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

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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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