement income market worth £12 billion and growing every year. It has been created to tackle the inertia that one report by the National Association of Pension Funds/Pensions Institute said leads to "the passive or ill-informed acceptance of inappropriate and uncompetitive rates".
The ABI mandatory code requires members to:
• provide clear and consistent communications to ensure customers are able to make informed and proactive decisions, and are able to shop around for the most appropriate product;
• prominently highlight enhanced annuities and the higher income they can potentially offer and inform customers whether they offer these product and how to find out who does;
• clearly signpost customers to advice and support, both from regulated advisers and government-backed advice organisations;
• establish transparency in the annuity market so that customers have a clear picture of how providers' offerings fit in to the wider market.
Intermediaries should benefit from the changes that aim to encourage thousands more people to actively review their options. Pension companies must start to communicate with their customers about their options between two and five years ahead of retirement. No application form can be included unless specifically requested by the customer. The materials they provide must give information about the purchasing process and promote shopping around clearly and concisely, making it obvious people might be able to achieve a higher income by going elsewhere. Follow up packs must "give a strong message of the need to make a decision".
The sales process within the pension companies must include a number of mandatory questions to prompt consideration of their options, including health and lifestyle details that could lead to an enhancement and whether their pension includes any Guaranteed Annuity Rate (GAR) conditions that could mean they might actually lose out by going elsewhere.
Customer material must include links to useful sources of information such as the Money Advice Service and Pensions Advisory Service. The third point above acknowledges the key role that professional intermediaries have in delivering successful outcomes to customers and the new code includes the scope for a new intermediary directory to be added.
That directory is now under construction with input from a range of stakeholders to ensure its suitability. We would urge all those keen to generate more retirement business and benefit from future expansion of the market to look out for its launch and to get involved. It will be a searchable online database of regulated intermediaries that will create a direct contact point for consumers seeking professional help. Those included must conform to the ABI's rules on the sales process, including the mandatory questions into the client's personal and health circumstances.
Intermediaries will of course face competition to attract the clients they want which will mean keeping one step ahead of the competition. One of their strengths is the ability to consider the consumer's overall situation, which may or may not be the annuity that pays the best income. It is important to think about all the options, for example, how decisions may affect dependents or whether to include inflation protection. In a market where there are now a range of options beyond standard annuities, such as enhanced, fixed-term and investment-linked annuities, an important role is deciding on the best solution at the right time.
Technology has advanced over the three years since PICA's report highlighted the efforts some advisers were taking as a way to cut costs and speed up information gathering, quote-generation and administration. A key differentiator between those seeking to help annuity buyers will be perfecting that technology and using deeper underwriting to respond to the advances in medical research, particularly as the market is moving away from standard rates and towards more personalised solutions.
While the code is obviously a huge step in the right direction, intermediaries should continue to look for opportunities beyond the scope of the code which covers only contract-based schemes. There is still no obligation for those running trust-based occupational pension schemes to adopt the higher standards set out in the ABI's code to promote shopping around and build in the new protections for retiring members, leaving about 2.5 million people out in the cold.
Stephen Lowe is group external affairs and customer insight director at Just Retirement
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