Steve Webb's recent comments on annuities have provoked fierce debate. Helen Morrissey asks if this can provoke a wider conversation on the future of the retirement income market.
Steve Webb's recent comments about annuities have got the industry in a spin. In an interview with The Sunday Telegraph the pensions minister said people should be able to switch their annuities periodically in the same way as they switch mortgage providers.
The suggestion was widely lambasted with Increaseyourpension.co.uk director Craig Palfrey accusing Webb of displaying "the breathtaking extent of his ignorance surrounding annuities."
He also pointed out that much of what Webb was advocating already exists in the market in the form of fixed term and enhanced annuities http://www.ifaonline.co.uk/ifaonline/news/2320970/webb-pensioners-should-be-able-to-switch-annuities
The financial consequences of such a move have also been highlighted with the price of transfer values and potential exit penalties negatively affecting the consumer in many cases.
"If people were switching annuities then there would need to be some form of exit charge attached and over time you could find that this erodes savers' capital," says Skandia head of retirement planning Adrian Walker. "However, I would guess people would be more likely to want to do this if their circumstances change. For instance their partner may die or they may develop a health condition. In such cases they may find they get a better deal."
AJ Bell's head of platform marketing Mike Morrison pointed to wider issues such a move would have on the industry.
"What if we get to a point where annuity providers can no longer provide annuities profitably and close down?" he says. "What happens to the policy holders then and would the government step in?"
Undeterred Webb followed up his comments with an interview on Radio 5 Live saying that: "I just do not buy that annuities give the best value for money."
A wider issue
While Webb's comments may not have proved popular they have highlighted the importance of large scale reform in the at-retirement market, most noticeably in how we raise awareness among the general public. While a wide range of retirement products do exist how many people are actually accessing them or even know that they exist?
Wider issues such as determining what constitutes value for money also need to be addressed according to AJ Bell's Morrison: "Webb focused on how long you need to hold an annuity to get value from it," he says. "If you need to hold an annuity until age 90 and you live to 100 then that annuity has provided you with a valuable benefit. We need to make people understand the value of products like annuities."
Independent consultant Rachel Vahey believes Webb's comments have opened up an important debate.
"I would like to thank Steve Webb for actually trying to do something," she says. "He has certainly got people talking and it is clear we need practical solutions in this area. There are a lot of options out there at the moment but what is missing is a discussion about them. Products like fixed term and investment linked annuities go a long way to meeting people's needs. Steve Webb has said he is looking at a task force focusing on this area and this is definitely what is needed."
Annuity Direct director Alan Higham agrees the market is in urgent need of reform.
"I'm not taking what Webb said about switching annuities too seriously," he says. "If you wrote annuities with surrender values then the expense of calculating transfer values would cause problems and we could see annuity rates fall by up to 20%. I think he is trying to highlight the issue of engagement with these issues to the general public."
He continues: "Annuities work well when they are bought at the right time for the right price and with the right features. The problem is they are often bought at the wrong time and with the wrong features."
According to Higham the minister needs to address a "regulatory and communication bias" towards annuities in the retirement income market if consumers are to get a better deal.
"A lot of people have never even heard of annuities when they come up to retirement but when they go through the process they believe they have to buy one," he says. "Webb needs to understand there is a regulatory and communication bias towards annuities and we have to look at whether this is appropriate."
Skandia's Walker believes more needs to be done to get people to understand the importance of actively engaging with their pension planning and the benefits they can receive as a result.
"We need to engage with the consumer more and get them to take more responsibility," he says. "The idea that you can use the open market option to get a better deal has been around for a while. It's not necessarily the case that annuity providers are ripping people off - the consumer needs to engage with the process either themselves or through an adviser. They might then find out that income drawdown or a fixed term annuity is more suited to them than an annuity. Webb has laid down a challenge to the market on how to engage with people who aren't engaging otherwise we won't get the outcomes we need."
While there are many different types of product out there can they be used by everyone? How likely is it that someone with a £30,000 pension can use solutions such as income drawdown, investment linked or fixed term annuities? It doesn't matter how well informed a consumer is if they can't actually use the products.
"People need to be asking whether they need to annuitise at the moment but if not, what else is out there" says Skandia's Walker. "We need to look at how can we develop better solutions for those with smaller pots?"
AJ Bell's Morrison agrees more innovation is needed: "We need innovation in this market," he says. "Webb did announce an annuity taskforce last year but we've heard nothing since. We need to sit down with a blank piece of paper and work out where we can go from here."
However Annuity Direct's Higham believes some of the more alternative products do have application for those with smaller pots.
"I think some of these products can be used on a mass market basis," he says. "If someone has two policies of £20,000 each then you would just about have a viable pot for say an investment linked annuity. Fixed term annuities can also work well in such cases but the problem is that no-one knows what they are."
So while Webb's comments on the annuity market may not have been welcomed they have begun an important debate. While there may be a need for more product innovation it is clear that increasing consumer knowledge and engagement is the key to improving retirement outcomes. This should form the basis of any retirement income policy in the future.
What made financial headlines over the weekend?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch