GRAXIT! – an open letter to Phil Loney on how he can help solve the GAR problem.


An open letter to Phil Loney – CEO of Royal London


You’ve started a good debate on Guaranteed Annuity Rates and how we should manage them in this time of Pension Freedom.

Getting out of GAR contracts (GRAXIT) is proving a problem.

Those of us in the Pension Play Pen who’ve involved ourselves have found out a lot on the way- thanks for that!

But your solution of passing the buck from advisers to Pension Wise isn’t going to solve the problem, it’s simply kicking the can down the road. We agree that Pension Wise are better placed than Financial Advisers to help ordinary people understand what they’ve got and what these guarantees are worth.

But the can’s still kicking around. Only a muppet would give up guarantees for free but we’re now free to be muppets – and many of us won’t listen to Pension Wise any more than consult an adviser,

To stop the can kicking around. we need some help from insurers. We need you to come up with a plan to help people get fair value from their guarantees.

We notice, you’ve started talking of GAOs – (Guaranteed Annuity Options). But these plans were sold with Guaranteed Annuity Rates.  I’m sticking to “rates” , because I did not spend hours reading the small print, I just chose to save money,

Now we know the small print. Most of these guarantees are conditional on being taken on a certain day, typically a significant birithday. 

These conditions are part of the contract with you – the insurer. But these conditions are now getting in the way of freedoms and have become anachronistic – wilfully unhelpful and not treating customers fairly (in the least).

Take for example people who want to take their AVC separately from their main scheme benefits so they can retire early from the scheme and use their GARs later. If the Scheme Rules don’t allow this but allow early retirement on favourable terms, then the Guarantees are worthless.

In order to exercise early retirement rights and exercise the GAR option, the member would need to get the Trustees to amend scheme rules -or there would have to be an override created by Government legislation.

These are big changes which have either require a change in national legislation or require hard-pressed schemes to fork out  individually for legal fees.

Insurers are benefiting from inflexible retirement rules that have nothing to do with how people actually retire!

Surely these kind of problems should not be happening, there has to be an alternative approach that works to everyone’s interest.

Here’s our alternative

For those who want to exercise the option of their guaranteed annuity rates early , we think that insurers should accelerate the transfer value beyond the nominal value of the investment fund.

That means releasing some of the capital reserved for pay-out at the point of the option but only a portion. The rest of the capital can be retained by the insurer in lieu of unearned management charges..

So an individual would have an accelerated transfer value , you’d have a lot of risk off your books and we wouldn’t have to hassle trustees to change scheme rules.

I am sure that a formula for calculating a reasonable reduction can be agreed upon that can be applied  multi-laterally across insurers in this market.

This is infact no different from the practice of incentivised transfer values that is in common use in occupational schemes looking to de-risk. It is proving very popular with members who get freedom and a fair proportion of the value of benefits they are giving up. the scheme loses liabilities and the exercise loosens the sponsor’s balance sheet.

This is particularly useful for mutuals such as Royal London where the majority of the guarantees are provided from within a with-profits fund.

While the insurer and the fund benefit from muppet-like behaviour by policyholders cashing out at the investment value, this is not a smart way for a society like Royal London to carry on. Sooner or later, the muppets will come back, as they always do, and demand restitution.

Far better that you agree a formula in advance, than take the risk of retrospective penalties and the accompanying reputational risk.

Much better for you and Royal London, that you agree a formula to accelerate the transfer values for Guaranteed Annuities so that people can take a decision based on a fair exchange.

Not only will more people transfer, but they will transfer in a more informed way. Royal London, and other insurers have everything to gain by adopting this idea – you have nothing to lose.

I am quite sure you will find this idea initially disappointing. The pension freedoms may have created a false impression that your policyholders will walk away from their guarantees.

The imposition of the requirement to take advice on GAR policies stymied that prospect and kicking the can to Pension  Wise won’t help you much either.

For you to de-risk your balance sheets of this guaranteed stuff, you are going to have to give away some of the money that currently sits on reserve and that may be an unpleasant thought.

But it is a better thought than being caught up in the current advisory log-jam, or worse- finding yourselves embroiled in another  scandal surrounding legacy and TCF.

Yours sincerely

Henry Tapper

Founder of the Pension PlayPen

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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7 Responses to GRAXIT! – an open letter to Phil Loney on how he can help solve the GAR problem.

  1. Phil Loney says:

    Henry thank you for your letter. I am grateful for your interest in this subject.

    Guaranteed Annuity Option is the accurate title and we should stick with it. The Rate being that which applies if you take the option. The fact that this is an option is clear from the fact that the rate concerned can only be taken at a certain age or age range and if it is not taken at that time it lapses.

    Your proposal is not a new one. It essentially involves giving value to policyholders who hold the option regardless of whether they exercise the option. It is essentially similar to a GAO compromise scheme which many companies will consider from time to time.

    The problem with this sort of approach is that in the case of with profit GAO policies the extra value ascribed to these policyholders comes at the cost of lower pensions for the other customers in the fund. A fairness issue that you repeatedly ignore.

    The take up rates on GAOs are falling. This is a direct result of the wider set of freedoms that customers enjoy. None of these customers has had their GAO removed. You refer to such customers as “muppets”. Personally I hope that you will drop this condescending language. As Chris from Pension Wise has pointed out there are scenarios in which taking the cash early to pay off onerous debt or to avoid getting into debt makes sense.

    Your analysis fails to address why non GAO policyholders should consider it fair to arguably subsidise the free choices of those who have GAOs but choose not to utilise the option available to them because they perceive that another course of action is more valuable to them.

    Henry you make an arguable case which is not new to the with profit committees that periodically review these matters. It is a paternalistic argument in an age of pension freedom. However there are equally arguable viewpoints that seek to protect the interests of with profit policyholders who do not have a GAO put are also owners of the assets of the fund. I am sure that with profit committees, including ours at Royal London, will continue to weigh these competing interests in their deliberations around policyholder fairness

  2. henry tapper says:

    So long as you have these “options” on your books Phil, they limit the capacity of the fund to distribute to other policyholder – and to an extent limit the capacity of the mutual to invest in new products. As CEO, I would expect you to want to find ways to get people to walk away from them,

    But pulling down the barriers that have been put up Government to protect people from financial self-harm is not the way to solve the problem.

    People need to engage, get educated and only then can people feel empowered into taking decisions. At the moment the decision is binary, cash in or hold out. Most people will hold out if they can – they should not feel guilty for getting what they are entitled to. Nor should they stop seeking a fair compromise with the insurer.

    If people cash in and lose their guarantees , without engaging with the consequences they are being muppets, that’s not me being condescending – it’s just straight talking – which we need more of!

    Hopefully we will be able to use the IGCs to resolve these kind of issues, if not- I fear a Ros Altmann moment coming on!

    • Phil Loney says:

      Henry I don’t know where you have got the idea that we are keen for customers to walk away from these benefits. It is a figment of your imagination or the assumptions that you hold about insurance companies. It is precisely because people are struggling to source and afford advice on these policies that we have called for Pension Wise to be involved. I think that GAR take up rates have dropped by an alarming amount. I personally hope that if Pension Wise delivers a good service on GAR pots above £30k , we would be able to extend the service to smaller pots, and see some recovery in these take up rates.

      The reality is that at current low take up rates the reserves available to distribute in the way that you envisage would be very much lower. Or put another way, this would be the worst time to implement the approach that you have suggested, from the viewpoint of policyholders with GARs – hardly a totem of fairness therefore.

      What I find most disappointing in your running commentary on this topic is your refusal to engage with the perspective of the other with profit policyholders who would suffer smaller pension pots as a result of the approach that you suggest. I don’t think you can just ignore them, and that is why we have with profit committees to balance these competing policyholder interests. I suspect that most with profit committees will try to find approaches which are fair to both constituencies but this would be much easier if they could have faith that customers with GARs are making good choices assisted by effective guidance or advice. This is clearly not happening at the moment and I hope that Ros will focus on this issue as a first priority rather than second guessing the decision making of with profit committees who have a far deeper understanding of the competing customer interests than any civil servant or consulting actuary operating at a distance.

  3. henry tapper says:

    I am a great fan of mutuals and of members behaving responsibly to each other. However I am not a fan of sacrificing my pension rights for the good of other members – especially when there are millions of them!

    I might as well cash out my retirement pot for the benefit of other tax-payers!

    • Phil Loney says:

      Although we are having a vigorous debate on this issue Henry, I know we share a lot of common values around fairness. Indeed that is at the heart of both views and I suspect a synthesis of these competing interests will be the solution for many with profit funds.

      I hope you resolve matters with Zurich on your own policy Henry.

      Personally I don’t think we have asked any of our customers to sacrifice their pension rights. Rather they have kept their current rights and have been given new freedoms by the government which mean new options for how they use their money. It is vital that we give them the best guidance / advice to make good choices.

      • henry tapper says:

        I think we are at a stage where people feel they want to know what they’ve got and not to be taken for granted.

        Many people are frightened to ask questions.

        But we now have chances to challenge the pre- conceptions.

        Steven Groves of partnership and I have been talking about this. It’s been DM so I won’t share but there does Sen a new willingness to debate these tough issues.

        I don’t know if I am right. But I want these hard questions discussed,

        There are many more on the back boiler Phil!

  4. Chris Wrightson says:

    Both your opinions are valid. However, I have spoken to many educated people who are far from ‘muppets ‘ who have their retirement plans well in control. What is happening is that providers are covering their backs by not allowing customers to choose another option if they have a GAR below 30K without expensive financial advice. Many of these people are members of DB schemes that will provide good guaranteed income in retirement and so want to use their DC accounts in an ad hoc manner. Tax implications are the main topic of discussion!

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