Better Business: Pensions and the OMO

Bob Bullivant, CEO of Annuity Direct, says the large 'Harry Houdini' providers are avoiding the open market option and IFAs are the only people qualified to advise on retirement planning...

As we know, IFAs are moving to professional status, so we may as well start by declaring a conflict of interest – Annuity Direct stands to gain from the actions proposed here.

Good. That’s got that out of the way.

But the nice thing is that consumers also stand to gain, which is a real example of treating customers fairly.

Those who will lose are those with a massive conflict of interest who have no interest in professionalism – the large product providers.

Much has been written about the needs of the retired population and the issues which they face as their retirement years lengthen.

It is true to say that most people do not have enough money in their pension fund to purchase a pension that will meet all of their retirement needs – other than the rare few in defined benefit schemes – and they will have a different concern – whether their ex- employer can afford to meet its pension obligations.

Retirement planning therefore becomes a mixture of compromises – between the death benefit you want and the one you can afford – between the inflation protection you would like and what you can afford.

Managing retirement risk

It is about managing the risks of retirement – death of a partner, inflation and the need for care -and understanding the actions that you can take to mitigate those risks.

And it is about understanding all of the products available and making decisions based upon good information. Finally, it is about understanding your pensions and beneficial or penal clauses.

Defined in this way it becomes absolutely clear that the only people who can do this are independent advisers.

They are the only people with the technical knowledge and skill to be able to understand both the client’s needs and also the products that could be used to meet those needs. It should be that when someone reaches retirement they seek the services of an IFA.

But only one in three people actually do – and it is time to analyse what is going on and why this is probably the biggest scandal in financial services.

Put yourself in the position of CEO of a major life office.

Your business is under pressure as your products become increasingly lower margin, you do not like risk and your investment expertise is regularly out performed by specialist investment firms.

IFAs are tired of your poor administration and have turned to platform and SIPP products.
Is there a market out there that enables you to increase your margins – a captive client maybe?

Over the years you have sold many thousands of pension policies and when the client retires he can take the money away – or you can try and keep them and sell them an annuity that is not the best but then by not being the best your margin will be better.

Tempting – to pay lip service to all of the missives that come out of the ABI and FSA and to play by the letter of transparency of the open market option but maybe add some words that you hope the client will stay with you – or that by ticking this box his tax free cash will be paid by return. In other words – rely on the client to take the easy option rather than shopping around.

This is what is happening and two out of three people are doing just that.

One step further

The pressures that are now being brought to bear are meaning that the big providers are going one step further and putting together a panel of providers to try to make their annuity service look like a broking service. The way it works is for an enhanced provider or two to be added to a panel so that the client does get an enhanced quote if they are eligible.

This is interesting as it is in the impaired and enhanced market that we see most rate variation and so by restricting the provider choice it is likely the client will not receive the highest rate.

Of course the deal between the companies means that a nice fat commission is paid for losing the business. The rates are often lower than those available to IFAs – cosy arrangement, isn’t it?

If this were not bad enough there is a strong possibility that because this is restricted advice no proper investigation of the existing scheme will take place meaning that valuable guaranteed rates might be lost and that possible exit penalties might be imposed.

Switching

This leads to another point – why is it that if we move pension funds prior to retirement we are subject to FSA guidelines on pension switching?

When the most important switch of all is actioned – to buy retirement income these rules do not apply – or at least it is not clear they apply.

The ABI has made a lot of progress in speeding up transfers with its options programme. Congratulations – but as usual it only tells half the story.

The real area of delay is in getting information and forms from ceding providers.

If these were included in the time that the ABI publishes the average time to process, then an open market option would be substantially increased.

The options programme is used as evidence of a desire to increase OMO – I would argue that it is what should be happening, so stop kidding us.

The astonishing ability of the large providers to avoid the open market option is comparable to the very best of Harry Houdini.

But it is neither magical, nor is it is morally sound.

The result is that pensioners are losing income, the Government is losing tax and more social security benefits are being paid.

Why is it that the Government and FSA find it impossible to sort this out? Perhaps it is time for the Treasury Select Committee to get involved and ask some difficult questions.

One thing is for sure. Annuity Direct will be asking those questions. Watch this space.