The affable , cricket loving chief executive of Royal London- Phil Loney- has written to Ros Altmann thus;-
Congratulations on your Maiden Speech. It is pleasing to hear such a positive advocate for pensions. I was particular pleased to hear you stress the importance of the role of Pension Wise.
You will be aware that Royal London has been calling for a new advice regime for mass market customers for some time. The pressing need for this service has not abated and I know that you have expressed considerable sympathy with this view point before entering Parliament. However the commencement of “Pensions Freedoms” in April has highlighted another area of potential consumer detriment and one that needs to be addressed urgently.
Thousands of people are affected by this issue, both customers of Royal London and across the wider market. In order to highlight the problem, and garner support for our proposed solution, I am publishing this letter on our website and briefing the media.
Significant numbers of customers in the over 55 age group have pension savings that have guaranteed annuity rates (GARs) attached to them. These guaranteed rates mean that the annuity income the pension would generate far outweighs the rates that currently prevail in the open market. A GAR producing annual income of 11% of the fund is not uncommon and this compares extremely favourably with prevailing market rates of around 4%.
Legislation passed only this year requires savers with safeguarded benefits such as GARs of over £30,000 to seek the advice of an FCA authorised adviser if they intend to cash in their fund as they are entitled to do under the Pension Freedoms. Cashing in the pension fund means the valuable guaranteed annuity rate is foregone so it is not a transaction that should be undertaken lightly. Clearly it was the intention of the legislation to safeguard savers with GARs by requiring them to seek the advice of a qualified adviser.
Two months into the new pensions regime it is very clear that this policy to safeguard savers with GARs is a failure. Savers with fairly modest pension savings, marginally over the £30,000 threshold, are deeply frustrated that their pension provider requires them to seek advice from a qualified adviser before accessing their own money. Providers are accused of creating barriers to prevent customers exercising their rights under Pension Freedoms.
Advisers, the lynchpin of the new legislation, are reluctant to engage with modest savers finding the limited scope of advice on GARs an uncommercial proposition. Others that might be disposed to assist modest savers are put off by the prospect of subsequent regulatory sanction when savers come to understand the value of the guarantees they have given up.
The situation that savers with GARs currently find themselves in is deeply unsatisfactory and risks bringing all parts of the pensions industry and the Freedoms themselves into disrepute.
We propose a simple and straightforward solution to the current impasse. Government has created the Pension Wise service to provide readily-available guidance free of charge for those approaching retirement. Pension Wise and the Pensions Advisory Service which is its chief delivery mechanism has an excellent reputation for impartiality and technical expertise in all aspects of pensions and retirement planning. The existing legislation requiring savers with GARs over the £30,000 threshold to seek advice from an FCA authorised adviser should be relaxed as a matter of urgency. There is no reason why the Pension Wise service should not be able to provide necessary guidance on GARs enabling savers to take a considered and informed view of their retirement provision.
I realise that enabling Pension Wise to provide guidance in this area will require a change to legislation and the FCA rulebook. It will also require a change in provider procedures if they are required to provide Pension Wise with details of a customer’s GAR. However these changes are relatively small and would address a significant problem in short order.
Let me be clear, we fundamentally believe that there is an important role for qualified advisers to play in the wider retirement planning market. Advisers provide clients with more complex needs a holistic view of their requirements. However casting authorised advisers in the role of gate-keeper to the savings for everyone with a GAR creates a situation that is unworkable for providers, advisers and customers alike. Pension Wise provides a simple solution to this problem.
We do not, however, believe that this solution should be extended to those with DB pensions. The complexity of these schemes and the nature of the guarantees that apply can only be assessed and communicated by a professional adviser with the appropriate level of qualification.
Group Chief Executive
Now I have to admit to being ignorant of the plight of these GAR-ites. I am one myself, having paid some AVCs when at Eagle Star, my friendly ex-employee Zurich is forever writing me letters suggesting I convert to a more modern policy without these guaranteed annuity rates, offers that I politely turn down.
For every £10 I have saved, my Eagle Star AVCs pay me £1pa for the rest of my life. For every £25 I saved, the new contract would pay me £1pa. I prefer an exchange rate of 1 for 10.
Being of weak mind, I wanted to test my views with my friend David St Cyr , a Barbadian actuarial colleague. This was David’s response
Based on Phil L’s own annuity rates (difference between 11% and 4%) , asking someone to cash in potentially circa 2/3rds the value of their entitlement just on the back of guidance (rather than advice) does not sit well with me.
[if !supportLists]– [endif]So for example someone with a £35k pot with an 11% GAR will get an annuity of circa £320 per month. Go elsewhere in the market and one would need circa £96k to produce same income (without a GAR). Does this not imply potentially giving up £61k (£96 – £35) benefit value if cashing in?
Even at these modest fund levels the amount “in play” is quite substantial!
Would guidance explore the various alternatives to achieving the members’ objectives (as IFA advice would)?
Do not think there would be any redress to TPAS if member subsequently complained.
Not sure RL should be the one lobbying here anyway. Surely there is a conflict of interest in that making it easier for people to cash in their GARs means taking RL off the hook for these same GARs?
I think there would be more legs in a lobby for changes that would allow for a more proportional cost/fee structure for the IFA advice market for funds at the lower end.
I think if more focus was placed on the amounts potentially lost by members cashing in their funds with GARs then members would then see the IFA requirement as a must (great value for money!) rather than a barrier!
Well quite! But maybe David and I are missing the point. I suspect that most IFAs are embarrassed to charge a minimum fee of say £500 to point out the bleeding obvious. By the time they’ve done all the regulatory paraphernalia and issued a report, the bill might be £1,000 and the advice…
Don’t be a muppet – stick with what you’ve got, it’s worth 250% more than the cash equivalent.
The client wouldn’t be happy, the adviser would be stuck with a bad debt and Phil’s no closer to getting the toxic guarantee off his books.
How much better to employ Pensions Wise, or at least the bit of Pension Wise that knows what it is talking about on complex pension issues – TPAS.
Michelle “Crackers” Cracknell, the CEO of TPAS is also an actuary- and a jolly good one. She would have no difficulty establishing the guidance for the likes of me, were I to come to her bearing my GARs.
I cannot advise you Henry, you have two courses of action , cash in your GARs and be a total muppet or keep them and be 250% better off. It is entirely your decision which course of action to take.
This guidance will of course cost nothing, it being a State-sponsored service. Armed with these fine words, I could go to another provider and tell them I have taken guidance, insist on being a muppet and want to take a transfer (to a drawdown policy) or just cash out.
I suspect that there are insistent muppets out there who will do this, making Phil happy and the muppet happy and not bothering the IFA who has better things to do – like work out how to deal with DB transfers.
Muppets will be muppets and we all have the right to make substantial donations to insurance companies (like giving back our right to a GAR). Pension Wise is, in this instance, being asked to act as a split condom, offering protection while assisting gestation.
And before anyone comes at me with complicated case histories involving when you can take AVCs according to scheme rules, the distortions created by GARs on more important decisions like the taking of main scheme benefits- I know! I’ve been there- it is tricky.
But in the final analysis , the decision is an easy one. Either you want to be a muppet or you don’t and we must let muppets be muppets!