Annuity Panel (December 2007) - Seeking guidance

CHAIRMAN: Billy Burrows, director, William Burrows Annuities
Burrows first became involved with annuities nearly 10 years ago when he helped to establish Annuity Direct. William Burrows Annuities was created in 1998 and one year later Burrows was asked to join Prudential Annuities as business development director. In 2001, Burrows re-established William Burrows Annuities.

Mike Douglas, managing director annuities, Aegon Scottish Equitable
Douglas joined Aegon Scottish Equitable in August 2006 from Partnership Assurance where he was chief operating officer. He has extensive experience within the financial services market and his knowledge of the annuities market is considerable.
Aston Goodey, head of sales (retirement solutions), Prudential
Goodey has been with Prudential for 20 years. He has held a variety of managerial roles in finance, commissions and life and pensions. Goodey has completed a diploma in insurance and financial planning.

David Greenall, distribution development manager, Canada Life
Canada Life has built a strong position in the open market option market with a reputation for highly competitive pricing and excellent levels of service. Playing a key role with this continued growth has been business development manager Greenall.

Matt Trott, product and marketing manager, Tomorrow
Trott joined GE Life, recently rebranded as Tomorrow, in 1992. He has worked in all parts of the business, including the sales office, operations and managing the pensions technical team. He is now responsible for developing Tomorrow’s annuity products.

Neil McCarthy, head of sales, Partnership Assurance
McCarthy has been involved in life assurance since leaving university in 1983. Primarily involved in sales and marketing, he spent seven years as head of personal finance sales at Swiss Life, having launched the solution range of protection products. He is responsible for managing the distribution team at PA in the UK.
across the retirement, care, protection and equity release propositions.


Burrows: What do you think will be the success and impact of postcode annuities?

Douglas: It is difficult to say – I have mixed views. A postcode can be used to pinpoint the street you live on but that only gives you a view of the individual’s disposable wealth not their accumulated wealth – and then only if they are the homeowner.
It can give you a guide as to what level of medical care they may have access to within that postcode but may not allow you to make informed decisions about their standard of living. How can a postcode help you differentiate between the 65-year-old who has lived in their property all their life so their mortgage is paid off, but may have spent all their life doing physical manual labour and the 65-year-old who moved in to their property 10 years ago having taken early retirement from a well-paid executive role?

Goodey: When pricing annuities, an insurer can only use factors for which they have reliable data and an understanding of that data. Therefore, few insurers are in a position to offer postcode annuities.
For those able to offer this, the advantages to using postcode is that everyone has one and so it is easy data to capture.
If you are the first mover then you can write better quality business (unhealthier lives) than your competitors.
This will force the market to move to postcode pricing to avoid anti-selection. The speed of change will depend on providers’ abilities to understand how to incorporate postcode into their pricing and admin processes. As the market develops and becomes more sophisticated providers will have to accept lower margins, or the price of annuities for people in affluent areas will become more expensive.

Greenall: They will probably be reasonably successful in the short term as there will be an easy application process.
Assuming they are successful, this will result in “standard” annuity rates getting worse for people not in the preferred postcodes, and this means not just those living in the South East of England but pretty much anyone living in a reasonably sized house on a nice street anywhere in the country.
It will be interesting to see whether the actual mortality experience of the preferred postcodes works out as the life office expects – research suggests that postcode is not actually that good a risk identifier in the situation when other observable characteristics of any given individual can be stripped out.
Is a healthy 65-year-old non-smoker with £75k of pension savings living in Wigan actually that much of a better risk than the same policyholder living in Tunbridge Wells?

Trott: The postcode annuity is another example of insurers trying to match more accurately the rate offered to annuitants to their life expectancy.
To this end, it has added to the debate that those with shorter-than-average life expectancies should be entitled to higher levels of income, and this has helped raise awareness of the enhanced annuity market as a whole.
However, the postcode annuity is a fairly simplistic way of measuring relative life expectancy, and there can be huge differences in risk between residents of the same street.
Traditional enhanced annuity providers, such as Tomorrow, look specifically at the risk of the individual customer and give enhancements based on their life expectancy rather than that of their neighbours. For this reason, clients that smoke or suffer from ill health are still likely to receive a higher income from a more conventional enhanced annuity provider.

McCarthy: As it seems to be only a minor enhancement, we do not see it as significant yet. In the long term, however, it will probably become another inevitable aspect of underwriting annuities.
But if it does catch on, it will need to be very sophisticated because of the potential variety of longevity risks contained within postcodes. Without this sophistication, there will be cross subsidies within postcodes.
Clearly, health is a better indicator – which can be underwritten – and individuals living with or who have had health conditions should look for enhanced or impaired annuities.


Burrows: The problem with the open market option is not that people do not know about it, but that for many it is simply not cost effective to purchase an annuity with another company because the process is so complex and the costs of advice is more than the increase in annuity. Do you agree, and what can be done?

Douglas: Firstly, I am still not sure that everyone approaching retirement does know about the OMO or that as an industry we are doing enough to promote it.
However, I do agree processes are complex and so may not be perceived as cost effective – although there are some companies who try to reduce the complexities by contacting ceding providers on the customer or adviser’s behalf to reduce their admin. But this still shows that people retiring are taking a short-term view of their retirement income and not fully appreciating the longevity risk.
Transferring to another provider may not seem cost effective for an extra £5 a month as a one-off, but if you take into account that that income might be paid for 30 years then that is £1800 you have missed out on.
Similarly, I agree the cost of advice can seem expensive, but isn’t the answer to redesign the way an adviser can be remunerated under an annuity to allow for more flexibility in the way they charge? For instance, to cater for fee-based advice.
The customer in many cases does also retain the right to pay for the advice another way, for example with a cheque from their current account – the money does not have to come from their annuity fund.

Goodey: Retirement is obviously a major life-changing event and hopefully people will have been thinking about what they are going to do some time before the event itself. There are clearly a lot of things people need to consider when they retire and their choice of annuity is only one part of a much bigger exercise.
If consumers are able to identify their needs then the process of shopping around should not be complex, whether this is through using an adviser, using the web or through dealing with annuity providers directly.

Greenall: I do not think it is a cost issue – the cost of advice is typically around 1pc of the purchase price and the difference in rate between the current pension provider and the best open market rate will often be far higher than this.
I believe it is a hassle/difference in income issue at small to medium-sized pension pots. If the accumulated pension amount is £30k then after tax-free cash the monthly annuity payment may be around £100 after basic rate tax. Even a 5pc difference in rate then only equates to £5 per month.
The process isn’t actually all that difficult but is it worth it for an extra £5 per month?
For small pots, advisers may refer an enquirer directly to a particular provider and suggest they deal directly rather than undertake a full review again because of the return vs hassle factor.

Trott: If a customer who smokes can increase his income by 25pc from a fund of just £5000, it is the equivalent of increasing the value of his pension fund by over £1000. Therefore, I would suggest it is always in the customer’s best interest to shop around, even if some of this extra value is used to pay for the cost of advice.
I would suggest the key issue now is that customers do not know how to use their open market option, rather than whether they have one.
When customers retire, they simply want someone to sit down with them, guide them through their options and explain what they need to do next.
Part of the solution may lie with generic advice, but this notwithstanding, the wording of pension provider maturity letters need to be amended to direct customers to independent sources of information and guidance. Only this will help customers exercise their OMO with confidence.

McCarthy: Growth in uptake of the OMO is slower than we would like, and the issues stated do contribute to this. But it is an inaccurate generalisation to say the process is too complex or too expensive. For example, people will be willing to pay the cost of advice if it results in a significantly enhanced annuity income for their whole retirement.
There is room for improvement, of course, as the recent Treasury review states. The industry is taking steps to do this, however, and the Association of British Insurers is to issue new guidelines to providers on this area.
Also, the timescales recommended by the ABI should be taken into account when assessing levels of redress for individuals who are affected by poor service, resulting from delays from ceding schemes.


Burrows: Do you think that the OMO can be increased by providing generic advice on the internet?

Douglas: I firmly believe generic advice will enable more customers to actually get some advice about their retirement income, which can only be a good thing. Also by using the internet the costs will automatically reduce which should help counteract some of the concerns raised in the previous question.
But whether it’s on the internet or through another means, our age-old issue will still need to be overcome – that of making this information easy to find.

Goodey: The consumer need is for assistance to be available if they need it, in order to make an informed choice at retirement. I see the availability of support via the internet as one part of a range of tools available to consumers including face-to-face advice, printed material and telephone helplines.
The availability of a range of sources for assistance has to be a major benefit for consumers when deciding on their retirement options.

Greenall: Yes, although the internet should still point people in the direction of getting proper financial advice – the cost of advice on annuity products is not high and the different options available to them should be explained to them.
Terms used in respect of annuities will need explaining, e.g. escalation, 50pc spouse, guarantee etc. and access to application forms and quotes and key features would also help.

Trott: I believe we must take every opportunity possible to explain to customers how they can use their open market option. However, I must admit I have reservations about having the internet as a hub for the communication strategy.
The people that would benefit most from the new generic advice service are those who are effectively priced out of the current financial advice market. I would suggest these people are the segment of the population who are less likely to have internet access, or the skill needed to use it. For these people a phone-based service will be much more appropriate.

McCarthy: Everything we do to inform and deliver educative tools is a positive step and will help to a certain extent. However, the primary drivers must be:
• providing clear and simple information in the vesting packs issued by every product provider, and
• simplifying access to the open market.


Burrows: In your opinion, what were the important achievements in the annuity market during 2007 and what were your disappointments?

Douglas: For me the important achievements were the greater range of annuity products now available and the value protection option (available from A-Day). These have helped begin to change the perception that annuities are inflexible with no death benefits. Providers are working on new variants all the time which is good news for the customer.
One thing I have found disappointing is that improvements in processes have been limited and there has certainly been no improvement in the timescales for transfers between providers. Introducing standardised forms for setting up an annuity and transferring information between companies have been considered for a long time and, as providers, we must work together to implement these. It is one way we could demonstrate a genuine commitment to our customers’ needs.
Finally, as an industry I think we still have a long way to go in informing and educating consumers about all the options available to them at retirement.

Goodey: The annuity market has continued to deliver competitively priced products that meet the consumer need of a secure income for life. We have also seen consumers become increasingly aware of the benefits of investment-linked annuities, and especially with profits annuities.
The retirement income and annuity markets have also seen the development of a range of new products (most commonly referred to as the third way) which should mean increased consumer choice.
The major disappointment has been that our proposals for a money-back guarantee annuity have not been implemented. Under a money-back guarantee annuity on death a taxable lump sum could be payable, equal to any difference between the original premium and the gross income paid to date.
We believe this proposal is simple, attractive to consumers, addresses one of the key consumer concerns about annuities, and should encourage pension saving. We are also concerned the 35pc tax rate on value-protected annuities remains in place. This is a penal rate to impose on basic rate taxpayers who may benefit most from the value protection option.

Greenall: The continued push for OMOs and the beginning of highlighting the benefits of impaired annuities were encouraging and this needs to continue. The disappointment is we still have a way to go with these although the ABI initiative is making progress

Trott: In the enhanced annuity market, I am pleased that the proportion of people taking out enhanced annuities has increased to almost 25pc of all open market option annuities, and awareness of the market continues to grow as more providers enter the market.
However, I am disappointed the take-up of the OMO continues to remain below 50pc, and the transfer of funds between providers remain so problematic.
Having said this, it gives me heart that these issues are now being tackled at the highest possible level, and I look forward to the position improving in 2008.

McCarthy: Important achievements:
• Increase in awareness and uptake of enhanced and impaired annuities
• Introduction of the common quotation form – a clear sign the industry is willing to work together to simplify processes for both IFA and customer
• Development of xml internet quotes
Disappointments:
• Not enough progress in speeding up processes – though hopefully the ABI and the Treasury review will improve this
• The OMO – overall the take up has not been high enough. The impact of this, of course, is that people are not maximising their income in retirement.