A changing landscape

Steve Lowe discusses the implications for advisers of recent retirement income changes

Huge interest is being generated around the introduction of new income drawdown rules in April but we shouldn’t forget that annuities are likely to dominate the retirement income market for years to come.

With the baby boomers now hitting retirement age in their hundreds of thousands each year, one of the biggest challenges we face as an industry is encouraging better choices at retirement.

As we count down the months until implementation of the Retail Distribution Review, it becomes ever clearer that the new rules are likely to restrict independent financial advice to those wealthier individuals happy to pay the increased costs.

This is opening up huge opportunities for firms to set up non-advised sales processes that can deliver useful valuable product selection services to a mainstream market.

The growth in the numbers of retirees and size of pensions makes success in the retirement income market a huge prize. Well ahead of the RDR deadline we are seeing the launch of a host of new streamlined, technology-based services by insurance companies, retirement specialists and IFA firms specifically designed to promote annuity choice to a mass market audience.

Despite the activity, these are early days so the level of sophistication will continue improving. There is also the problem of the open market option which, given the increasing choice in the annuity market, arguably delivers better value to a few conventional annuity providers than it does to the retirees needing to make good income choices.

Too few people take their pension to the best annuity provider and many miss out on enhanced rates. Research by the Pensions Income Choice Association (PICA), which wants OMO replaced with a ‘pensions passport’, identified £3.3bn of extra pensioner income up for grabs if only these customers were to engage in a shopping around process.

Changing landscape

So how is the annuity market landscape going to change as we move from a pre- to a post-RDR world? The answer lies in an interplay between changing attitudes, new options and improving technology.

On improving shopping around for a retirement income, the government has signalled it is losing patience – it wants action, not words. The Association of British Insurers recently revamped its ‘best practice’ guide for pension companies when communicating with retiring clients.

The corporate pension market is perhaps the worst offender. The Pension Regulator found OMO take up at 23% in occupational defined contribution schemes in 2008, falling to less than1% for AVC schemes. This compares to the average take-up of approximately two fifths for all DC pensions. Among the suggestions in a paper Enabling Good Member Outcomes in Work-based Pension Provision published in recent weeks is that employers should consider offering an annuity broking service.

The problem is that although trustees and administrators may fulfil their legal and regulatory duties, members are still left to do a lot of the work in a world they often don’t fully understand. Perhaps this is due to fear of overstepping responsibilities or because they do not have the tools at their disposal to help.

High expectations

This higher expectation on the pensions industry to deliver better outcomes, combined with more sophisticated technology, is set to transform the way annuities are sold in the coming years. IFAs are likely to pass on the more straightforward annuity business to non-advised or referral services, freeing up time for more lucrative clients.

Mainstream retirees will go into a non-advised process that will help them explore more income options and potentially find a better value deal than if they defaulted into the current pension provider’s offering. Strong growth will continue in the enhanced annuity market. Currently about one-in-six get an enhanced rate but research undertaken by Just Retirement identifies the number eligible could be as high as six in 10, suggesting many thousands are missing out.

Better information delivers better value to retirees so it is important underwriting is not oversimplified. We are piloting a tele-underwriting solution that takes the burden of detailed health and lifestyle fact-finding away from the IFA, instead linking the retiree to a trained medical professional. The data collected goes back to the adviser to use in the shopping around process, improving the financial outcome to clients regardless of fund size.

Technology is another area we feel requires more investment, particularly given the increase in take up of tools to help the corporate market such as the The Open Market Annuity Service (TOMAS). These services support trustees who are keen to deploy an efficient shopping around process and where required, independent advice can be bolted on.

The two key elements to change are now in place – there is a ‘can do’ attitude that we need to deliver better solutions and increasingly the technology and practical tools are in place to enable it to happen.

Steve Lowe is group director of external affairs & customer insight at Just Retirement