From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Pensions Regulator misses an opportunity to ensure DC trustees address annuity inadequacy

    Pensions Regulator misses an opportunity to ensure DC trustees address annuity inadequacy

    22 November 2013

    Another missed opportunity to address the inadequacies of annuities

    • The Pensions Regulator Code of Practice for DC scheme trustees suggests  independent advice or using an annuity broker are of equal value to members
    • But annuity brokers provide no advice, won’t explain benefits of not buying, don’t ensure right product or best rate and still charge fees
    • Independent financial advice should ensure members optimise the value of their pension fund with right timing, right product and best rate

    The Pensions Regulator has just released its latest detailed Guidance for Defined Contribution pension scheme trustees.  It includes a section which tells trustees what they should do to help members at retirement.  It is welcome that the Regulator is actually focussing on the importance of helping members at retirement, rather than just in the process of building up their pension fund.  The Guidance is certainly an improvement from previous positions in which members may have been left without any information on their options for taking income from their pension fund.  Trustees who follow this guidance should be serving members better and helping them achieve superior outcomes for themselves.  Nevertheless, the tone of the guidance is of concern.  This was an opportunity to make clear to trustees that the current market is not serving members well.  Those reaching pension age need to know what is best for them to do with their accumulated pension fund.

    The Regulator is indicating that sending members to an annuity broker is just as valid as using an independent financial adviser.  This is simply not the case and is a missed opportunity to highlight the value of individual advice being in members’ best interests.  An annuity broker is not the same as financial advice.  The Regulator’s Guidance is quite comprehensive in setting out the ways in which trustees need to consider helping members understand the different options they actually have and that they don’t have to buy an annuity, but then sending them to an annuity broker will surely imply that is indeed what they should do!

    Members who have other pension funds or who continue working, may be better off not annuitizing at a relatively young age, or might want to consider other options, but the complexity of these decisions means only an adviser can really ensure they understand what choices they have and how to make the best decision.  If trustees believe members’ interests can be equally well-served by both financial advice and non-advised brokers, then members will be misled and will be less likely to receive the advice that is clearly in their best interest.

    This Regulatory Guidance, therefore, does not go far enough in terms of ensuring members optimise their retirement income.

    Why financial advice is what members really need:

    • Independent financial advisers will ensure members have considered and chosen the best options – firstly is an annuity the right product to buy and is now the time to buy it? Secondly, if an annuity is right, what is the right type of annuity?  Thirdly, advisers will then help find the best rate.  Annuity Brokers will not give advice that someone should not buy an annuity, nor ensure they choose the right type of annuity to buy right product for each member.  They will offer some guidance, but that is not usually enough to mean members understand the importance of covering a spouse even if that means slightly lower initial income.
    • Annuity brokers are not covered by regulatory protection if customers buy the wrong product.
    • Advisers can approach all the companies in the market, whereas brokers do not have access to the whole of the market (only to the providers that are on their panel or list).
    • Brokers will still charge fees to sell the product on a non-advised basis.   Sometimes, the fees charged can be more than seeking independent advice and trustees should be sure that they are obtaining value for members’ money.
    • Brokers cannot negotiate better rates on behalf of members whereas financial advisers can haggle with insurers to get a better deal.
    • Brokers will not ensure members with health problems receive individual underwriting, whereas financial advisers will normally do this.  On-line brokers’ quotes for enhanced or impaired life rates will generally be lower than those available on an individually underwritten basis because the quotes are based on general questionnaire replies and the insurer will add extra risk margins to reflect the generic nature of the responses.

    The Regulator’s Guidance also fails to require trustees to explicitly disclose any fees and charges that are deducted either from members’ pension pots or from their annuity rate.  One of the problems here is that there is no transparency on annuity rates and charges in the marketplace generally, so it is almost impossible to compare value for money between one service and another.  The Regulator also refers to the ABI Code of Conduct for annuities, but this itself is not a good guide to current market conditions.  It will also exclude providers such as Hodge Lifetime, which do not belong to the ABI, but which often offer the best rates.   It is also not clear that members will get access to the best rates in the market if they only use an annuity broker whereas IFAs have access to the whole of the market and can find rates from firms that are not on an annuity broker’s database.

    In summary, the Regulatory Guidance which suggests that support for members at retirement is satisfied by either provision of independent financial advice or an annuity broking service is not good enough.  In the accumulation stage, the Guidance requires trustees to ensure that where costs and charges are deducted from members’ pots or contributions, they ‘provide good value in relation to the benefits and services provided’.  The fees charged by annuity brokers, relative to financial advisers, will often not satisfy this requirement.  It is important that trustees make clear to members that independent financial advice is what they really need in order to be confident of receiving the best value for their pension savings.  Combined with guidance about types of annuities, the option of waiting longer if extra income is not required immediately and the risks of purchasing an irreversible product at the wrong time, this would be a much better way to serve members’ best interests.

    The full guidance is available at http://www.thepensionsregulator.gov.uk/guidance/guidance-dc-schemes.aspx


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