The introduction of the code for members of the Association of British Insurers was the culmination of years of pressure from various consumer, government and industry sources concerned that millions of people were being short-changed when converting their pension into an income stream.
Last year the retirement income market exceeded a record £15bn, a number that is expected to keep increasing as the population ages and more people reach retirement needing to convert pension pots to income. The ABI’s figures show that financial intermediaries have a good foothold into this market, accounting for nearly £10bn of that money compared to non-intermediated sales of a little over £4bn.
However these figures are skewed by the wealthy few who can afford advisers. Four-fifths of pension savers have pension pots of less than £50,000 and the biggest difficulty – and arguably the biggest opportunity for intermediaries – is to find economic and profitable ways to deliver advice to this majority at a complex time in their lives.
This money is the bedrock of people’s retirement finances and they simply cannot afford to make poor decisions. The open market option gives consumers the right to take their pension pot to an external provider. Yet since its introduction in 1978 there has been a steady stream of research and studies showing that many people were consistently missing out on hundreds, or even thousands of pounds, of extra income each year by taking the annuity offer from their own pension company rather than shopping around.
A recent report by the National Association of Pension Funds and the Pensions Institute did not to pull its punches. It said: “Millions of private-sector workers saving for their retirement are stuck with a hugely unfair and opaque annuity system which lops up to £1bn off pension incomes every year.” The report uncovered evidence of “sharp practice and murky pricing” in the annuity market that put unsuspecting customers at a huge disadvantage.
While the problem has been around for years, the need to tackle it has become more urgent. The baby boomers began to retire in 2010 and during the next 40 years the number of pensioners is expected to rise by one-third. They face an environment where increases in life expectancy are depressing annuity returns and pushing back the state pension age. Innovation in the market has also made the market more complex, with standard annuities just one among a number of competing options that include impaired and enhanced annuities, fixed-term and investment-linked annuities, and a variety of income drawdown strategies.
It is estimated that the 6m people who currently have defined contribution pension arrangements could be joined by an additional 5m to 8m low to median income earners due to the introduction of auto-enrolment. There is little sense encouraging people to build up pensions without helping them deploy that money intelligently at retirement.
The new code – which, it should be noted, does not extend to the 2.5m members of trust-based occupational pensions schemes – seeks to remove some of the obstacles, address some of the information asymmetry, and improve customers’ confidence to search for the right pension. ABI member pension companies will need to contact customers between five and two years before retirement to introduce the need to make decisions. As selected retirement age nears, ‘wake-up’ and ‘follow-up’ packs must be sent to emphasise, in jargon-free language, the importance of making active decisions.
