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30Jan14: Are annuities fit for purpose?
- 1. Are annuities fitfor purpose? 30th January 2014 This event is kindly supported by
- 2. Welcome Baroness Sally Greengross ChiefExecutive ILC-UK This event is kindly supported by
- 3. Welcome from Legal& General Kerrigan Procter Managing Director Legal & General Retirement This event is kindly supported by
- 4. Sue Lewis Chair Financial ServiceConsumer Panel This event is kindly supported by
- 5. Annuity advice andpurchasing: the consumer experience Sue Lewis Chair, Financial Services Consumer Panel www.fs-cp.org.uk
- 6. Background Approximately 400,000annuities sold each year, £12 bn Expanding market: Maturing pots from personal pensions & GPPs (sold since 1987) Auto-enrolment “Small pots” problem Open market option (OMO) – take-up, weak rules
- 7. Finding 1: TheOMO doesn’t work well Open market bewildering & feels risky Consumers ‘shop and stop’ ‘Best annuity rates UK’ gets you nearly 1m hits Consumers do not drive competition Low consumer financial capability Fear of product complexity Fear of making an irreversible, high-cost mistake General distrust of professional advisers Inability to find appropriate advice at acceptable cost 7
- 8. Finding 2: non-advicedriven by advisers not consumers Major shift to non-advice due to: Light touch regulation; adviser not responsible for sale Lower costs (eg qualifications), higher profits via commission Big differences between advised and non-advised services Whole of market; deep underwriting, checks for contract terms (eg GARs); checks to ensure selection of right product Limited panels; limited support (annuity sales-driven); shallow underwriting; no checks for GARs etc (can be a disclaimer on site) 8
- 9. Finding 3: Introducers‘masquerading’ as advisers Introducers sell personal customer details to firms selling annuities Get around £250 for each subsequent successful sale Websites look like non-advice and advice sites, but: Consumer doesn‟t know who they are dealing with Doesn‟t even know where the firm is based Result? Customers get phone calls, emails, texts from firms they have never heard of and did not contact, contributing to “shop and stop” 9
- 10. Finding 4: pricingand competition issues Excessive profits on annuity books? 20 x profits on annuity books compared with all other lines, including pensions Academic research on „money‟s worth‟ (90%), out of date and only covered OMO rates Rollover pricing embeds cost of adviser commission even if customer does not use OMO; cost not visible to customer „Rollover‟ annuities most pressing concern, especially where provider is not in open market 10
- 11. Recommendations The FCAshould: introduce a code of conduct for the non-advice market address the causes of the current regulatory arbitrage between nonadvice services and professional financial advice undertake a rigorous market study to examine possible exploitative rollover pricing, annuity profits and the impact of tied relationships between insurers and annuity providers strengthen the definition of the Open Market Option. The Money Advice Service should: develop its independent annuity adviser directory, and launch a targeted education campaign The Government should: require employers and trustees to establish a high-quality, low-cost decumulation service for members of workplace schemes establish a ‟de-NEST‟ look at tax rules for multiple small pots 11
- 12. Dan Hyde Personal FinanceEditor The Daily Telegraph This event is kindly supported by
- 13. Tom McPhail Head ofResearch Hargreaves Lansdown This event is kindly supported by
- 14. Dr Ros Altmann Economistand former Downing Street adviser This event is kindly supported by
- 15. ARE ANNUITIES FITFOR PURPOSE? ILC-UK/L&G Panel Debate House of Lords 30 January 2014 Dr. Ros Altmann
- 16. ‘PURPOSE’ OF ANNUITIES Use pension savings to meet retirement income needs Provide good value, secure retirement income Offer mortality cross-subsidy to cope with uncertainty of lifespan Ensure pension savings support pensioners in retirement Insurance against living ‘too long’ so don’t run out of money
- 17. ARE STANDARD ANNUITIESFIT FOR TODAY’S RETIREMENT? Standard annuities are single life, level and only address one retirement risk – but there are many others during longer retirement No inflation protection Usually single life, no partner’s pension Dying relatively young means losing all capital Never do better if health or other circumstances change Never benefit from good investment returns or rate rise Nothing left for care
- 18. ANNUITY INCOME FROMAGE 65…
- 19. THE REALITY OFANNUITIES Unique financial product – complex and irreversible Asymmetry of information – poorly informed customers who only buy once in a lifetime, often buy wrong product May be secure income, but all capital at risk, no risk warnings ‘Small’ funds can’t find value No controls on charges, rates, value for money, suitability Customers pay ‘commission’ even if no advice received Must live to 90 or even >100 to get value!
- 20. VALUE FOR MONEY– MIS-SELLING? Name of insurer Age when insurer pays more than original fund if earns the assumed returns Assume 3.5% return on fund Prudential (MAS quote) Abbey Life MGM Countrywide Standard Life Halifax/Clerical Med/Scot Widows Pru/Royal London HSBC Life Sun Life of Canada/Phoenix Aegon LV ReAssure Legal and General Canada Life Reliance Mutual 102 100 97 96 95 95 95 94 93 93 92 91 90 90 89 Assume 4% return on fund 107 105 102 100 98 98 98 97 97 96 95 94 92 92 91
- 21. ANNUITIES SOLD AS‘NO RISK’ REGULATORY FAILURE No controls on charges or value for money for customer High charges often hidden, pay for ‘advice’ even if none received No risk warnings or suitability checks – caveat emptor OMO not enough - shop around for better rate for wrong product! £1bn a year lost to future widows/widowers meaning more poverty RDR bias against advice people need before irreversible purchase
- 22. WHAT REGULATORS COULDDO Reform COBS rules so people not just offered an annuity ABI self-regulation failed – need controls on charges & value Information, risk warnings & advice before buying – explain options Do nothing option, benefits of waiting Leave money invested either in pension or drawdown Timing, type, rate – customers need much more than OMO tPR guidance to trustees to ensure information and value of advice Address ‘small’ pots – allow as lump sum not annuitise
- 23. WHAT THE INDUSTRYCOULD DO Stand up against worst practice – dreadful value accepted by ABI Standard letters to explain all options Proper disclosure of charges, know your customer checks Develop decumulation options that fit better with people’s lives More flexible products, funds invested for longer, not all at 65 Drawdown for smaller funds Annuitise later to allow life/market changes: adjust for health/care
- 24. THANK YOU FORLISTENING… Dr Ros Altmann Blog: pensionsandsavings.com Twitter: @rosaltmann Website: www.rosaltmann.com
- 25. Jane Vass Head ofPublic Policy Age UK This event is kindly supported by
- 26. Tim Gosden Head ofStrategy Legal & General’s individual annuity business This event is kindly supported by
- 27. Are annuities fitfor purpose? 30th January 2014 This event is kindly supported by
Editor's Notes
- #19 The annuity risk is well-know (nine out of 10 advisers wouldn’t recommend it for themselves currently)Annuities are touted as the low risk or no risk option but that is not trueDie early and you lose your money and live too long and suffer from inflationCan you get value from an annuity?