Question: What impact will the FSA's recent report on the open market option have on take up going forward?

Each month we ask our industry to answer one big question!

Stuart Bayliss is managing director at Annuity Direct

The FSA's report has had an industry impact. The ABI had earlier published their own research which purported to indicate there was nothing wrong with the open market option and that people chose to stay with their existing companies because they love them dearly. But with the FSA report imminent, they are proposing significant new content for communication in the vesting process and acknowledging that much more needs to be done to improve both awareness of the open market and the efficiency of the process.

The consumer's basic understanding is that the pension he bought 20 odd years ago is going to pay him an income in retirement. Just prior to this momentous event he is told: "Oh no, not quite, in order to get the best value from your pension savings you have got to do something called an open market option."

We must target consumer understanding to ensure they know that they have the opportunity and responsibility to ensure that they obtain the best and most appropriate pension income for themselves and their dependants.

Nigel Callaghan is pensions analyst at Hargreaves Lansdown

The report should be applauded. It champions the retiring investor by exposing two fundamental flaws in the OMO process; namely the clear-as-mud language many insurers use in explaining retirement options and the woeful service standards of some companies in moving pension money. Crucially, the FSA has got the bit between its teeth and may take draconian measures against laggards unless there are substantial process improvements by December.

Given that our regulator has had to spell out the minutiae of the industry's shortcomings shows the depth of vested interests that has hitherto resisted calls for real change. While 40% of insurers are failing to meet minimum requirements grabbed the headlines, the fact that less than one in five are demonstrating best practice for OMO literature is even more alarming.

Peter Carter is head of product marketing at Met Life UK

The FSA report should act as a wake-up call to those companies which have yet to properly address their processes. Clearly when 40% of companies are failing to properly explain the open market option and 60% are subjecting clients to delays in transferring their annuities there is a need for action.

However, it is not quite so clear what the actual detriment to consumers is. Many consumers stay with companies which offer highly competitive annuity rates so are not suffering any loss from failing to exercise the open market option.

The FSA review will have an impact on take up of the open market option as companies must work to adhere to the Treating Customers Fairly rules.

It should also be expected that once consumers start looking at the open market they will start to notice alternative retirement solutions which in many cases will be better for them.

Ruth Clarke is sales and marketing director at Partnership

The FSA's latest report on the open market option is a salutary lesson in how much further the industry still has to go to demonstrate that it is putting customers' interests first.

Finding significant issues with both the pre-retirement wake up packs and the OMO process itself the FSA has highlighted some of the key reasons why consumers don't shop around more. Improving the prominence, content and clarity of the wake up packs will undoubtedly help but is unlikely to have much of an impact unless the pack highlights the potential extra income that can be gained by shopping around.

For those people who are deterred from exercising the option because of the potential delay in receiving income, however, simplifying and speeding up the process itself does have the potential to make a difference.

However, we think that the industry could do a lot more in bringing the OMO to customers' attention right at the beginning of the retirement process i.e. at the point at which the customer takes out their first pension policy.

Bernard Footitt is technical support manager (pensions) at Canada Life

The OMO uptake or lack of it is particularly vexing but I think the impact on OMO uptake is difficult to deduce from the FSA's thematic work on the OMO.

The first part was largely quantitative, however the qualitative aspect was disappointing as it highlighted how few firms have really good quality wake-up and reminder pack material. If this good quality material was to be adopted by all companies, there would be a real impact on the take-up of OMO.

Transferring schemes are not alone in affecting the OMO uptake, and quite properly, the FSA highlighted the totality of the dampening effect on OMO uptake when it reviewed the delay input by everyone concerned including delays by recipient pension firms, intermediaries and their customers. Certainly, the multiplicity of firms' requirements exacerbates the delays in the process, and the key person put off by this is the intermediary.

The FSA and the ABI should concentrate on pushing through better quality material and the adoption of a common documentation for OMO transfer to reduce the time taken for an OMO to be effected.

Andrew Gadd is head of research at The Lighthouse Group

The findings by the FSA make shocking reading. They discovered that the documentation sent out to those nearing retirement by 21 out of the 55 companies surveyed did not even meet minimum standards with the information failing to explain the advantage of the open market option and burying facts in a mass of jargon.

As a result the FSA has confirmed that companies must bring their paperwork up to scratch by the end of December or face further sanctions/penalties.

From a financial planning perspective it is vital that investors have complete faith that their pension planning will not face problems such as this in the future and Lighthouse wholeheartedly welcomes this move by the FSA.

Simon Gadd is managing director for Legal & General's annuity business

There is no doubt that the poor uptake of the open market option is an issue. We believe it is important that today's annuity customers make a conscious informed choice on their future income in retirement.

It is a common perception that customers approaching retirement are generally in a state of ignorance about their pension and annuity options, however, independent research we recently conducted highlighted that some customers are informed and confident in conducting their own research. Their decision to stay with their existing provider will be the right choice for them. This is particularly true if that provider offers competitive annuity rates and the customer has confidence in both their existing provider's service and capability to provide their future income. So it is important to draw a distinction between those customers who are already researching the market and then choosing to remain with their original provider and those that are not researching the market at all.

Steve Lowe is marketing director at Living Time

We are supportive of the FSA's target actions to ensure product providers do a better job in communicating the benefits to their customers of using the open market option. However, we do not feel these actions go far enough.

Longer retirements are creating new challenges and complexities, and providers are responding with innovative ideas. But so far the comments following publication of the OMO report have only served to reinforce limited choice by underpinning the assumption that choosing a lifetime annuity, albeit a more competitive one, is a good outcome for the vast majority of retirees, We think the bar needs to be raised higher. Living Time is campaigning for OMO to be recognised as 'Offer More Options' to ensure that the industry focuses on using the open market option in a more beneficial way. We are encouraging pension companies, employers, trustees and advisers to present to their customers, employees, members and clients the full range of retirement solutions including those that offer greater flexibility to deal with changing economic and personal circumstances.

Alison Morris is head of commercial planning - retirement income and planning team at Scottish Widows

Scottish Widows strongly supports the OMO and our retirement packs highlight this option to our customers. We are keen to see all providers offering similar information to customers and believe that the FSA's review, plus initiatives such as the new ABI guidance on retirement packs, will help to achieve this.

However, there will always be a significant number of customers who choose not to exercise their open market option, often for very good reasons.

As well as a greater awareness of the OMO, we're also keen to see customers making wiser choices with their pension funds at retirement, whether with their current provider or not.

Athole Smith is head of business development for annuities and income drawdown at Prudential

The FSA report will lead to higher standards of communication and education across the industry which should result in all customers gaining a better understanding of their options at retirement. Given that research has shown that less than a fifth of people seek financial advice leading up to retirement, these communications also need to highlight the benefit of financial advice, which in turn should result in greater use of the OMO. Other aspects of the end-to-end OMO process also need to be improved such as the time taken to set up retirement income plans and a better understanding that seeking the best rate is not always the best solution. Customers need to understand their income needs and risk attitude and then find the most suitable product.

Matt Trott is head of annuities at LV=

There is no doubt that the targeted approach by the FSA in this initiative will result in an improvement of these packs. However, the research also raised several issues that many other providers may need to take on board. In particular, the FSA noted that very few companies mentioned the advantages of shopping around for customers with health problems, and the weak flagging of the importance of financial advice.

Although these findings may not surprise many people, I believe they are symptomatic of the key reasons why the take up of the OMO is lower than it should be. It isn't necessarily that people are unaware of their right to shop around, but they are unaware of how to shop around and the difference it can make to their retirement income.

Andrew Tully is senior pensions policy manager at Standard Life

We need to consider the take up of OMO in context. Figures from Standard Life show around 28% of annuitants have funds below £5,000 and effectively have no OMO. A further 22% have funds between £5,000 and £10,000 where only three providers offer annuities. Even if these people move provider the additional benefit will be very small, and there will be time delays in receiving retirement income. In addition, many people have guaranteed annuity rates or choose income drawdown.

Despite that, it is clear the operation of the OMO can, and must, improve. The time it takes to move funds from one provider to another needs to be quicker, and communication to customers needs to be clearer.

We are looking closely at the FSA report to see what lessons we can learn. But whatever improvements take place there will never be 100% OMOs. Realistically, many people have pension pots which are too small to make it commercially viable for providers or advisers to search for their business.

Jason Walker is a senior manager at AWD Chase de Vere

Without doubt literature from annuity providers is not clear enough regarding the option of an OMO. However, does the report from the FSA go far enough? For example the FSA report suggests that literature should include a clear message that exercising the OMO might result in a higher pension and is therefore worth investigating. In reality how strong is this message and will it have the desired impact on the uptake of OMOs? Clients should have no doubt that an OMO could increase their retirement income and by how much. They could even be forced to include open market rates on the quote allowing clients to compare differences in income. Clients also have to consider other factors such as health or even where they live as impaired life or postcode annuities can again significantly increase income. Annuities are complex and a lot of factors need to be taken into account. Only by taking independent financial advice will a client be sure they are making the right decision.

Adam Wrench is product development manager at London & Colonial

If customers are not to be disadvantaged or even misled, it is essential that all of the options be covered; i.e. not just using the OMO in the traditional way (which was simply to seek the best rates available for a traditional guaranteed annuity). If that were all that was required, the potentially very beneficial flexibilities now available from new products and other scheme types made possible by the A-Day changes would be largely nullified. The powers that be have for a long time encouraged the industry to be more innovative - they must not now thwart the various developments that we are seeing by oversimplifying information or advice that is provided at what is arguably the most critical point in an individual's pension lifecycle.