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.
Founder of the Pension PlayPen