Stephen Lowe takes a look at the enhanced annuity market and explains why 2013 will be an important year
Quarterly sales of enhanced annuities achieved a significant landmark in 2012, surpassing £1bn for the first time. Yet, there are good reasons to think a market that has expanded at close to 30% a year for the past five years has plenty of headroom for further growth.
Towers Watson summed up where the annuity market is heading in 2013 and beyond, pointing out "the use of individualised underwriting based on health and lifestyle related factors may gain further traction as retirees strive to make the most of whatever pension savings they do have".
One could argue the growth of personalised underwriting and enhanced annuity sales is only getting into its stride.
Even now, we estimate that, while up to two-thirds of retirees could benefit from enhanced rates, only about 20% actually do. Research by one of our peers has suggested enhanced annuities account for about 40% of sales by premium in the advised market, but only 2.2% in the non-advised market.
Given the scrutiny of the annuity sales process in recent years, it is sobering to think hundreds of thousands each year are continuing to miss the best deals. However, there are grounds to believe 2013 could mark a watershed.
What is changing?
March sees the introduction of the Association of British Insurers' new code of conduct to encourage retirees to shop around. It forces pension companies to filter for health issues before selling an annuity and to clearly signpost their customers to sources of advice and support such as regulated advisers.
The ABI is also mandating its members to publish their annuity rates based on a series of randomised hypothetical customer profiles. This is a bold step towards much-needed transparency with members required to provide data to help consumers and the media identify where good and not so good value exists.
Although we wholeheartedly support the reforms, the reality is that the world is moving away from crude pricing on factors such as age and gender towards more personalised solutions.
The smart way for people to uncover the best value is to secure the services of an intermediary to help them navigate the market, enabling them to find the most suitable shape of retirement income solution and then the best rate.
Technology is revolutionising distribution by making comparisons faster and cheaper. For the post-Retail Distribution Review regime, advisers are rethinking their business models, putting personalised, tailored solutions at the heart of their proposition.
On top of this, new services are being developed for middle market clients and those with smaller pension pots, who make up the bulk of the multi-billion market. High street brands such as the Nationwide are also moving in and more online competition is inevitable.
This same technological change is allowing insurers to gather more data and crunch numbers more cost-effectively This enables us to offer rates that more accurately reflect the risk we are taking on.
A consequence is that no single enhanced provider will offer the best rates across the board. Therefore, advisers with a restricted advice model need to engage with a number of enhanced providers to ensure their client proposition is competitive and credible.
Panel constructions or rather distribution agreements have been a focus of attention by the FSA too.
In a recent RDR bulletin the regulator said: "Unfortunately we have found a number of firms that seem to be looking for ways to circumvent the adviser charging rules.
"This includes soliciting or providing payments that do not look like traditional commission, but are generally intended to achieve the same outcome - to secure distribution. Clearly such arrangements are not in the spirit of what we are all working so hard to achieve."
Putting the client outcome at the heart of the intermediary service proposition is clearly the right place to start to avoid criticism. To do that, intermediaries active in the retirement market have two important ‘must dos'.
The first is to collect detailed health and lifestyle information using the common quotation form. The second is to engage with a number of enhanced annuity providers so you can be confident of offering ‘best in breed' options to all clients.
Stephen Lowe is group external affairs and customer insight director at Just Retirement
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Advisers and providers gathered at the Grand Connaught Rooms in London on 20 November to celebrate the ingenuity and the graft displayed in the protected product arena throughout the last 12 months. These awards are growing in popularity every year, and our congratulations go to the winners and highly commended.