November 2007

Publish rates for fair comparison

Dear Editor,

The recent Pre-Budget report (PBR) contained a package of measures which the Government believes will improve the operation of the open market option (OMO). These changes are a result of the review into the annuities market which was launched last December. The aims of this review were to increase the number of people exercising their OMO, ensure people make informed choices, and increase the number obtaining the best rates.

Annuities are still the most commonly used vehicle to provide an income in retirement so it is important people choose the type of annuity that best meets their individual circumstances.

The changes announced in the PBR include the introduction of a web-based tool to guide people through their retirement income options, FSA checks on delays in transferring OMO funds and an ABI pledge to re-vamp their existing Statement of Good Practice on Pension Maturities.

I have no argument with any of the changes being introduced. However, this review was an opportunity to give customers greater transparency when converting their retirement savings into income. Laudable as these developments are, they are unlikely to help consumers find the best deal.

Constant chatter about the failure of the OMO always seems to centre on differences in published market rates but this misses one of the main issues. When you look at the FSA tables, you will see that there are only eight providers offering level rates to everyone.

Yet, according to a press release from Cass Business School last year, there are over one hundred annuity providers. It's just that the vast majority of them don't seek business in the open market.

This has a number of consequences. Firstly even when a saver does shop around for an annuity at retirement the choice is somewhat limited.

The second, and more significant issue surrounds the annuity rates being offered to members of those providers who don't offer OMOs. Are these universally bad? Quite good? Or a bit of a mixture?

In reality, because these providers don't publish rates for all to see, it is almost impossible to compare their rates with the handful of providers taking new business in the market.

If the Treasury really wants to ensure that more people get the best rate possible, a positive step would be to ensure a full league table of annuity rates is published regularly rather than relying on those who are willing to share their rates.

If the Government tackles this market shortcoming then many more people will enjoy better rates whether they choose to shop around or not.

Andrew Tully
Senior Pensions Policy Manager
Standard Life