Employees who are about to retire are not getting enough support when it comes to choosing their annuity, the National Association of Pension Funds (NAPF) has warned.
The UK’s leading pensions body has published a report on the advice and brokerage market used by employers in the private sector whose staff have defined contribution (DC) pensions.
The report spotlights a string of barriers that prevent employers from appointing these services. This means savers end up retiring with a poorer annuity deal than they could have got if support to ‘shop around’ in the annuity market had been embedded in their pension arrangement.
At present, those offering DC pensions to their staff are only required to offer them some basic information ahead of retirement that encourages them to shop around. Whilst the industry has worked hard to improve the information and communications staff receive, hundreds of thousands of retirees each year are still failing to act.
The NAPF wants to see more support for employers and trustees to help them put good services in place, so that they can help their staff with difficult, one-off decisions around annuities and income drawdown.
Current issues include:
• Those offering DC pensions to their staff are often too scared to go beyond the legal minimum in helping them at retirement because they fear legal comeback. But these fears are often based on misconceptions and can be allayed by a greater understanding of the benefits to staff of helping them shop around.
• Those working for smaller employers or with smaller pension pots are most at risk because of the costs to their employers of setting up guidance and advice services, and because smaller pension pots are less profitable for advisers and brokers. This creates a lottery in the amount of help that retirees receive to secure a pension income.
• The advice and brokerage market can be complex for employers to understand, with a range of different charging and service propositions available. Employers may need help understanding what arrangement works best for their staff.
• Fee and commission-based charging models can both help deliver a better deal for savers, but employers need to be alive to the pros and cons of each, and the impact of different groups of staff.
Mel Duffield, Head of Research and Strategic Policy, NAPF, said:
“Too many people are still at risk of failing to make the right choices and get the right shape of annuity at the best price. As they approach retirement what they really need from their employers is more support and advice. But at the moment there are market barriers that stop that happening more widely.
“Auto-enrolment will ensure that all employers are helping staff save for their retirement, and it would be a great shame to see some of those contributions go to waste when it comes to drawing a pension.
“People should automatically shop around for the best annuity when they retire, and employers and pension trustees can do more to make this happen. Whilst insurers are getting better at communicating with savers, it is still the case that hundreds of thousands are failing to obtain quotes and compare prices in the market.
“The decisions around how to turn a pension pot into an income in retirement are baffling. Savers need help from an independent source to ensure they understand the options and make sensible choices.”
The NAPF plans a number of work strands to help its members better support savers when they reach retirement.
It will launch a Made Simple Guide for trustees and employers later this year, which will provide practical guidance about the benefits to scheme members in need of support at retirement and the range of options available to them on the market. It aims to break down some of the perceptions about the risk of going beyond the regulatory minimum.
It will also enhance its training and development for trustees and employers running DC pension schemes. It will offer support on how to implement these services, including guidance on the regulatory implications of providing different forms of support and advice, and what to look for when appointing an adviser or broker.
The NAPF plans to explore how it can improve the functioning of the market and help DC schemes that are not currently being well served – notably smaller DC schemes and DC schemes where members have smaller fund sizes. This could include, for example, the setting of minimum standards for advisers/brokers to develop a shortlist for trustees and employers, or the development of a master-arrangement for advice/broker services that can benefit DC schemes so that they may be better served.
|
