Retirees would make better decisions about how to use their pension money if there was a clear divide between saving into a pension during the working years and drawing out of it during retirement, according to Just Retirement.
In the wake of the FCA’s critical study of the annuity market, the retirement income specialist said providers of pension accumulation products should have to ensure their own customers reaching retirement are made to buy their income solution via the external ‘open’ market, boosting transparency and competition.
“The bad practice that afflicts this market would disappear if there was a clean break so that providers of pensions had to compete to hold on to their own customers’ pension money,” said Stephen Lowe, director at Just Retirement.
“Having seen the choice on offer, customers could still buy from their existing provider if they wanted to but the difference is that it would be an active and informed choice.
“At the moment we have a two-tier market where a minority of informed customers tend to shop around and leave for better deals but a significant number stay where they are, perhaps thinking loyalty will be rewarded. That rarely happens, as the FCA’s report makes clear.”
He said that while providers could use the existing relationship they have with their customers to offer better deals, they rarely do so. It is far more common for them to offer poorer deals, relying on customer inertia to boost their own profits. The knock-on effect has been to undermine confidence in the whole market, discouraging retirees from choosing guaranteed income solutions that did offer good value.
“The FCA report is just the latest in a series which demonstrates that despite all the attempts to boost shopping around, we still have this two-tier market. It would be a radical move but splitting the pension ‘manufacturing’ from the ‘distribution’ could quickly promote competition where it is most needed.
“Everyone would be free to buy from whichever pension provider they preferred, but it would be an active choice rather than the result of passive acceptance of the first deal they are offered.”
Stephen Lowe said that FCA explicitly stated in the market study that guaranteed lifetime income solutions such as annuities are good value, particularly if people shop around. “The pension rules are changing but people’s need for income to pay the bills remains the same. In the new pensions era we need to make sure that fact does not get forgotten.”
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