"The capability to meet people's needs is not there", says Aries' Ian Neale as he discusses the current state of the annuity market.
Between consenting adults in private, thinking aloud can be a useful activity. A minister might use his or her senior civil servants as a sounding board. When the listener is a journalist conducting an on-the-record interview for a national newspaper which is more than happy to print anything said, the minister is taking a big risk.
Thus the dominant news story this week has been Steve Webb's expressed desire that annuitants should be able to switch provider to get a bigger pension, in the same way that home owners can move their mortgage every few years. Apples and pears, you might say; mortality is not a concern for mortgage providers. It's more than worrying, because this is a pensions minister who is generally reckoned to know his stuff, and in a Government that seems willing to give him plenty of rope.
Industry commentators have pointed out that no-one is forced to buy an annuity on retirement and even those for whom drawdown is normally ruled out can opt for a short-term annuity. Providers have said transferability could be priced into a lifetime annuity contract, but it might reduce the rate by 25% - hardly what the minister is looking for! Those transferring to get a better rate would mostly be impaired lives, which would lead to even lower initial rates and that's without taking into account the cost the member would incur in arranging a transfer of the annuity.
So altogether not merely a bad idea - practically speaking it's a non-starter. It gets worse. Had the minister merely been flying one of his kites, it might have attracted less attention, but it was described by the Telegraph as part of his "blueprint for an overhaul of the private pension system". A blueprint is an architectural plan or technical drawing, a design showing considerable detail. That's not what we have here.
Webb described the annuity purchase process as "a lottery". Others have described the annuity market as inflexible, in need of reform, or simply "broken". There is probably a fairly strong consensus that for an increasing number, it doesn't work. I think it is a mistake to suggest it used to and thus simply needs repair. The problem is more fundamental - the capability to meet people's needs is not there.
Only in recent years has the rate of growth in the number of relatively low-value money purchase pots at retirement started to accelerate. The Open Market Option (OMO) is far from a complete solution to poor annuity rates, not least because people don't know how to go about taking advantage of it. Professional advice, if you know who to trust, can seem expensive. The Financial Conduct Authority's (FCA) current thematic review of the market might highlight the present post-RDR drift to non-advised annuity purchase, but will it do any more than identify defects?
I suggest much more radical initiatives are required if future retirees are to have any hope of a comfortable life. Few people are financial experts, just as few are really knowledgeable about medical treatment. One thing that really does make a difference to cost is scale. A National Wealth Service, analogous to the National Health Service, with competent salaried advisers could help channel individuals in the right direction for each one. And not only at retirement, when it is often too late to offer much improvement.
Perhaps there is even an opportunity here for the Government to make something of the much-maligned Money Advice Service.
Written by Ian Neale, director, Aries Pension & Insurance Systems Ltd
ian@ariespensions.co.uk
