Annuity scandal requires drastic action
The joint report by NAPF and CASS Business School into the scandal that is the current annuity market, sets out the problems very clearly but when it comes to a solution, it fades away into the same old proposals which we have tried too many times to have any confidence in.
The report headlines that private sector workers are being cheated out of up to £1 billion of their possible pension incomes by an industry that has managed to remain opaque about how it does its business and plays on the ignorance of the consumer base in order to profit from them.
These are serious charges, and by and large the report, while not substantiating specific instances, makes a plausible case for most of its allegations. It is clear that it is going to be a Herculean task to clear out these particular Augean stables.
The key issues identified by the report were a lack of advice; a reluctance to shop around and obscure pricing practices.
The report calls for employers and regulators to help remove these problems. Surely the last thing we need is yet another round table, which eventually results in a series of recommendations designed to get people to improve things voluntarily. A far more robust response is needed if public confidence in the industry is to be restored.
The primary issue raised by the report is the lack of use of the Open Market Option (OMO). Instead of tinkering with rules to try to make it more persuasive, we need to make a clear differentiation between the accumulation side and the decumulation side of the industry.
Banning pension providers from selling annuities would force everybody into an OMO situation at the point of crystallisation. This could be achieved by having decumulation products sold from a separate company within the group, while insisting that Chinese walls are put between the two companies, similar to the way things are done in the banking world.
This may be drastic, but it forces those about to retire to make a decision across the market as there will be no automatic offer from their existing pension provider. At crystallisation, the only information communicated to them from their pension provider should be relating to the monies they saved with no mention of the options now available to them. This means they will require financial advice to complete the process.
RDR has removed the option for ‘free’ advice and those with income pots below a certain level will be reluctant to spend the £650, which the ABI has calculated is the cost of a full advice session.
Simplified advice or a DIY approach is not good enough for this ‘once in a lifetime’ decision. So what is needed is an entitlement for those below a certain level to a single full advice session with a registered IFA – some sort of voucher which could be sent to them by their pension company, which would entitle the prospective retiree to a full advice session on the best option for their pension savings.
This would remove the problem that the pots are not sufficiently large for any adviser to bother with – consider it the financial equivalent of the Free Legal Advice system.
While this proposal would not solve all the problems, it would go a long way to resolving the scandal by making the OMO compulsory across the nation and ensuring that no post-retirement option was bought unadvised.