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Pension kite flying is not constructive

Pension kite flying is not constructive

Minister Steve Webb has obviously had a lot of time to think over the Christmas and with great enthusiasm he announced his latest brainwave in an interview with the Sunday Telegraph on the 5th January. Why, opined the minister, can’t people switch their annuities just like they switch their mortgages in order to get a better deal over time? The comparison sound reasonable enough on a theoretical level but turns out to be quite ludicrous when one comes to consider how it would work in practice.

In the first place, people understand mortgages. That doesn’t prevent them being ripped off occasionally but basically the majority of the people do understand what they are buying when they take out a mortgage. This situation contrasts significantly with the position on annuities, which most people only buy once in their lifetime and are not aware of the details of the product.

Secondly in the case of mortgages, people feel in control as they have the lump sum and are making the payments, which is the exact opposite of an annuity; in an annuity, control has gone over to the financial services provider who has the lump sum and is making the payments.

Finally, what about advice? Will any IFA risk advising a pensioner in his or her seventies to switch annuity? How much extra would they have to get from a new annuity in order to cover the cost of the advice and still come out ahead? One would imagine that a significant increase would be required for this to happen. Even then, the IFA would run the risk of being accused of ripping off the pensioner if they died before they had broken even on the change of annuity. The seeds of a future ‘mis-selling’ scandal seem to be buried in the detail of this proposal.

Of course, they could do an execution only switch, but this would lead to commission being paid to the business carrying out the switch, which would also have the papers in full cry. And it is already acknowledged that new retirees are vulnerable at annuity purchase time, given their poor knowledge of the product. How much worse would the situation be when they become older and have more health issues?

The whole annuity market is in urgent need of reform, but the minister needs to be more aware of his position and stop kite flying in the national newspapers. Annuity reform is a complex area that requires considered discussion in an informed arena, not a headline grabbing sound bite in the media, which only serves to worry the public even more about annuities. The minister would be well advised to have more research done before confusing an already turbulent pension’s landscape with new ideas that haven’t been fully formed yet.

Photo Credit: David Spender

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

Google Plus: TomMurray

What do you think? Let us know in the comments below!
[separator type="3/4"]Comments from LinkedIn: The Annuity Group (UK)

Comments

  • Ros AltmannRos

    Ros Altmann

    Independent Policy Expert, Investment, Pensions, Savings, Annuities and Retirement

    Steve Webb is really saying, I think, that he believes are not the right product for mainstream pension decumulation at the relatively young age of 60 and 65. He is calling for a more flexible approach to pension income that can adapt to people's changing life circumstances and market changes. He is also rightly concerned about the lack of transparency in charges and value for money. I think his remarks have been rather misunderstood or misrepresented. He is right to call for more flexibility and it is time for a reasoned debate on decumulation

    Tom MurraySharon McGuire like this

  • Tom MurrayTom

    Tom Murray

    Head of Product Strategy at Exaxe Ltd.

    I don't think anyone doubts the need for change or that the current system is letting down retirees. However, I'm not convinced that floating simplistic ideas in the Sunday Newspapers is necessarily the best way to get a debate started.
    My problem with the idea of switching annuities is that while it is superficially attractive, the reality is that it will mean elderly people run the risk of 'churning' - a risk that the government and regulators have been working hard to eliminate across the industry.
    It is already possible for people to buy fixed term annuities or to enter drawdown arrangements which preserve the possibility of choice. Is the bottom line that while annuities are good value at a national level, it is impossible to ensure that they are good value at an individual level, as what you get back does depend upon how long you live. Mind you, the exact same comment could be made about the Basic State Pension as, if you don't live long into retirement, you get extremely poor value for the NICs you have contributed over a lifetime.
    I just feel the comparison with mortgages was a bit gimmicky and doesn't hold well. The Minister would be better off looking at ways to get people back into the mind-set that their future income level above a solid minimum depends upon themselves and therefore they should be engaging with it earlier. Auto-enrolment is a huge step forward in this regard, although I would have preferred it to be compulsory. I believe that the best way to increase innovation in the at-retirement market is to stimulate the market itself to be more demanding rather than to legislate it.

    Sharon McGuire likes this

  • Bob ChampionBob

    Bob Champion

    Retirement Product Lead at Skandia

    Very interesting discussion on radio 5 when most of us would not have been able to listen. Steve Webb, Tom McPhail and Martin Lewis are the participants., .

    Steve Webb confirms what Ros read into his comments.

    http://www.bbc.co.uk/iplayer/episode/b03nstwx/Shelagh_Fogarty_09_01_2014/

    From 24m15s in…

    Ros Altmann likes this

  • Helen MorrisseyHelen

    Helen Morrissey

    Editor of Retirement Planner and deputy editor of Professional Pensions at Incisive Media

    We definitely need reform in this area - should annuities really be being bought by people in their 60s? I wrote the following feature if you fancy a read?

    http://www.ifaonline.co.uk/retirement-planner/feature/2322085/webb-and-annuities-time-for-a-wider-debate

    Sharon McGuire likes this

  • Steve LoweSteve

    Steve Lowe

    Group External Affairs & Customer Insight Director at Just Retirement

    I think Tom makes some important remarks in his article.

    Its very important public commentators take personal responsibility for making considered and thought through comments in the media. Unbalanced, generic provocation with no practical solution can lead to scaremongering and may lead people approaching retirement to trust nobody through fear.

    The Minister should raise his stick-prodding as a policy initiative with colleagues in HMT who own the policy for annuities as part of his task force on decumulation and not as a party political initiative.

    Millions of pounds of retirement income is evaporating away from retirees every month because hundreds of thousands of people are making poor retirement income purchase decisions. This is not new news to the audience of this linked-in community.

    The Minister, his DWP and HMT colleagues could usefully act now to make shopping around for a retirement income the default as a way to remove ‘bad-inertia’ (for clarity, shopping around for shape and rate). Shopping around drives competition and ensures equitable and not excessive margins are generated. Half the annuity market already operates in this way thanks to the services provided by professional financial intermediaries.

    Politicians spent time finding a way of using good inertia to create auto-enrollment in pensions accumulation so its time for them to act positively to protect those people at the end of the retirement savings journey.

    So Minister. This brief is not new. You’ve had time to reflect over the last 4 years. Less kite flying more action.

    [separator type="3/4"]Comments from LinkedIn: Pension Play Pen

    Comments

    • Jane SamsworthJane

      Jane Samsworth

      Partner and Pensions Practice Area Leader, Hogan Lovells, providing comprehensive advice on UK pensions law

      There's less to this idea than meets the eye. How do you value a part-used annuity and determine the remaining transfer value, quite apart from the associate costs? Another question: I understand that annuity costs are kept lower than they might otherwise be because of the cross-subsidy from short-lived annuitants that favours the longer-lived. To the extent that this still applies given the availability of impared life annuities, could it survive annuity switching?

      Sharon McGuireTom Murray like this

    • Tom MurrayTom

      Tom Murray

      Head of Product Strategy at Exaxe Ltd.

      I agree that the technical issues are significant and they would also make things far more complex for the annuitant to understand when it came to switching.
      As for the problem of the cross-subsidy, this is a key area that is never brought out in discussions on the value of annuities. The result of this subsidy is that annuities will always be poor value for those who die early and always be excellent value for those who significantly exceed the average life expectancy. This is of course identical to your lifetime of national insurance contributions for which you get very little BSP if you die early but a huge return if you live to receive the telegram from the Queen - but no one ever seems to complain about the 'value' factor there.

      Sharon McGuire likes this

    • Henry TapperHenry

      Henry Tapper

      Director at First Actuarial

      Top Contributor

      Jane, perhaps Steve will pronounce on "annuity follows member" next week. The magic box is open and Pandora's winds are flying about! We've got another 14 months of this nonsense till the next election.

    • Jane SamsworthJane

      Jane Samsworth

      Partner and Pensions Practice Area Leader, Hogan Lovells, providing comprehensive advice on UK pensions law

      Henry, you make an excellent point. We are in the later days of the currrent administration when it becomes progressively harder to find proponents with the time, enthusiasm and commitment to make significant changes, legislative or otherwise. Attention shifts to the next election and what might happen thereafter. That's good in one way - we could all do with a period of consolidation. But there is a number of important matters out there for consultation at the moment and it would be a pity if we miss the boat. We hosted a workshop with the Law Commission this morning on its consultation paper on fiduciary duties and investment intermediaries (excellent paper) and I'd be sorry to see so much hard work come to nothing because of the timing.

    • Henry CobbeHenry

      Henry Cobbe

      Investment professional

      There seems to be growing momentum for a fresh look at retirement income options given the disturbing opacity of the annuities market. Whether quotes are a providers' own or a 'whole of market' option from execution-only brokers, there is no central reference point for transparency of what constitutes a fair price (if you know of any, let me know). ABI's survey based efforts are a step in the right direction, but is only of limited use.

      Besides, trying to bring transparency to the annuity market could be the answer to the wrong question. My question is, why annuities at all?

      Collective drawdown is one meritorious alternative, and combined with some guarantees begins to look very compelling. But it should not be beyond the wits of the investment industry to come up with long-term income-only products in exchange for a lump-sum of capital: it's the oldest time-value-of-money trade in the second-oldest profession.

      Annuities' complexity (read 'opacity') arises from delivering retirement income via a life insurance policy, which is as nontransferable on this world as our very souls. We need to exchange a lump sum for a payment stream for a fixed time frame that can be inherited by our beneficiaries on death, but is NOT linked to death or to us individually, ie a fungible gilt-edged income stream. That doesn't escape yield volatility problems but at least it becomes transparent, comparable and portable. NS&I would do very nicely if they were allowed to.

      My hunch, is that for income-stream-follows-member we can expect investment banks, not insurance companies to lead the way, and that may be no bad thing. But a lot of legislation would need to reworked to purge out business-as-usual thinking and retirees would have to have faith that vampire squids are preferable counterparties to the existing bunch of annuity providers (and their handsomely reimbursed platforms/intermediaries). Embarrassingly for the providers, that may not be so hard!

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