Legal & General is supportive of the FCA Market Study that will review the retirement income market as a whole. In its Thematic Review of the annuity Market, which resulted in the Market Study, the FCA estimates that 150,000 consumers each year would potentially benefit from shopping around and switching provider. Over the coming months the FCA Market Study will investigate this situation further and see how it can be improved.
Legal & General believes that an immediate priority for the industry and government must be to reduce the number of customers who are potentially losing out through making the wrong choices about their retirement income.
Tim Gosden, Director of Strategy for Legal & General Individual Retirement Solutions said; “If you look at industry statistics for 2013 then of the 150,000 consumers the FCA has identified, only 7% are benefiting from an increased income by disclosing poor health or lifestyle issues, whereas roughly 50% of consumers who are shopping around and switching provider are doing so and obtaining an uplift to their income.
Pot size is also a significant issue for this group of consumers. Based on 2013 industry data, over 20% have a pension pot of less than £5,000, around 40% have a pot of less than £10,000 and 60% have a pot of less than £20,000.”
We believe there are some immediate priorities that could be taken by the industry and government:
Trivial commutation
Many of these customers may be purchasing an annuity when they could have used the triviality rules and taken their pension fund as cash instead. We would welcome an investigation to look into this and if it is an issue find out what can be done to improve the situation. We believe that the current triviality rules are overly complex and need to be simplified and revised to allow more small pots to be commuted in the future.
New product development
A change in the current pension regulations that would enable providers to develop alternative product solutions would be welcome. For example, to help consumer with smaller pots, more flexible rules that will allow for a short term annuity or drawdown where funds can be depleted over 5 years, say.
15 minute conversation
We believe that all consumers buying a retirement income product deserve and should get at least a 15 minute conversation with a knowledgeable person. That could be an adviser or other intermediary, their provider or organisations such as The Pension Advisory Service, (TPAS) or the Money Advice Service, (MAS). This will help to ensure they are making the right choices around all of the important issues including triviality, timing, shopping around, combining pots, shape of annuity, health and lifestyle etc. Some of these consumers are genuinely disengaged and simply can’t be left to go it alone. This is why Legal & General is working with The Pension Advisory Service on a pilot study to offer people the opportunity of at least a 15 minute conversation.
An important outcome of this conversation will be to ensure that every consumer gets the best personalised annuity quotation from their pension provider which takes into account their individual circumstances. So when they shop around they have a personalised template for making valid comparisons. Also, if enhanced annuity terms are not available from their pension provider they fully understand the benefit of disclosing information about their health and lifestyle when they shop around.
Tim went on to say: “We do not believe any of the issues raised by the FCA are insurmountable, but they do require a proper understanding of the challenges that many consumers face with this often one-off important financial transaction.
Some of the issues can be resolved relatively quickly with a sensible dose of regulatory change but Legal & General believes that there is a lot to be gained from simply talking to customers and ensuring they are in a position to make informed choices.“
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