With around 50 days to the introduction of the retail distribution review (RDR), the International Longevity Centre-UK (ILC-UK) has today published “Advice for all”, a new report which sets out practical solutions to address the advice gap post RDR.
Following the RDR there are concerns that fewer advisers will provide full advice to those with average pension pots, with some choosing instead to shift up the wealth spectrum.
“Advice for all” highlights the views industry and voluntary sector experts outlined at the Retirement Income Summit, hosted in June 2012 by ILC-UK and sponsored by Aviva and Partnership.
“Advice for all” calls for immediate action to reduce the risk of an advice gap which could result in poorer and less well advised pensioners. Of delegates surveyed at the start of the Summit, 78% believed the RDR will result in an advice gap for people with small pension pots.
The policy recommendations from the experts at the Summit include:
- The industry should create a comprehensive league table of annuity rates and a directory of advisers.
- Annuity providers must publish all annuity rates, regardless of whether they offer them just to current policyholders or open to all retirees.
Better information for the consumer:
- Consumers should receive from their pension provider, the key details about their policy on just half a side of A4 paper.
- All consumers should have the right to a short conversation about their retirement options.
- Providers and regulators should work together to ensure consumers no longer receive volumes of compliant but ultimately overwhelming information.
A greater role for technology:
- Annuity advisers and providers should explore greater uses for technology in delivering advised and non-advised services to help people understand their options at retirement and help them make an appropriate decision.
The report highlights that the difference between the best and worst annuity rates can be significant and too few people understand that they can shop around to get the best annuity rate through the ‘Open Market Option’.
“Advice for all” highlights four urgent challenges which must be addressed immediately in order to prevent consumer detriment:
- The advice gap: those with modest incomes may no longer have access to advice and could lose out on much needed retirement income.
- Too few savers are exercising the Open Market Option: retirees are losing out on retirement income through annuity providers’ failure to promote OMO properly.
- Information overload: more needs to be done to ensure customer information is developed from a consumer, rather than compliance, perspective.
- Lack of focus on the right type of annuity: there is a risk that consumers focus on the annuity rate they receive, to the exclusion of whether the type of annuity they are purchasing is right for them, which is critically important.
The report also highlights four longer term issues to be solved:
- Erosion of savings culture and industry trust: Confidence in savings is low due to the poor reputation of the financial services industry.
- Tackling opaque products and rates: Lack of transparency damages customers’ confidence in the industry and prevents consumer engagement with pensions.
- Slow pension transfers: The mechanics of the pensions industry has made it difficult for retirees to get good annuity rates and accordingly erodes trust.
- Too many small pension pots: Fragmented pension pots do not engender engagement in the way a large pension pot does.
Delegates at the Retirement Income Summit were asked to vote on different policy proposals during the event:
- 84% of delegates at the summit agreed that better consumer outcomes would be achieved if simplified advice was made workable.
- 85% agreed that non-advised solutions combined with more financial education, transparent communication and appropriate ‘nudge’ techniques could help people get more from their pension pot.
- 63% agreed that all pension customers approaching retirement should receive a one-page letter explaining that shopping around could provide them with more income.
- 65% said the Government should consider some simple defaults for annuity purchase.
- 79% of delegates said benchmark annuity rates for non-open market annuity providers should be published.
- 83% said advised and non-advised services should be subject to the same rate transparency requirements.
- 82% agreed that the Government and industry should develop detailed proposals to simplify the pensions transfer process further, whilst 95% said the industry should improve the flow of information from the current pension scheme to the member and their adviser and to release the monies to the new provider more easily and quickly.
Launching the report, Baroness Sally Greengross said “Our work on the Retail Distribution Review over the past year has highlighted a very real concern that many people will cease to access the advice they need. It is right that we raise professional standards in the advice sector. But we must all work harder to ensure that the poorest among us can maximise their income in retirement. Our report proposes solutions to the problems identified at the Retirement Income Summit. It is vital that industry alongside the Treasury and DWP, act on these ideas.”
Gregg McClymont MP, Shadow Pensions Minister, said: “I welcome the ILC-UK report. The urgent focus on the need to improve the value for money pensioners get when they turn their pension pot into an annual income is justified. For many people the current system just doesn't deliver value for money at the point of retirement".
Clive Bolton, Managing Director of Aviva's At Retirement business commented “Aviva wants to explore ways to help consumers get the best possible income in retirement. One of the unintended consequences of the Retail Distribution Review may be to limit access to advice at retirement, particularly for consumers with moderate savings who may not wish to pay a fee for full independent advice. By continuing to improve access to the Open Market Option and help retirees shop around for the right annuity we can make a very real difference to consumers’ income in retirement.”
Steve Groves, Chief Executive at Partnership “We are facing an annuity apartheid where there is a risk that only the wealthy will shop around for the best retirement income. We have been campaigning to ensure that Government, consumer groups and the industry talk to find solutions to help the majority (78% of annuities sold in the UK in in 2011 were for fund sizes under £40,000) get access to better retirement income, in the face of a potential advice gap with the introduction of the RDR. An annuity is for many of us, a once in a lifetime decision. For those with health or lifestyle conditions the difference between the best and worst rates can be up to 40%. At the same time, too few exercise or fully understand the benefits of exercising the Open Market Option and only 27% of people purchased an enhanced annuity while up to 50% could be eligible”.
1) A full list of voting results is available in “Advice for All”. 123 experts attended the Retirement Income Summit and voted on a variety of options.
- The report, Advice for All, will be available from 10.00 on 7th November on the ILC-UK website at http://www.ilcuk.org.uk/index.php/publications/publication_details/advice_for_all
- In March 2012 the ILC-UK published a report entitled, The Retail Distribution Review and Small Pension Pots, which explored the impact the RDR would have on access to advice for those with small pension pots.
- The ILC-UK recommended the Government and Financial Services Authority (FSA) should investigate the opportunities to mitigate the implications of RDR on financial advice for those with small pension pots, particularly for the 40% of people at retirement who would benefit from increased retirement income as they were eligible for an enhanced annuity for health and lifestyle reasons, and shopping around.
- It also urged the Government and FSA to provide a clear distinction between the provision of information and advice, and make clear to what extent providers are able to guide customers without it being deemed advice.
- The report urged the government and FSA to review other topics, such as joining up the public policy agenda on financial advice and enabling saving. There was genuine concern that lack of cohesion and policy fragmentation created by silos between the FSA (leading on RDR), HM Treasury (the policy lead on financial advice) and DWP (leading on retirement outcomes for pensioners) will result in the poorest and least well-off pensioners receiving sub-optimal retirement outcomes.
- Alongside the report, the ILC-UK published an open letter to Mark Hoban MP (Financial Secretary to the Treasury), Steve Webb MP (Minister for Pensions DWP), and Lord Adair Turner (Chairman of the FSA), calling for the Government and FSA to host a ‘retirement income summit’ to ensure the protection of the poorest pensioners. The letter was signed by senior Politicians across all parties, trade associations, providers, financial advisers and representative bodies.
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