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I spoke yesterday in Leeds Castle “the most beautiful castle in the world. The NAPF South Estern Group had rented the old brewery for their annual conference and I had the place to myself between 7 and 9am (see photo below)
The subject of my talk was “why people find annuities so difficult”. There was a great question from the floor along these lines
If you get everyone who is unhealthy getting better rates because of medical underwriting, won’t you reduce the amount of pension for those in good health.
The point’s sensible , assuming as it does that the pricing of annuities is rational and “joined up”.
I pointed the questioner to this quote
“We find that selection effects account for the majority perhaps one-half to two-thirds -of the total annuity costs for the typical individual. The pure administrative cost loadin- gs on UK annuities are relatively low.” Murthi, Orszag, and Orszag (1999).
What the brothers Orzag are saying, in economist-speak, is that the rate we get for standard annuities from the big insurers already assumes that the “impaired lives” have taken their business elsewhere.
So all the smokers and those with high blood-pressure and chronic asthmatics etc etc etc who are currently buying “standard annuities” are simply giving the annuity insurers a free lunch. A free lunch at the Fat Duck as typically those who are receiving impaired life annuities are typically receiving over 20% more from their pension pots than they’d have got from a standard annuity.
This is not an attack on conventional annuity providers, it is not their job to ensure that people find value for themselves and unless they are seen to be actively denying those at retirement the opportunity to shop around, we should not be accusing them of mis-selling.
We can point the finger elsewhere. Only 33% of those annuitising their personal pensions use the open market option– that’s bad enough. Worse still it emerges from PICA that only 25% of those taking annuities from occupational schemes use the OMO. In other words, the Trustees of occupational schemes who hold themselves up as the guardians of good quality pensions are actually doing worse at promoting at retirement planning than the insurance companies.
Either way, for the 960,000 of us reaching 65 this year, the need to understand annuities is pretty urgent. It’s no use our worrying about this in years to come if the baby-boom has been and gone (it is 65 years since 1946).
Forgive me if I repeat myself. Many who have been reding my blog this year will be getting tired of me banging on about this and believe you me I am no better off line than I am on-line.
We have some great people working on this, PICA have most of them. My friend Tom Mcphail is causing trouble in the DWP and good for him. Now it’s up to us to give him and his buddies support by ensuring that every scheme we are involved with is using the open market option not just to get best standard rates, but to make sure that those of us entitled to better annuities get them.
They will not be robbing Peter.
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