The annuity market may just be approaching a new dawn says John Greenwood
You have to look far and wide to find critics of Labour’s Pensions Bill amendment calling for all DC members to be automatically referred to an independent annuity broker. Everyone in the pensions industry has known for years that getting annuity purchase wrong is arguably the biggest single financial mistake pension savers will ever make. And it is a mistake hundreds of thousands of them are, unbelievably, still making every year.
Labour pensions shadow Gregg McClymont MP’s amendment, which requires that ‘any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such brokerage services itself’. Selected brokerage services would have to meet certain best practice requirements and secure access to ‘most annuity providers’.
McClymont says: “More and more people are waking up to the scandal of annuities rip offs, but Ministers are still sitting on their hands. This Tory-led Government has brought forward a pensions bill that is just half a reform.
“Ministers must now act on private pensions and ensure that there is fairness in the system – including in the purchase of annuities. It should be part of the duties of pension schemes to direct their savers to the best independent annuity brokerage service available or to offer such independent brokerage services themselves.”
The amendment was filed in the week after an NAPF report suggests employers and trustees are often too scared to go beyond the legal minimum in helping retirees seek out the best option because of unfounded fears legal comeback against them.
That report suggests those working for smaller employers or with smaller pension pots are most at risk of poor outcomes because of the costs to their employers of setting up guidance and advice services, and because smaller pension pots are less profitable for advisers and brokers.
The idea of a clearing house for retirees to pre-vetted annuity brokerages was floated a year ago by Debbie Harrison of the Pensions Institute following an earlier investigation of the annuity market for the NAPF. Brokers such as Hargreaves Lansdown and TOMAS regularly sign up to deals with employers and schemes on a ‘take everyone’ basis, and supports of the plan suggest similar deals could be cut for access to the panel.
McClymont’s plan would see all DC retirees referred to an execution-only annuity broker at the very least, if full advice is not offered.
Before going that far the NAPF wants to explore greater communication of the options open to employers and employees on at-retirement issues, improved training of trustees. It will also consider the establishment of a shortlist of approved brokers for trustees and employers or the development of a master-arrangement for advice and broker services for DC schemes.
NAPF head of research and strategic policy Mel Duffield, says: “Too many people are still at risk of failing to make the right choices and get the right shape of annuity at the best price. As they approach retirement what they really need from their employers is more support and advice. But at the moment there are market barriers that stop that happening more widely.
“People should automatically shop around for the best annuity when they retire, and employers and pension trustees can do more to make this happen. Whilst insurers are getting better at communicating with savers, it is still the case that hundreds of thousands are failing to obtain quotes and compare prices in the market.”
The situation is improving for retirees, at least amongst larger employers. A recent Towers Watson survey of FTSE 100 companies’ DC schemes found that 69 per cent provided an annuity broking service, up from 50 per cent a year earlier, with another 3 per cent planning to introduce one in the next year.
But with 500,000 people a year retiring in DC plans, split fairly equally between contract- and trust-based, pressure for speedier action is likely to continue.
McClymont’s amendment does not completely sever the link between accumulation and decumulation, which could be achieved by making shopping around the default position. He is calling for members to be ‘directed’ towards an annuity broker, or ‘offered’ one. That is not the same as making the open market option the starting point at retirement. But it is a step those pushing for the opening up of the annuity market would take with open arms.