Read his article below; here are the five killer points he makes
- There’s a market failure and it’s not about accumulating savings, it’s about the pensions these savings buy – what the “money purchases”
- Annuities, like gas and electricity are confusing to buy so people make rubbish purchasing decisions
- The Government has forced the utility companies to get their act together, they can directly simplify the annuity purchasing decision
- The Government have provided a simplified savings vehicle – NEST, they can provide a simplified decumulation vehicle using the capacity of the Treasury to issue Bonds and the DWP to pay pensions.
- Government should insist that all people buying an annuity take independent advice and use the open market option.
I’d add a couple of suggestions to the mix.
The Treasury are currently investigating selling our infrastructure to the large funded pension schemes in return for the kind of inflation linked income streams to pay their pensioners. By extension , these income streams could be employed to provide the people David Mowat is talking about with better pensions.
As with NEST, Government intervention should be targeting those with least in their pension pots. The Government could limit the amount of pension people’s money could buy as they do the number of premium bonds we can purchase. A limit of £30-50,000 sounds about right).
Anyway, enough of me, here’s David Mowat…
The Impending Pensions Crisis
by David Mowat, MP for Warrington South
As an MP in my fifties, who has spent his professional life in the private sector I have lost count of the number of conversations I have had recently about pension under-provision. To say that the industry is mistrusted is an understatement. This really matters. At a time when the last few final salary schemes are closing, it is now up to each of us (or at least those not lucky enough to be in the public sector) to build a retirement pot. To put this into context, a pot of about £250,000 would be needed to achieve a £10,000 inflation-proof pension at 65. Right now the average punter has around £40,000 in their pot.
The industry, which should be assisting us to manage and defuse this time bomb is failing. They are taking advantage of a massive “asymmetry of information” between themselves and their clients to profit through opaque pricing. There is a massive “market failure” and the consequence is severe for millions. According to the FSA around 30% of all pension pots are siphoned off in charges. The UK charge structure is higher than in other European countries. In broad terms this means that the majority of tax relief (the Government chips in £35 billion a year) goes not to investors but to fund managers.
85% of retirees buy annuities from their investment provider without getting quotes from the open market. There are many instances of retirees purchasing sub-optimal products due to poor understanding and artificial complexity. The market does not work because the types of charges and indeed types of annuity seem designed to make comparison almost impossible. Genuinely independent advice has been difficult to obtain as so many advisors have earned their living in commissions from the providers themselves.
So what should the Government do?
We can draw a parallel between the charging practices of annuity and investment providers and the complex tariffs used by energy providers. The Government is rightly enforcing simplicity on the big 6 energy companies and they should do so in this industry too. We will be told we are restricting choice but this is self-serving nonsense.
We must make the industry publish proper total expense ratios (TER’s) that include all costs, not just some as at present.
We should insist that every potential annuitant obtains truly independent advice, ideally three open market quotes. If the pension fund manager provides the annuity, insist that a truly independent advisor signs it off. Failing that legislate to insist that the annuity provider must be a different organisation to the pension fund manager.
The advent of auto enrolment makes the case for reform even stronger. More unsophisticated consumers will be introduced to a market they can’t understand. If the industry fails to address these issues and the Government fails to act, I believe we will be on the cusp of the next mis-selling scandal.
- Pensions crisis: one in 10 forced to delay retirement (henrytapper.com)
- Mothball NEST till 2017 (henrytapper.com)
- F1rst Briefing – Annuity Reforms (firstactuarial.wordpress.com)
- Is Auto-Enrolment a busted flush? Pension Play Pen lunch Jan 2012 (henrytapper.com)
- The NAPF point the finger at the £1bn annuity scandal (henrytapper.com)
- Putting your staff before your pension scheme (henrytapper.com)
- Annuities explained (confused.com)
- Define your aspiration. (henrytapper.com)
- Sorting the pensions of the “squeezed middle”. (henrytapper.com)
- Who made that choice for you? (henrytapper.com)
- I have seen the future of DC (part 84) (henrytapper.com)
- Can we have a word Mr Webb? (henrytapper.com)
- Aspirational pensions – popcorn pensions!! (henrytapper.com)
- Yes pensions minister (henrytapper.com)