Perhaps the key to understanding why the takeup of the open market option is less than it should be is to look at some of the behavioural aspects. I usually analyse the annuity market in terms of those with small funds, those with above average funds and those with large pension funds. In the context of the open market it might be better to segment the market in another way:
* Those who are not engaged with pensions and simply take the first offer they receive from their insurance company.
* Those who rely on their pension scheme or financial adviser to get them the best annuity.
* Those who are savvy enough to shop around for the best annuity rates on their own.
Clients in the second two categories should get the best rates in the market. Those relying on their scheme or adviser to shop around for them must assume that the market will be fully researched on their behalf. Clients who do their own shopping around must ensure that they get access to the best rates.
It is people who fall into the first category that the industry should be most concerned about and who need the most help, but how we can help people who do not want to help themselves?
The second observation is that the ABI appears to be doing little to encourage policyholders to consider options other than the conventional guaranteed annuity. The sceptic in me suspects there might be something fishy going here. Some of the serious annuity commentators and many of the actuaries who price annuities have argued that the returns on conventional annuities are so low that many investors may be lucky to get their money back, let alone receive any interest.
Not only are annuity rates at historically low levels but pensioners today have more complex retirement income needs.
Nowadays most pensions will be paid for a 20- to 30-year period as on average most will live to beyond their 85th birthday, so it is important to take a long-term view of retirement. It may be tempting to get the highest income at the outset but over time inflation will reduce the spending power of a level annuity. If inflation were to run at 3.5 per cent a year the income would be reduced by half after 20 years.
In conclusion, anything that helps to increase the uptake of the open market option must be welcomed and the ABI’s latest initiative will surely help pensioners to better understand the advantages of exercising the open market option.
