30jan14: are annuities fit for purpose?
DESCRIPTION
The Financial Services Consumer Panel, (FSCP) recently published a report which argued that the annuity market does not work well for the majority of consumers. The Panel felt that the “complex market” was “failing to deliver good outcomes for many consumers”. The value of annuities is increasingly being questioned by journalists and opinion formers. Rates are improving but have been relatively low and too few individuals exercise choice or have access to the advice they need. Those in favour of other alternative income options, such as income drawdown, have signalled that it is the end of annuities. Yet, annuities offer significant benefits over other forms of pension income. A guaranteed income for life is considered a better option by some customers. The debate, sponsored by Legal & General, a leading annuity provider, in conjunction with the International Longevity Centre - UK (ILC-UK) was held in the House of Lords, on Thursday 30 January 2014. During the event we explored what the industry, government and the regulator needs to do to respond to the FSCP challenges and whether annuities are still fit for purpose. Or does the industry need to innovate in product design and access to flexible solutions that meet future customers’ expectations? The event, chaired by Baroness Sally Greengross, firstly presented the views of a panel of six leading representatives from across the industry who have an interest in the at retirement market outlining whether they believe that annuities are still fit for purposes and if not, what other options they believe should be considered. The panel included Sue Lewis, Chair of the Financial Services Consumer Panel; Dan Hyde, Personal Finance Editor of the Daily Telegraph; Tom McPhail, Head of Research at Hargreaves Lansdown and Chair of Pension Income Choice Association (PICA); Ros Altmann, Economist and former Downing Street adviser; Jane Vass, Head of Public Policy at Age UK and Tim Gosden, Head of Strategy for Legal & General’s individual annuity business. Following the panel presentation the debate was then opened to the invited audience which included parliamentarians and senior representatives from across the industry. Senior representatives of charities, think tanks, government departments, regulators and selected media contacts who regularly write on this subject, were also invited.TRANSCRIPT
Are annuities fit for purpose?
30th January 2014
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Welcome
Baroness Sally Greengross
Chief ExecutiveILC-UK
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Kerrigan ProcterManaging Director
Legal & General Retirement
Welcome from Legal & General
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Sue LewisChair
Financial Service Consumer Panel
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Annuity advice and purchasing:the consumer experience
Sue Lewis Chair, Financial Services Consumer Panel
www.fs-cp.org.uk
Background
Approximately 400,000 annuities sold each year, £12 bn
Expanding market: Maturing pots from personal pensions & GPPs (sold since 1987) Auto-enrolment
“Small pots” problem
Open market option (OMO) – take-up, weak rules
Finding 1: The OMO doesn’t work well
Open market bewildering & feels risky Consumers ‘shop and stop’ ‘Best annuity rates UK’ gets you nearly 1m hits
Consumers do not drive competition Low consumer financial capability Fear of product complexity Fear of making an irreversible, high-cost mistake General distrust of professional advisers Inability to find appropriate advice at acceptable cost
7
Finding 2: non-advice driven by advisers not consumers
Major shift to non-advice due to: Light touch regulation; adviser not responsible for sale Lower costs (eg qualifications), higher profits via commission
Big differences between advised and non-advised services Whole of market; deep underwriting, checks for contract terms
(eg GARs); checks to ensure selection of right product Limited panels; limited support (annuity sales-driven); shallow
underwriting; no checks for GARs etc (can be a disclaimer on site)
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Finding 3: Introducers ‘masquerading’ as advisers
Introducers sell personal customer details to firms selling annuities
Get around £250 for each subsequent successful sale
Websites look like non-advice and advice sites, but: Consumer doesn’t know who they are dealing with Doesn’t even know where the firm is based
Result? Customers get phone calls, emails, texts from firms they have never heard of and did not contact, contributing to “shop and stop”
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Finding 4: pricing and competition issues
Excessive profits on annuity books? 20 x profits on annuity books compared with all other lines,
including pensions Academic research on ‘money’s worth’ (90%), out of date
and only covered OMO rates Rollover pricing embeds cost of adviser commission even
if customer does not use OMO; cost not visible to customer
‘Rollover’ annuities most pressing concern, especially where provider is not in open market
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Recommendations The FCA should:
introduce a code of conduct for the non-advice market address the causes of the current regulatory arbitrage between non-
advice services and professional financial advice undertake a rigorous market study to examine possible exploitative
rollover pricing, annuity profits and the impact of tied relationships between insurers and annuity providers
strengthen the definition of the Open Market Option. The Money Advice Service should:
develop its independent annuity adviser directory, and launch a targeted education campaign
The Government should: require employers and trustees to establish a high-quality, low-cost
decumulation service for members of workplace schemes establish a ’de-NEST’ look at tax rules for multiple small pots
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Dan HydePersonal Finance Editor
The Daily Telegraph
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Tom McPhailHead of Research
Hargreaves Lansdown
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Dr Ros AltmannEconomist and former Downing Street adviser
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ARE ANNUITIES FIT FOR PURPOSE?
ILC-UK/L&G Panel Debate
House of Lords
30 January 2014
Dr. Ros Altmann
‘PURPOSE’ OF ANNUITIES
Use pension savings to meet retirement income needs
Provide good value, secure retirement income
Offer mortality cross-subsidy to cope with uncertainty of lifespan
Ensure pension savings support pensioners in retirement
Insurance against living ‘too long’ so don’t run out of money
ARE STANDARD ANNUITIES FIT FOR TODAY’S RETIREMENT?
Standard annuities are single life, level and only address one retirement risk – but there are many others during longer retirement No inflation protection Usually single life, no partner’s pension Dying relatively young means losing all capital Never do better if health or other circumstances change
Never benefit from good investment returns or rate rise
Nothing left for care
ANNUITY INCOME FROM AGE 65…
THE REALITY OF ANNUITIES
Unique financial product – complex and irreversible
Asymmetry of information – poorly informed customers who only buy once in a lifetime, often buy wrong product
May be secure income, but all capital at risk, no risk warnings
‘Small’ funds can’t find value
No controls on charges, rates, value for money, suitability Customers pay ‘commission’ even if no advice received
Must live to 90 or even >100 to get value!
VALUE FOR MONEY – MIS-SELLING?
Name of insurer Age when insurer pays more than original fund if earns the
assumed returns
Assume 3.5% return on fund
Assume 4% return on fund
Prudential (MAS quote) 102 107 Abbey Life 100 105 MGM 97 102 Countrywide 96 100 Standard Life 95 98 Halifax/Clerical Med/Scot Widows
95 98
Pru/Royal London 95 98 HSBC Life 94 97 Sun Life of Canada/Phoenix 93 97 Aegon 93 96 LV 92 95 ReAssure 91 94 Legal and General 90 92 Canada Life 90 92 Reliance Mutual 89 91 Aviva 89 91
ANNUITIES SOLD AS ‘NO RISK’ - REGULATORY FAILURE No controls on charges or value for money for
customer
High charges often hidden, pay for ‘advice’ even if none received
No risk warnings or suitability checks – caveat emptor
OMO not enough - shop around for better rate for wrong product!
£1bn a year lost to future widows/widowers meaning more poverty
RDR bias against advice people need before irreversible purchase
WHAT REGULATORS COULD DO
Reform COBS rules so people not just offered an annuity
ABI self-regulation failed – need controls on charges & value
Information, risk warnings & advice before buying – explain options Do nothing option, benefits of waiting Leave money invested either in pension or drawdown Timing, type, rate – customers need much more than OMO
tPR guidance to trustees to ensure information and value of advice
Address ‘small’ pots – allow as lump sum not annuitise
WHAT THE INDUSTRY COULD DO
Stand up against worst practice – dreadful value accepted by ABI
Standard letters to explain all options
Proper disclosure of charges, know your customer checks
Develop decumulation options that fit better with people’s lives
More flexible products, funds invested for longer, not all at 65
Drawdown for smaller funds
Annuitise later to allow life/market changes: adjust for health/care
THANK YOU FOR LISTENING…
Dr Ros Altmann
Blog: pensionsandsavings.com
Twitter: @rosaltmann
Website: www.rosaltmann.com
Jane VassHead of Public Policy
Age UK
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Tim GosdenHead of Strategy
Legal & General’s individual annuity business
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Are annuities fit for purpose?
30th January 2014
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