January 2008

Raising the standards

The open market option (OMO) has been around for as long as I can remember in the personal pensions era.For almost as long financial advisers and their clients have been tearing their hair out over its highly inefficient operation.

The tragedy is that retirees requiring certainty around their in-retirement income stream have been opting to take their income from their pension provider due to lack of efficiency in OMO processing. The result is that many of them have lost out on a higher income from a more competitive annuity provider, or an enhanced rate for illness or lifestyle problems.

Issues faced by advisers wanting to exercise the open market option (OMO)

The main issue advisers face is with the transferring of money from the ceding scheme to the annuity provider; the problems are compounded if more than one ceding scheme is involved. This was the big issue raised by members of the retirement income round table in the December issue of Retirement Planner.

Some of the contributory factors cited by the round tablers included legislative requirements, amount of paperwork demanded by ceding schemes and recipients, lack of resource and/or lack of will among providers to serve customers properly. Indeed when the OMO transfer is on a SIPP to SIPP basis, the times quoted for in-specie transfers run into months - 1Elaine Turtle of Hornbuckle Mitchell said, "Some of the large providers are quoting us nine months to do in-specie transfers."1

David Marlow of Alexander Forbes Financial Services hit on the key driver for annuity purchase as opposed to income drawdown purchase - "If you're talking to someone who retires with a total pot of £25,000, it's difficult to place that through the open market option, let alone see your way through to giving them an investment-linked product which is suitable for their needs."(1)

What are the pros and cons of OMO?

That aside, the big pro of the OMO is that the current pension accumulator provider may not be the most competitive decumulator (annuity) provider. Furthermore, the retiree may qualify for an enhanced annuity that their current provider cannot offer.

Another pro is the efficiency with which some annuity providers service their annuitants in terms of paying the annuity income, and another reason is to join the large annuitant pool of a particular annuity provider so that underpinning of the mortality cross subsidy element is reflected in the annuity they pay.

As with the big advantage there is a big disadvantage; namely, the issue of speed or lack thereof of transferring pension pots for decumulation, be it income drawdown or annuity purchase. Aston Goodey of Prudential said; "There is a current forum among some big players, including ourselves, where we are trying to improve things."(1)

The ABI recently held an all day seminar on "Pension Transfers and Maturities" where most members had at least one representative. As a major annuity provider, my own company sent three representatives, one from new business and one from each of our technical units. At this seminar, Norwich Union presented its experience following the adoption of "receiving scheme/policy declaration" joint paperwork covering both pension transfers and OMOs. A pilot scheme showed a 32% reduction in the "end to end time" taken on a sample of 200 cases; the processing times have been reduced by both the ceding schemes and receiving company. Big wins for everyone - well done NU.

Standard Life also presented its work in progress on pulling delays out of their "end to end" process; an interesting finding was the number of stages in the process that are outside the control of the ceding scheme when transfers out or OMOs are in process. This appears to be when the client and/or their financial adviser are dealing with the paperwork. Standard Life is pulling time out of their parts of the process by minimising the need for paperwork and using e-mail or telephone where possible to move the transaction through. Again big wins for everyone.

What needs to change to ensure clients get the most out of their options?

The downside of trying to exercise an OMO is just simply the time it takes. It's a truism but it should be as easy to get your money out of your pension as it is to put it in, and I understand the widespread suspicion that clients have that the delays are down to ceding scheme providers wanting to hang onto a client's money for as long as possible!

That said, I believe that clients do have to understand that it is not helpful to wait until the last moment to begin the process that leads to receipt of their retirement income. In addition, the regulatory impact on pension transfers and the pre-retirement income process is onerous and time consuming; just look at RU55 on pension fund withdrawals (paragraphs 3 and 4) to see the wide ranging requirements at this time.

I do believe that the adoption of the four-month "wake-up" pack in combination with the six-week reminder pack is making it easier for clients to investigate the benefits of the OMO in securing better retirement incomes be it simply because of a more competitive rate, an enhanced rate or using more sophisticated annuity and income drawdown options.

The industry needs to be slicker in its dealing between different companies on the movement of pension funds, but the client and financial adviser community also need to remove delays in their parts of the process.

(1) "Retirement Income Round Table - Income options" - Retirement Planner (28 November 2007).

Bernard Footitt
Technical Support Manager - Pensions
Canada Life