November 2007

Annuities

Annuity assessment

What are the main areas where annuity providers fail customers i.e. transfer times, communication? What progress has been made and what more can be done?

The biggest area where annuity providers fail customers is, without question, on transfer times, especially for closed life offices. This is one example of where the principles of treating customers fairly are yet to penetrate into the fabric of the providers' structure.

The ABI has previously issued a statement of best practice on maturities which contained recommended timescales for transfers between providers but to date they don't appear to have reaped the desired results.

We are currently working closely with the Treasury to improve this, but it does need either wholehearted commitment from the whole industry or compulsion from the regulator or government.

What questions should advisers be asking clients when it comes to buying an annuity? Are these questions being asked?

Clearly, a client's attitude to risk is the main issue affecting product choice. However, this includes more than just investment it includes inflation and longevity too. Clients don't understand the longevity risk and it's our job, as an industry, to explain this so that they do understand. It's what advice is all about.

How aware are people of the impact inflation can have on their savings and what can be done to limit its impact?

Current long-term interest rates are low suggesting that inflation will remain at similar or lower levels to today. People must balance the desire to maximise their income during the initial most active phase of their retirement, with the need to provide an adequate income in later life. The balance between fixed and escalating annuities will vary between people and should consider the availability of other assets to provide inflation protection.

Despite increasing life expectancy making it more important to keep your options open: how many people are still choosing to buy an annuity at the age of 60-65?

Increased life expectancy doesn't necessarily mean that you should keep your options open. Keeping money actively invested increases the likelihood that an adverse market could significantly affect your fund.

It is precisely this risk that increases the true value of an annuity. It guarantees an income for life regardless of how life expectancy increases.

What impact are fixed term annuities having on the market? Does their introduction signal a move towards a phased retirement strategy?

We've yet to see these products have any significant impact on the market.

What issues need to be addressed in the open market option?

The key issue remains the time it takes to transfer money from the pension provider to the annuity provider. As the whole aim of retirement income is to replace your salary while you were working, then the process ought to be seamless.

You ought to be able to retire from your job on 1 November and have your retirement income in your account by 1 December so that your income is uninterrupted.

Unfortunately, this is not the current experience for the vast majority of retirees.

Are there any specific groups of people who particularly need to shop around for the best annuity deal?

Everyone should shop around for the best annuity deal. This is now commonplace for those looking for car, life or house insurance so why wouldn't you also do the same for your retirement income.

Clearly, those with health problems are a particular group who need to shop around. Only a handful of providers offer enhanced or impaired annuities and these don't tend to be traditional pension companies. Clearly, almost no one with health problems will get the best deal for their circumstances by taking their annuity with their current provider.

While the drawdown market continues to grow, it is still dwarfed by the annuity market - what needs to be done to increase sales further?

The important thing is to do the right thing for the client. So choosing drawdown, annuity or any other product is a client issue not a manufacturers' issue.

How do you see the drawdown market evolving?

There are several factors affecting this market including:

- market volatility

- increased publicity around under-funded pension schemes, and

- the State's desire to reduce people's reliance on it in retirement.

Increasingly this will mean that customers will look for products that provide the best of both worlds: the guarantees of an annuity with the potential for growth that drawdown can offer. Therefore, the new breed of products that manage to marry these two to provide an income for life will become increasingly important.

Do you think the client's possible suitability for drawdown should be highlighted as part of the open market option?

I would assume that all advisers would consider all the potential retirement options when advising their clients. As the majority of providers have neither a qualified and regulated advisory service nor a holistic view of each client's finances then they don't seem best-placed to highlight this to their clients.

What impact do you think recent market volatility could have on the drawdown market?

It's vitally important that customers fully understand the investment risk that they're taking on. This includes the risk not just to their investment performance but also the long-term risk to their standard of living in retirement.

Many of the 'third-way' products have come under scrutiny and as such have to explain investment risk to potential investors in very clear terms. This makes sure that customers clearly understand the complexities of the product.

About AEGON Scottish Equitable

AEGON Scottish Equitable is part of AEGON, one of the world's largest life insurance and pension companies. In the UK, AEGON operates in three areas of the long-term savings and investment sector: life and pensions, asset management and advice. The company has more than £45bn of assets, which includes all revenue-generating income and employs over 4,500 people. Its vision for the future is to become the best long-term savings and protection business in the UK.

About the author

Mike Douglas is managing director - annuities at AEGON Scottish Equitable. He joined in August 2006 from Partnership Assurance where he was chief operating officer. He has extensive experience within the financial services market and his knowledge of the annuities market is considerable.

Mike Douglas
Managing Director - Annuities
EGON Scottish Equitable