August 2008

Wake up to key messages

Pensions are essentially simple products. People pay money into a pension plan; they receive tax relief on their contributions; hopefully their employers pay something as well; the money is invested in different sorts of funds linked to the stock market. When the person gets to retirement they take the money out and that's when it becomes complicated.

It appears the pensions industry is becoming increasingly concerned about how people take their retirement income, and is beginning to review if there is some way this can be improved. The FSA is reviewing providers' literature to make sure it is satisfactory. The Treasury is monitoring how many people exercise their open market option and the ABI is working with its members to improve the information sent out before retirement, and the process for money to be paid between providers.

The Department for Work and Pensions (DWP) is also involved. It recently published its research into the attitudes of people approaching retirement, especially looking at their experiences of planning for retirement and the annuitisation process. At 155 pages it's a comprehensive piece of kit, and from it the DWP draws several conclusions.

The main one seems to be that people believe using the open market option is going to be complicated, time-consuming and simply not worth the effort. This is a worrying statement. We know that often exercising the open market option can lead to a higher pension income, especially if people buy impaired or enhanced annuities. But delving behind the statement shows life is never as simple as the headlines make out.

The root cause of the problem is ignorance. People have a fragile grasp on what benefits they can have at retirement. Most know about the possibility of tax-free cash, but don't really understand what their pension options are, and certainly why it might be better for them and their family to choose an escalating annuity or one that pays a spouse's pension.

As expected, people's degree of financial awareness and knowledge about pensions and annuities, and their level of engagement with planning and saving for retirement drove the way in which they coped with the annuitisation process. The more financially knowledgeable tended to know what information they needed, where they were likely to get it and how best to use it.

However, for the less financially astute the only source of information they used was the wake-up letter from the provider.

The DWP is determined to take action. It wants to improve the communications strategy around annuitisation. It intends to do this by introducing an independent simple Key Messages document to be issued with the wake-up letter or earlier. This will be designed not to overload the individual with information. It also wants to make sure people understand how to access independent financial advice and how this is paid for, as well as highlighting sources of publicly available financial information.

This is all well intentioned but I feel sorry for the customer. I would like to see the DWP discussing with the FSA and HMRC about how we can cut down the information we have to send to customers at retirement - not add to it. This conversation should be about quality, and not quantity, and how we can remove some of the more 'pointless' requirements, such as information on lifetime allowance.

Although retirement options seems to be the most fashionable phrase in pensions at the moment, I get the feeling the action plan is a piecemeal affair, with each government body proposing different action. What would be refreshing is if these bodies - together with advisers and customers - worked together to develop a more consolidated approach.

Rachel Vahey
Head of Pensions Development
AEGON Scottish Equitable