Westminster Forum – Annuities Panel – The future of the annuities market – choice and consumer awareness
Ros gave some introductory remarks and spoke to powerpoint slides to give her views of the failure of the UK annuities market to serve customers. The panel was chaired by Richard Graham MP
Dr Ros Altmann, Independent Pensions and Retirement Expert
by Dr. Ros Altmann
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SLIDE 1: Thank you Richard and hi everybody, thank you for coming.
SLIDE 2: I just wanted to give you a whistle stop tour of what I think may be going wrong with the annuities market. Obviously we’re going to have a discussion about it but my question is ”who cares about the customer?” And this is a unique financial product, there is no other financial product like this, it’s completely irreversible. If you buy the wrong house you can change it, if you choose the wrong spouse you can change it, but with annuities you’re stuck, and we have poorly informed captive customers who need advice but the RDR has biased the market against the advice that people actually need.
I’ve prepared the slides and I hope you’ll get a copy, I won’t have time to go through it in detail now, but essentially you’ve got trustees of schemes signposting their members to an annuity buying service at retirement, who usually don’t have a clue that they don’t actually have to buy an annuity. We’re told this is insurance against living too long, that’s supposed to be the most important thing that you need insuring against in retirement.
SLIDE 3: But hang on a minute, there are so many other risks in retirement that your pension savings should be able to help you with, but when you buy a standard annuity they won’t.
The risk of inflation: all the quotes you see are for level annuities and inflation linked annuities have become even worse value. If interest rates rise you’ll never benefit, if you die relatively young you still don’t benefit, any change in your personal circumstances or the market circumstances, whether it’s your health or what’s happened to a partner (if you’ve actually covered a partner), none of that will make any difference once you’ve made that irreversible decision. If markets do well you won’t benefit, if you need care in later life it won’t help you.
So you hope that this product is good value.
SLIDE 4: Well I would argue that it isn’t and you can see what’s happened to annuity rates we all know that there was a period when they were high in the early-1990s, then they stabilised around 9% up to about 2001, that was pretty good. Then we had another downward shift and they stabilised around 7%, even that wasn’t too bad, you got some of the mortality cross subsidy coming in. But then you had QE, and since March 2009 you’ve had a major shift downwards again in annuity rates and that, when they reached around the 5% level, for me was a real wake up call.
SLIDE 5: And let’s look at the advantages and disadvantages of annuities. Well obviously an annuity means you will know what income you are going to get for life (but of course you won’t get any protection against inflation); you know you won’t run out of money if you live too long; and you won’t face ongoing charges. That’s all great as long as you get good value, but there are so many disadvantages that I think people don’t understand. At current low rates you’ve got a problem. There is no control on the rates people can charge you; on the value that you get from your annuity’ there’s nobody looking at whether the pricing is fair or works in the customer interest. And of course it’s not just about the best rate. The reform programme is all about shopping around for the best rate, but that probably means that you are at risk of buying the wrong product at a good rate! You need the right product at the best rate. This is your one chance when you’ve saved all those years to find the right thing for your life, for the rest of your life and possibly a partner’s life.
The ultimate problem for me is that people actually need advice because annuities are complex, they don’t understand them, and they’ll pay for advice anyway but they won’t always get it. If you buy direct from your provider you’ll pay commission but you won’t get any advice. If you buy from a broker you’ll probably pay more than if you’d gone to a financial advisor in the first place who can trawl all the providers in the market for you, do the right thing for you, make sure that you get the right type of annuity. There’s no other financial product like this that is regulated as a no risk product, but ultimately you risk losing all your capital. The income maybe but secure but the capital isn’t, and even with a 5 year guarantee at a 5% annuity rate the insurer will keep 75% of your money, and if you need money for care in later life there’ll be nothing left for you.
SLIDE 6: This is not a normal market, people do not understand but there are times when even the biggest providers don’t actually want to sell annuities to you. I just went on to the Money Advice Service website, last week and the week before, it’s pretty clear that the Prudential does not want to sell annuities at the moment.
This is what I found for a 65 year old. By the way I put on the website of Money Advice Service that this 65 year old was married but I asked for a single life annuity, there was nothing on what they gave me which suggested I needed to know that I might leave my partner with nothing if I died, it just gave me these rates. All of the rates there and the Pru miles below, the top rate’s 23.3% more out of a £27,000 pension fund. By the time you’re 85 you would have had £6,000 more. With the name Prudential, people will think that’s quite a respectable company. But if you took this rate you would have to live to about 96 before the mortality cross subsidy would kick in.
SLIDE 7: There is something wrong with this market, I think people need risk warnings and advice before they buy, they need more transparency and more flexible options and I hope that we’ll have a good discussion to try and drill down into some of the things that I’ve said here.
Thank you very much.
Richard Graham MP: Ros’ answers to some of the audience questions are below:
Quetion: Do you agree that people are buying annuities at the wrong time, rather than that there is something fundamentally wrong with annuities?
Dr Ros Altmann: Yes I certainly agree that at the moment people are buying annuities much too young, 65 is much too young and the mortality cross subsidy in many cases has disappeared, but I just worry about this… where’s the sense of urgency? More than 1,000 people every day are buying an annuity and are at risk of being poorer forever when they’ve done the wrong thing and nobody’s telling them that they don’t have to buy. You know, the DC trustees are signposting them to an annuity service, even though the ‘do nothing’ option has a lot of merit. If you’ve got a small pot and you’ve got a final salary pension scheme, you don’t need to annuitise it right now and if you die before 75, the whole lot passes on tax free. Without an advisor, nobody will help you find that out.
Stephen Lowe: Just Retirement
Chairman, the question I wanted to ask the panel was is the challenge not about the product but actually more about the distribution and people getting access to somebody that can help them shop around or help them chose the right deal.
Dr Ros Altmann: Well I think you’re absolutely right Steve, distribution is the issue here. The customer does not understand what they are doing, we all know that, the customer needs somebody to actually hold their hand and explain to them what’s going on before they make this irreversible decision. If they go online to a broking service that doesn’t do it for them, it might get them closer to where they need to be, but it doesn’t actually get them the product they need, it doesn’t get the best rate that they need because not all broking services cover the whole of the market, and even the ABI code doesn’t cover the whole of the market. We are stepping forward a little bit to where we need to be, but we’re not getting there. With Single life, even if you underwrite somebody if they’re very ill, they’ll get a good rate but their partner will be left with nothing, whereas in DB you automatically had partner cover. We’re moving to DC with absolutely nothing, it’s astonishing that auto enrolment is rolling out across the country and nobody’s looked at the annuities market within it and putting proper controls in place to make sure people have the best chance of getting the right annuity. Part of it is cost. I’ve seen evidence last week of a pension provider that doesn’t offer annuities, all its customers are sent to another pension company which does offer annuities, one company. You don’t know if they’re offering the best rate or the best product. But that company pays the referring provider 3.5% of your pension fund. You don’t get any advice for it, you don’t get anything for it, how is this allowed to happen, how can it be right, I don’t get it.
Richard Graham MP: One last question. Gentleman in the front has had his hand waving.
Adrian Boulding: Legal and General
Thanks very much Chairman. I’m from Legal and General, also I’m an non-executive director of pension quality mark. I agree with Ros and Michelle, it’s a very big decision we’re asking people to make, they are often very poorly equipped to make that decision. Now the pension schemes that have won the pensions quality mark have undertaken that they will provide help and guidance and support to their members as they go through the retirement process, and as those members decide whether to buy an annuity, what shape of annuity and whether to buy an enhanced life one or not, they get guidance, help and support from their scheme for doing that, but that only covers a quarter of a million people because that’s the people in pension quality mark schemes. Should we extend that and should we make it a Government’s requirement for a pension scheme that they must help their members through this retirement process, when they reach that age?
Richard Graham MP: Adrian thanks. So last question, let’s try and get a quick sound bite from all five before we invite the Minister to come and talk to us. Dominic, why don’t you start and we’ll go right to left.
Dr Ros Altmann: Well I think the key to this may well lie in the charges and the way commission is taken out of the product. At the moment people can get plenty of money for not giving any advice, so what’s the incentive to try and work hard to give the advice? I think if we look just at the quality mark and information, we will not help people enough because they do not understand even the basics. The word annuity, the word enhanced, the word open market option, as Michelle said, it doesn’t mean anything to them, they need to sit down and talk it through with somebody. I think we should start with trustees of defined contribution schemes who have a duty to look after their members and make it work well at least for them, and then hopefully it will feed through to the rest of the market.
Richard Graham MP: Thank you. Well we’ve raced through some questions and answers, I’m sure everyone is grateful to the panel for trying their best to answer some big issue questions, and now we come to what I’m sure is going to be the highlight of this session, which is a chance to hear from the Minister Steve Webb, who will be well known to you all and has certainly been in his job longer than any of his 12 or 13 predecessors under the last Government. Steve, welcome to this forum and come and share with us your thoughts, bearing in mind I think a number of people will have noticed that at the Lib Dem Party conference, you announced the Government was considering setting up a task force on annuities and perhaps you’ll share with us some thoughts on that. Please will everyone join me in welcoming Minister Steve Webb.
Dr. Ros Altmann
5 november 2013