Nobody in the pensions industry can claim to speak on behalf of the man or woman in the street with anything approaching the authority of Dr Ros Altmann. The story of her single-handed struggle with Whitehall over the collapsed pensions of more than 120,000 pensioners has been well documented. But she believes there is an injustice of a similar scale waiting to come crashing down on the pensions industry because of the way pensions are converted to annuities with no concern for the needs of the consumer.
“There were nearly half a million people last year buying annuities with small pension pots locking themselves in for the rest of their lives into what may or may not be very poor value,” she says. “This could definitely be a future challenge against the government. The FSA knows this is going on for DC pensions. It might be a challenge against the trustees and I think it would be a very valid challenge.”
These might seem like idle threats from any other pundit, but Altmann has taken on the Government through the courts and Parliamentary Ombudsman and won again and again, finally achieving compensation for those who missed out on the PPF with the establishment of the Financial Assistance Scheme.
Altmann sees the problems with annuitisation through the workplace as equally widespread across trust-based schemes and contract-based ones. “I see trustees of defined contribution schemes who by their providers are writing to people with impaired lives and putting them in standard annuities. These poor people sometimes don’t ever find out that they could have got so much more.”
And what might a challenge against the government or regulators looked like? “The FSA is allowing people to price this is a sale, but they are not regulating it as a sale. You are paying commission to the insurance provider for selling this product, and there is no advice whatsoever so they are taking money off you and the Government is forcing you to do it.
“It is a new product. Otherwise the insurance company could not justify taking the commission from you if it was the same as the previous product.
“The Government knows consumers don’t know what they are doing. The Government has consulted on this since 2001 and it has had respondents to this consultation from people outside the industry but has chosen to listen to people inside the industry and has ignored the problem,” she says.
So could this turn into a full-scale review on the scale of the hundreds of millions of pounds set aside for the Financial Assistance Scheme? “I hope so. The FSA is completely asleep at the wheel on this issue.”
So how should the system be fixed? “You should not be allowed to sell an annuity to somebody unless they have answered the obvious questions that need to be asked.
“It could be basic advice to a questionnaire where you have to tick a series of boxes. But at the moment, under the current regulatory system, the easiest thing to do is the worst thing. You get companies writing to people saying ‘if you want your pension quickly, take this box’. If they do take the open market option it can be horrendously delayed.
“They are being forced by the government to do something and the regulator is not protecting them and 1 or 2 per cent of fund value is being taken away from them at the point of conversion,” she adds.
She does accept that there are moves afoot from some providers to bring greater annuity choice to the retiring consumer, such as the increased range of non-conventional options being offered direct and providers like Aviva actually launching TV ads to promote shopping around. “There are some companies that are doing good things. The bigger companies have started to wake up,” she says. “Part of it is rearguard action, but part of it is genuinely some of the more forward- thinking companies becoming concerned that they could impair their brand if they get caught up in this, and that they ought to start behaving more fairly.
“But it is the rest of the market who are doing it who I’m worried about, and the FSA is doing nothing about it. We had a raising standards initiative and a voluntary code. Of course the people who sign up to the code are behaving better, but it’s the ones who don’t sign up who continue to behave badly. The only thing the FSA has looked at is the length of time that it takes to transfer the funds, but that is not the real issue.”
With such huge battles behind her, does she see herself taking on this or any other campaigns in the future? “Not at the moment,” she says – an answer that some insurers will doubtless be pleased to hear. For Altmann, life as a campaigner has been engaging but has held back her career.
“I haven’t had much time to do anything else or earn a living. It was something I passionately believed in, and I really cared about these people and I think similar challenges exist against the Government on the annuity side but I’m only one person.
“It was fantastic, it really was. But it was a one-off. The case was so strong and the Government was so stupid in the way they handled it, as they are doing again with Equitable Life,” she says.
She has been asked to help out the Equitable campaigners, but yearns to come in from the outside and get back to the heart of Government. “I have often thought about Equitable and it is a big injustice, and I would love to help, but it doesn’t make you any friends. I cut off a whole chunk of my career. I was working inside Government. I was an adviser at Number 10. If you are working on strategy and policy that is the way you get results. It’s all very well chatting on the sidelines, but unless you are in the policy arena it is much less likely that you’re going to get something done.”
In recent months she has also been very critical of the pensions industry’s faith in the notion that equities will win out over the long term. In May she issued a report in association with MetLife, accusing the UK pension system of being a giant bet on the stockmarket. Altmann thinks that the personal accounts default fund cannot afford to wed itself too closely to the cult of equities and will have to start out with a relatively risk-averse investment process to avoid the risk of the project becoming stillborn if markets tumble drastically in the early years.
“I really hope there will be some careful thought to the potential for losses in the default funds. I like to see people going into very low risk funds at the beginning and then becoming more adventurous later on.” “If you had launched personal accounts in the last 18 months it would have been a disaster. We have seen in Sweden and Australia that people have lost a fortune. Most ordinary investors’ idea of risk is not ‘will I beat the market’ but ‘will I lose money’,” says Altmann.
So with personal accounts likely to be a benchmark for the performance of private sector default options, what does she think the industry will come up with as a differentiator?
“My instinct is that most ordinary investors don’t tend to look at their investment performance compared to a benchmark. The challenge anyone providing pensions other than personal accounts has to offer the employee something that is better, and that is likely to be in the area of education, or maybe with some kind of advice thrown in. It may also comprise rolling in extra options such as Isas and share option facilities as well,” she says.
“But from employers’ point of view the low risk option is to go with personal accounts. The Government organises it, and you do not have any risk in terms of choosing the wrong provider or choosing the wrong type of pension scheme.
“Service will be a differentiator too. Under personal accounts you put the money in and don’t see anybody, whereas if you get someone coming to the office to help you along with your decision-making then there is potentially some value in that service,” she adds.
She sees the education and advice that will need to be introduced with personal accounts as essential, but points out that if people really get some genuinely relevant guidance from the process they could be opting out of pensions under the system as it currently stands.
“There is a huge value in education. But if people went to a fee-based adviser they might be told put the money into an Isa and not a pension. There are cases where younger people, people with debts and those who can’t be sure they can manage without that money now might be better off not in pensions,” she says, adding that she believes there will be some changes that could affect the disincentive to save between now and 2012.
“If you ignore personal accounts in the means test that would be fantastic – that would be a sea change. If you allow people to access some of their tax-free cash early, that would get through some of the locked box problems,” she says. “If elected, I do not think the Tories will introduce personal accounts in the current environment. They might say we are going to make pension credit temporary and phase it out over the next 10 years. They will address the issue of means-testing undermining personal accounts,” she says.
As one of the key movers in setting up the safety net for final salary pension schemes, what is her view of the moral hazard created by the PPF, with schemes like British Airways releasing the sponsoring company from £300m of guarantees?
“I am very concerned about what happened with the British Airways pension scheme. But I understand the realities they are working on. If BA collapses then the government is going to have to step in because the PPF will not be able to cope with the liabilities.
“The view seems to have been taken that whatever you can do to shore up BA is the best thing for pension schemes and you have to do it now while the business is in trouble and hope for the best. It is a finger-crossing exercise,” she says.
“The interesting thing for me was that the regulator did not intervene at all. The regulator could have said to the trustees of the company that we do not accept this and I would imagine that if a less a high-profile company had done it things might have been difficult. The danger for the PPF is that if the regulator is not strong enough, and there are lots of reasons why it may not be, the trustees actually have an interest in keeping the scheme going as long as possible. When push comes to shove they are on the same side as in the employer.
“As more people get over the age 65 threshold then you are securing more pensions at the 100 per cent level. And that is maybe a design fault, or a design issue with the PPF. If everybody was reduced by 10 per cent, we would not have the timing issues, but at the moment they are not” says Altmann.
With an election less than a year away does she see a change of government as an opportunity to be brought in from the cold? “Whichever government is in power, I don’t mind. I don’t actually think pensions is a political issue, this is a national issue,” she says. She is hopeful that the campaigning she has engaged in so energetically has not burnt her bridges at Number 10 and the Treasury. “I hope not. Ministers changed so quickly and memories are short, so who knows?”
Dr Ros Altmann: A life in pensions
Education• University College London B.Sc – First• Harvard University, USA Kennedy Scholar studying public policy and government at Kennedy School of Government.• LSE Ph.D. in economics, investigating poverty and incomes of the elderly. Career• Prudential Assurance, fund manager 1981-1984• Chase Manhattan Bank head of international equities 1984-1989• Rothschild Asset Management board director 1989-1991• Natwest Investment Management board director 1991-1993• Consultant to UK Treasury apr-sep 2000 – worked on the Myners Review of institutional investment• Policy adviser to Number 10 policy unit on wide range of pension policy issues, including policy proposals for pensions, lifetime savings and annuities. Devised policy initiatives to reform both state and private pensions, retirement policy and encourage middle income groups to save.• Lord Chancellor’s Strategic Investment Board 2004 to date.• Trustee Trafalgar House pension fund 2007 to date.• Investment strategy/pensions policy independent consultant 1993 to date.• Campaigner on pensions issues
