Steve Webb has been at it again, suggesting that the annuity crisis could be solved if we had a one year cooling off period after we’d bought an annuity in which we could take it back (with a receipt) and exchange it for an annuity which looked a bit nicer.
I’m reminded of the false optimism of the schoolboy who skims a flat stone on a still pond. He thinks that stone will bounce forever till he learns that when the initial energy has worn off, stones still sink in water.
I first met Steve Webb at a conference in the mid 90’s. He was an academic interested in pensions, I sold pensions. I heard him speak about the need for intergenerational fairness and on the power of state pensions, he was great. But the world he inhabited was different from mine. He knew nothing of targets and “reason why” letters and the lure of 140% of Lautro.
I don’t think much has changed. If Steve Webb had ever had to advise people on annuity choices, he would have found out that there is no room for the niceties when the cost of your sale is £250 and the most you are likely to make if the customer buys is £300. If the customer walks away you are going to have to sell to the next five just to cover the cost of the sale!
It’s no use blaming the salesman for all this, nor the sales process. There is something systemically wrong with the way DC pots are converted to income and to understand what, you need to understand what happened in insurance in the 1980s and since.
Originally, the personal pension we know today was called a section 226 Retirement Annuity and was designed as a with-profits policy with the income being paid out of the profits of the investments. These policies were designed for professionals, accountants, solicitors, and self-employed medics. These people had advisers and plenty of net disposable income. The Equitable Life and other mutuals owned the market.
The along came Abbey Life and Allied Dunbar and in their trail a number of other brash upstarts. These companies were not mutuals, they relied on hard-hitting salesman and they looked to extend the use of the 226 to a much wider range of self-employed people. I was one such salesman, my typical premium was £25pm and I sold hundreds of the things to van drivers, pet-shop owners and the like – I even sold one to myself.
The smooth South Africans who started these companies; Weinburg and his mates, became influential in Conservative circles in the early 1980s. They convinced politicians that financial empowerment of the financially unsophisticated would lead to a lower dependence on welfare and general economic prosperity. The Personal Pension that was born in 1987 was to do to insurance what Sid was to do to share ownership and salesmen like me were hailed the standard bearers of this brave new world.
But there was a disconnect. The politicians had not engaged with the sales process then (just as they aren’t doing now). They had not thought through the cost of sales, nor the need for insurance companies to protect their margins when policyholders had to stop contributions. It took thirteen years for them to cotton on that the personal pensions set up in the early years were totally unfit for purpose.
What in fact had happened, was that the 226 policy, fit for high earners with high premiums with paternal mutualism protecting them, had turned into the personal pension sold to Sid with no consumer protection. The result was Stakeholder Pensions, a botched attempt at consumer protection which tackled the worst abuses of the personal pension but did nothing to address the fundamental problem, the promised empowerment of the consumer simply hadn’t happened, people were mis-buying pensions faster than we could mis-sell them.
The problem was not acute at this time, stock-markets stormed ahead and the impact of high accumulation costs were barely notices. Interest rates were high and people were exchanging pot for pension at a conversion rate of £10;£1 or better. But money was leaking out of the system at an alarming rate nonetheless. John Denham and others worked out that it was only the tax-breaks on these personal pensions that made them attractive and most of the tax-break was being trousered by insurance companies and advisers.
All this changed in the next ten years, low interest rates meant low annuity rates and low returns on the markets, the charges on some personal pensions exceeded the growth on the plans and the annuity purchased meant that the original promises on statutory money purchase illustrations, were so far from the actual pay-out that many people lost all faith in the system.
In the early years of the 2000s , it was still possible to transfer in your personal pension pots into a company scheme (if you had one). As annuity rates plummeted, more and more people were advised to take advantage of what seemed generous guaranteed pensions payable either as added years or fixed pension promises. The window did not stay open for long.
As the first decade of the new millennium came to an end, the consequences of 20 years of all this started to become clear. No thought had been given to the decumulation of the funds people had built up and the concept of the open market option was pretty well unknown outside a small coterie of specialist annuity brokers. The Pension Annuity, which had been a core activity for the Prudential, Eagle Star, Standard Life and Scottish Equitable/Widows/Life was now an anathema to insurers beset by Solvency I and II.
The number of old school insurers actively competing for annuity business shrunk to three (Aviva, L&G and Canada Life) to their number were added new kids on the block, individually underwriting annuities. What has started in the 1970s as a with or non profit guaranteed annuity had ended in a market free for all where nurses phoned annuitants to encourage them to disclose their dreadful state of health in return for an enhanced annuity.
Which brings us up to date. Enhanced annuities make salesmen money, conventional annuities don’t. Automating the annuity process makes you lots of money. Dealing with large pots on an automatic basis (with nurses encouraging you to bare all) makes you a small fortune.
This is cack, it is no way to run a pension system. It is the result of poor policy, poor regulation , poor advice and poor execution. We are here because we took a series of wrong turns and listened to the easy options rather than struggling with the hard ones.
Successive waves of politicians have followed dogma at the expense of best outcomes and what we have been left with is a system of annuities that is a total shambles.
Steve Webb’s sad attempts to keep the stone skimming across the water look in vain. If there is hope, it is the hope that we will look across the North Sea to what is happening in Denmark and Holland where DC pensions are working considerably better.
But to do so , will be to risk the wrath of the Treasury and its paymaster the ABI. Whether we can unwind the past and return to a sensible settlement for our DC pensions, depends on the capacity of politicians and the will of the people, to put outcomes first.
My worry is that politicians and civil servants, cocooned in a world where none of this matters to them personally, will fail to engage in the nuts and bolts of personal pensions and will, as a result, let us eat cack.