September 2008

Where there's a will

At last the FSA now seems to be getting to grips with the annuity market which has to be good news for customers. In spite of the fact that the open market option (OMO) has been available for decades the way in which this is processed has changed little over the years.

The FSA has recently undertaken an audit of 'wake up packs' sent by 22 providers and has been quoted as describing them as 'misleading, jargon filled and opaque'. The fact that the FSA found that some 40% of wake-up packs sent to those approaching retirement did not meet regulatory requirements has to be a concern for providers.

A significant proportion of providers' literature also failed to mention that shopping around could give you a higher pension income - surely the whole point of the exercise? These reports only add fuel to the perception held by consumers that ceding scheme providers are profiting from holding onto their accumulated pension pots for longer than is necessary.

In response, the FSA and the ABI have recently announced changes to the wake up letters aimed at simplifying and improving the clarity of the content. It seems the letters will heed previous calls that they should not be any longer than two or three pages and will include the FSA's guide to retirement options. At the time of writing it is still unclear as to whether the new format will go as far as to include a comparative illustration of the provider's rate against other market leaders at the time.

Part of the answer

Although clarity and standardisation of the wake up packs should be welcomed this is only part of the answer. Improving customer awareness of the fundamental retirement decisions that will need to be made at retirement must be improved. Reliance on the wake up packs should be more of a default last resort position rather than a retirement solution. The danger is that customers will wait for their wake up letter before they engage with a financial adviser to instigate their retirement plan by which time it could already be too late.

There have been calls from certain parts of the industry to make exercising the OMO compulsory. However, this does seem to ignore alternative retirement options available rather than simply obtaining the best conventional annuity rate. Despite this, some form of 'compulsory review' to include a comprehensive assessment of all the retirement options available should be welcomed.

While some form of 'compulsory review' could be a solution to ensure customers do not miss out on the best retirement plan this will only succeed if there is access to a financial adviser. For the majority of individuals with the average pension pot of less than £30,000 financial advice will probably not be an option and they will instead need to rely on the FSA's intended 'money guidance' service.

An advantage of improving customer awareness and implementing a retirement plan earlier will be to dispel the assumption that they must use their OMO to buy an annuity at retirement and that there are no other options. Annuity purchase is only one solution - among others are income drawdown, temporary annuities, variable annuities, ASP and scheme pension. Some of these options allow annuity purchase to be deferred even beyond the age 75 threshold. Therefore the message should be loud and clear to customers approaching retirement - first decide your retirement plan then choose the best rate (if applicable).

The retirement plan may consist of a phased retirement which may also include a mixture of different products rather than an all or nothing approach. This will be especially relevant for individuals that may be in good health at the start of their retirement but that may contract an illness or medical condition that will qualify them for an enhanced/impaired annuity in later years.

Service standards

The actual selection of an appropriate annuity provider is only half the story. A solution also needs to be found to ensure that ceding schemes deal with OMOs in a timely manner that treats customers fairly. Recent reports have stated that some providers take months rather than weeks to process an OMO. If the customer is purchasing a conventional annuity the majority of these will miss out on the guaranteed annuity rate originally quoted when the annuitisation process began. These rates are normally only guaranteed for 14-30 days. The solution may need to be a two pronged approach by the providers, increase the timescale these quotes are valid for while at the same time reducing the time the OMOs are processed.

The current processing time for investment linked annuities can offer some comfort. Some investment linked annuities will allow the customer to transfer 'in specie' their investments from the ceding scheme directly into their annuity. Provided these investments are allowable by the insurance company and the investments have already been registered electronically using the CREST system - then there should be no reason why the re-registration of these assets should not take days rather than weeks or months.

While there may be some sympathy for providers disinvesting some more complex investments there seems to be a general consensus that a target timescale is needed. There have been some suggestions that a timescale of six to eight weeks should be a good starting point for the FSA to stipulate with some firms going further and calling on the FSA to enforce fines for breaching a realistic timescale. Whether this will be something the FSA are prepared to take action on remains to be seen.

Adam Wrench
Product Development Manager
London & Colonial