Open Market Option – is the ABI going far enough?

Helen Morrissey looks at the ABI’s recent proposals to increase use of the open market option and asks if they go far enough.

Raising awareness of the open market option has been a big issue for some time now. While there is evidence that more people are shopping around for their retirement income, around one third of people still don't access the open market option. The Pensions Income Choice Association (PICA) has been lobbying government to make the open market option the default process for retirees, while providers such as Living Time have also done their bit to raise awareness of the issue via its Offer More Options campaign.

Today the Association of British Insurers (ABI) stepped up to the mark by announcing it will introduce a compulsory code of practice for insurers. Under the new code ABI members will remove the annuity application form from the communications sent to retiring customers. It is hoped this will prevent customers automatically taking out an annuity with their pension provider.

The ABI's director of life and savings Maggie Craig says: "The Association of British Insurers believes all consumers should shop around to maximise the income from their pension savings. However, not enough people shop around currently. This new industry initiative has been developed to make a significant difference to people's retirement outcomes."

Of course there are strong merits to such a process. For years insurers have come under fire for protecting their own interests at the expense of the consumer - why would they wish to risk losing money by highlighting the open market option? By removing the annuity form from the communications pack they will prevent many retirees from blindly ticking a box and purchasing an annuity from their pension provider. It is to be hoped this will result in more people shopping around for a better deal.

While many in the industry hailed the initiative as a step in the right direction there remains a strong sense that this initiative does not go far enough. While we know annuity forms will be removed from information packs we have yet to hear more details as to how the consumer will access the information needed to shop around effectively. An ABI spokesperson said this process would be the result of further discussions with ABI members and would be in place in Q1 2012.

Will people have access to the information they need?
However, the success of this initiative will live or die on the robustness of this process. Living Time CEO Kim Lerche-Thomsen has real concerns about whether customers will be able to access the information they need to make the right decision.

"The ABI's initiative is a step in the right direction - by not putting the annuity form in the information pack we won't see people getting rolled over into an annuity with their pension provider," he says. "However, will the process tell people about the things they need to know to make the right decision? Will it tell them that they don't need to purchase an annuity from their provider or even that they don't need to purchase an annuity at all? These people may not know the importance their health plays in getting the right retirement income product or the importance of timing the purchase of an annuity correctly. Most critically will they know that once they sign on the dotted line to purchase an annuity then they can't change their mind?"

Concerns were also raised by PICA chairman and Hargreaves Lansdown's head of pension research Tom McPhail who described the announcement as being "a long way from an acceptable outcome" and hinted that the ABI "was giving away a little ground now so they wouldn't have to do more in the future."
While the process put forward by the ABI goes some way towards eradicating the inertia that results in people ticking a box and signing over their retirement income to their pension provider, McPhail believes real engagement is the key to helping clients get the best retirement income.

"We need to have the retiree consider issues such as the state of their health as well as what kind of retirement income they need. Without this kind of engagement then it is not possible for people to get the right shape of retirement income."

McPhail also said the ABI's proposal "threatened to circumvent the DWP and the Treasury" who are working closely with groups like PICA to simplify the shopping around process. PICA's proposal is for providers to issue retirees with a pension passport which would furnish the client with all the relevant information they would need to search the open market for the best retirement income. McPhail believes this proposal could actually work out cheaper than the ABI's proposal as well as delivering better outcomes for the client.

So while the ABI's proposal seems to go some way towards encouraging retirees to look at what the market has to offer it is clear that much work will need to be done to ensure they receive access to adequate information. As the process stands retirees will be saved from the potential mistake of ticking a box and getting their retirement income from their pension provider. However, this is only part of the battle. If retirees are not able to access high quality information as to the options available then we will continue to see people making the wrong retirement income decisions.