No S**t Sherlock – FCA states the obvious

Shock! Horror! The internal annuity market is broken.

So, claims the FCA in its long-awaited Thematic Review of Annuities, published today. In its 36 page report, the FCA states 80% of the people who buy annuities from the ceding provider could have got a more generous retirement income if they had shopped around and bought from a different provider. It goes on to say one in six people could increase their retirement income by more than 10% if they changed provider, and for people with severe health conditions the figure is potentially much higher.

It also has the startling news that the situation is worse for those with pots of less than £5,000 as only a handful of providers offer them annuities.

And what’s the FCA’s answer to this? To conduct a competition market study and further supervisory work.  More reports, which we probably won’t get to see for at least another 15 months.

In a way, I get why FCA had to do the report. It has to get actual proof of the situation, to prove the internal annuity market doesn’t work. But on the other hand, I am staggered it has taken 13 months to state the obvious, to tell us what we already know. And to leave us dangling in the same position, with only the promise of more reports.

This doesn’t take us any further forward. It doesn’t help the hundreds of thousands of people who will retire this year. And it’s not as if its hands are tied. The retirement income market is well aware it has problems. The social media and websites are awash with ideas of what we can do to improve the situation. It’s just a mystery why the FCA doesn’t stop, listen, and act.

For example – I’ll give you five quick hit ideas. None of these are original – there are several providers or organisations recommending these today.

1.       Give people a simple pension passport – gives people all the information they need to shop around. ABI or FCA could introduce this.

2.       Get the provider to obtain a completed health questionnaire – this will highlight the client’s health situation and, if suitable, will push them towards an enhanced annuity. ABI or FCA could action this.

3.       Get people to sign a disclaimer if they stay with the original provider, This means we put in front of them in big letters “are you sure about this? you might be doing the wrong thing”, Again, one for ABI or FCA.

4.       Remove commission. Introduce adviser charging style fees and disclosure for the non-advised channel, so people know –and agree to - exactly what they are paying. One for the FCA.

5.       Finally, get the trivial commutation rules sorted. We should be talking about a level of at least £10,000. HMT should be actioning this.

Please FCA, ABI and HMT. Do something. Don’t just write reports. We need Steve Webb’s idea of a taskforce to identify some quick wins. Because the longer this goes on, the more damage is done to the market, and the more people lose out.

The charge cap: to be or not to be, that is the question?

Today’s announcement from Steve Webb about the potential pension charge cap had half the pension commentators cheering and the other half tearing their hair out.

After asking last Autumn for the fastest consultation period possible, today Webb confirmed the decision on the charge cap has been delayed. Instead he wants the cap to come in by April 2015 (and not April 2014 as previously mooted), and said he will give employers at least 12 months’ notice. The reason for the delay? He was worried about the amount of time employers would have to make changes to their schemes.

This policy is Steve Webb’s baby. His great legacy of this coalition parliament. So, to delay it means it was either a massive victory for industry lobbying or he came under some very uncomfortable pressure from the Treasury. Or both.

Webb definitely wants a charge cap. Although it was headed up as a ‘consultation’ there’s little doubt, despite the OFT’s view, Webb was always going to introduce a cap. We can now expect a paper next month, and Webb’s intention is to introduce the charge cap by April 2015. The problem with Webb’s plans is we need the cap in legislation, and with a general election in May 2015, there’s a real possibility this might get caught up in a legislative traffic jam as the coalition government tries to pass all the remaining legislation milling around as the clock ticks down. And whilst we know this policy is important to Webb, it may not be as important to the rest of Government. Including, significantly, the Treasury.

We do know the cap’s going to apply to all qualifying pension schemes – in other words ones being used to automatically enrol people, or those where the members are people who would otherwise qualify for automatic enrolment. We also (probably) know that active member discounts will go, and will have to be unwound for any scheme set on that basis.

What we don’t know is the level of any charge cap. It’s very unlikely to be above 1%, and much more likely to be 0.75% or 0.5%. And we don’t know what charges the charge cap will cover. Although the talk was of AMC, several have lobbied for all charges to be included including all the pesky fund charges (even the known unknowns and the unknown unknowns – to sort of quote Donald Rumsfeld). And we don’t know what will happen about schemes previously set up on a commission basis.

So, what can we do now? Well, avoid AMDs to start off with. They will only cause problems later on. Only set up schemes with probably at most a 0.75% charge – if that’s possible – to err on the side of caution. And start to look very closely at existing schemes being used to harbour potential automatic enrolment employees. If they are on an ‘old’ basis, they will need to be unwound or shifted, and we may have about a year to April 2015 to take action. But groundwork can be made now.

The charge cap is not yet home and dry. There is still a significant possibility it could be kicked into the legislative long grass. Webb wants qualifying schemes to be pristine clean with low charges and no fiddly AMDs. And the ironic thing is even though he has faffed around with this policy, employers, providers and advisers have all started making the changes necessary for the introduction of the cap. So we could end up with the peculiar position of no charge cap in legislation, but a charge cap in practice.

Transferring annuities - a nil sum game

The pensions industry was woken sharply from its post New Year lull this weekend when Steve Webb put forward the idea of transferring annuities. This idea was, sadly, met with, dare I say it, derision by most of the industry.

Why do I say sadly? True, it was a half thought through idea. First the option already exists, although only a few providers offer it – presumably through lack of interest from annuitants. Second it will never quite get the results people want. People want to transfer to increase their income, probably because their circumstances have changed. But you have to remember transferring is almost always a nil sum game. Generally, actuaries don’t let people work options against them.

So, if you choose to transfer because you have developed health problems and you now want an enhanced rate, then the ceding insurer will work out the transfer value on your new current life expectancy and the instalments yet to pay. You may be able to get slightly better rates in the open market – but it won’t be a step change. Especially when you factor in adviser costs involved in transferring.

What about the incredibly unlikely scenario that rates increase and you bought your annuity at the nadir of the market? I am willing to bet my house actuaries will think about this possibility and work into the original pricing enough cushioning to make sure it doesn’t hurt if this situation arises. Some reckon that would reduce starting annuities by 25%. For everyone. Regardless of whether rates go up or not. Regardless of whether they transfer or not.

So the idea of transferring annuities is not really a flyer.

But it was sad it was met with so much mockery. At least Webb is putting forward a solution. Over the past six months we have spent much of it wringing our hands and saying isn’t it dreadful the annuity market isn’t working. I think the time of analysing is past. We now have to work together to come up with some proper tangible ideas about how to achieve better distribution of annuities and better incomes for pensioners. Let’s hope the FCA review  sparks off a few good ideas.

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The other piece of pensions news this weekend was that David Cameron committed to providing the triple lock guarantee on the state pension for the duration of the next parliament. This is not a light decision. Such a guarantee costs money. But as the PPI has shown it is by far the best way of providing a decent pension, and much more effective than tinkering around with charges. I only hope that in 25 years’ time when I retire the triple lock is still around. But I seriously doubt it.

Charges fiddling whilst low earners’ pensions burn

The Pensions Bill makes a reappearance in Parliament today after the summer recess. Greg McClymont, the shadow pensions minister, is still concerned with getting amendments made which will force providers to disclose the whole of the charges to the pensions customer including all the little investment nuances. And Steve Webb will tomorrow publish his reply to the OFT report, calling for a 0.75% charging cap for workplace pension schemes to attack ‘the scourge of high charges’.

Now, don’t get me wrong. Low and transparent charges are important to the success of automatic enrolment and pensions, and these guys are right to be waging this particular war. I get all that.

But.

The PPI has over the last couple of weeks published some interesting stuff about how people can get an adequate pension in retirement. And what has struck me is the importance of the triple lock guarantee for state pensions. For example, one chart shows that for a lower earner the probability of getting an adequate retirement income from private and state pensions is 63%. But if the triple lock guarantee gets replaced by linking the state pension only to earnings, then that probability plummets to a mere 36%.

Yep, down from 63% to 36%. Slashed.

Another chart shows if someone wanted to replace two thirds of their income using a traditional lifestyle investment fund, then, assuming 0.5% amc and that the state single tier pension has the triple lock, they would need a 11% contribution rate.

Change that to 1% amc and the contribution rate needed understandably goes up to 12%.

But change the triple lock guarantee to earnings linked only and the contribution rate goes up to 14%.

Concluding that the triple lock guarantee is way more important than charges. But so far, no political party has committed to continuing with the triple lock guarantee in the next parliament.

So, pension politicians. Yes, carry on with your crusade to get low and transparent pension charges because it is important. But please can we shift the focus and also include the triple lock guarantee. Let’s get their promise that the triple lock guarantee will be there after 2015. Because that will make the all important difference in making sure lower earners (and everyone else) get an adequate income in retirement.

A disaster for Nest?

If automatic enrolment was a marathon (and it certainly isn’t a sprint), we would be hitting the four mile mark around about now. And so far, so good. Everything seems to be going swimmingly. Employers have planned, implemented, and complied – with the help of their HR department, consultants, and advisers. The incredibly low opt out rate of 10% is dazzling. Steve Webb  and his DWP gang must be leaning back with a smile on their faces.

This week we learnt Nest has signed up 100,000 members. Great news. But not as good as the 250,000 members Legal & General have signed up to their master trust. Despite Nest insisting all is OK, and it is on track to meet its grand masterplan, some are saying this is a disaster for the Government-sponsored scheme and action needs to be taken quick. That action being to remove the transfer ban and contribution limit.

Excuse me if I don’t join in this wringing of hands in despair, but I don’t think this is a major catastrophe. Nest was set up with a very specific purpose. To help the employers the rest of the market couldn’t – or wouldn’t want to – reach. (And not necessarily to provide the cheapest charges as some have argued.) So far we are only at the beginning of automatic enrolment, and the schemes up for grabs have been provided by big multinational employers. The sort of employers almost all providers are happy to ‘reach’ and have on their books.

Roll on 18 months, and I can guarantee that the member numbers on Nest’s book will be swelling, whilst L&G (and other providers) will have withdrawn somewhat from the fray and the fighting for schemes.

So to talk about disaster and removal of limits is premature. It may be that the transfer ban has to be lifted to implement the automatic transfer of small pots. But it shouldn’t be removed purely because Nest hasn’t secured as many big schemes as it wanted to. Let it instead start to concentrate on its true market – the small employers who will need every ounce of help Nest and others in the industry can give.