The end of it all

The default annuity option for schemes run by Mercer, Towers Watson, Bluefin, Punter Southall and in advanced talks with two more of the biggest EBCs, The Open Market Annuity Service (Tomas) is quietly hoovering up large parts of the corporate retirement market. So what is under the bonnet of this growing organisation that is side-stepping the Retail Distribution Review by delivering a whole-of-market offering on an execution-only basis?

Graeme Riddoch, sales and marketing director at Tomas, sounds like a man on a mission to eradicate the bad practice in the workplace pensions annuitisation process that has led to countless articles warning of the legal risks to trustees in not providing a suitable annuity to retiring members. But to get there he is having to walk on the right side of the line between advice and information.

“If you ask a customer they will say ’this is the best advice I’ve ever had and I would recommend this service to a friend’. But we do not recommend products. What we do is give people all the information they need to make an informed decision. We support them and we help them, but we do not advise,” he says.

But is it not dangerous that people think they have had advice when they have not?

“What we are trying to do is create something that gives you the same kind of benefits and outcomes but not within the strictures of TCF level four, and all the overheads that are required. A lot of our distributors use this service for advised sales. I don’t have a problem with advised sales – our service takes a lot of the legwork out of it – but we are finding an increasing acceptance that historically annuity services were advised simply because everything was advised. But if you present information in a compelling, professional and personal way, you give the consumer tools to make an informed decision, the outcomes are going to be very little different from if they had received advice,” he says.

Operating on an execution-only basis means Tomas can continue to receive commission from providers and not spend the time IFAs are required to with the client. This allows it to offer trustees a service that can give their members access to the whole of market, provided through a telephone service explaining the difference between level, indexed, and enhanced annuities as well as features such as spouses’ benefits and guarantees. Only 10 per cent of customers use the website, and then only for research, with almost all speaking to staff on the telephone for their final choice. Tomas says its outcomes are far exceeding those typical across the trust-based market.

“Take-up of enhanced annuities, for example, is in single digits in the trust-based world, but we get 58 per cent of people enhanced rates. We also get higher take-up of spouses’ pensions than the open market,” he adds.

The annuity market has features that perhaps make it easier to offer a quality execution-only service than other areas of personal finance, and the intermediary will always filter out those clients who want to look at something other than annuities, such as income drawdown or third-way annuities. But while execution-only may present risks in the retail market, the presence of the EBC in the workplace pension process should reassure customers, says Riddoch.

“The EBC is always the gatekeeper to the customer. I don’t want to sound arrogant but we will probably own the EBC market. We have got the likes of Towers Watson selling us into the corporate world which is very powerful, saying we have vetted these guys, it is a non-advised process, but that is okay don’t worry about it,” says Riddoch.

And is there any cross-subsidy between the bigger funds and the little ones?

“If this business fails I am going into business suing people for wrongful annuities, I have got a black box with annuitys rate for the last seven years and I know what people should have been getting”

“Well there is a little bit of that, but we cap our commission at £50,000 fund size, so we do not charge for more than that. We don’t feel it is right to charge the full percentage on funds over £50,000,” he says. “We did one for a £500 pot. They got the same service. L&G took it. We would have been better off all going down the pub and spending it – the income was minimal. Our commission was about £5 to £10 on that one.” Tomas shares its commission with some intermediaries.

The streamlined nature of execution-only and the ability to still receive commissions is leaving many players in the industry to consider where else business can be conducted on a non-advised basis. But Riddoch believes it can only go so far.

“There’s a school of thought that says that you could do fixed term annuities non-advised. You might be able to because we already have discussions about the fact conventional annuities still have risks and unknowns attached to them in relation to inflation. If you lock in enough of the moving parts, present the information clearly and give the customer enough information to make an informed decision, you can do it. But once you start going up the hierarchy into more complex products, such as third-way products, it would be far too tricky,” he says.

And could you do with profits annuities?

“There is a school of thought, mainly held by Prudential that you can. I am not sure, because there are far too many moving parts,” he responds.

The annuitisation process has been an open wound for the pensions industry for years, leaving life insurers open to criticism, but Riddoch believes ABI members are finally getting their house in order with the new code of conduct that comes into effect from next March. That will see ABI member providers publishing their standard and enhanced rates for everyone to see, as well as highlighting the benefits of enhanced annuities and signpost them towards advice and support on the open market.

Riddoch believes the ABI code of conduct will leave the trust-based with a lot of catching up to do and he challenges Bill Galvin at The Pensions Regulator to match what the ABI is doing. With over 3 million people in trust-based DC, Riddoch believes a direct read-across of the ABI’s procedure is needed.

“We believe The Pensions Regulator has to extend corporate governance into the accumulation phase. At the moment it stops at the point the member retires. If you have been fortunate to have been with Scottish Widows in your accumulation phase then you’ve got a good fund. But if you buy the Scottish Widows annuity you are unfortunate enough to unwind 30 years of investment return because you will end up with one of the least competitive annuities in the market.

“I actually think that Galvin is concerned about the supply side. There are too many schemes and the low level of education amongst trustees is stunning. But there are services that work – mine and those of others – so someone has to bite the bullet and say that if you have to save in a corporate pension then you have to get good treatment when you get to the point of buying an annuity.”

This was one point made in Debbie Harrison’s ’Treating DC Members Fairly In Retirement?’ report for the Pensions Institute earlier this year. Harrison made other allegations about life insurers manipulating prices and Riddoch agrees he has seen evidence of questionable provider activity.

“We can see their rates over the time and they do have sweet spots. There have been some shenanigans where providers wanted to get their rates at the top of the Daily Telegraph table. So there was one provider who had superb rates for a 65 an old female on RPI, but nobody buys RPI. So there has been window-dressing around specific right points and the particular style of annuity.

Harrison also pointed to a lack of train tracks to take retirees to the right place to annuities.

Of Northern Irish birth and having moved to Glasgow for a substantial portion of his life, Riddoch is comfortable saying: “Debbie’s report was about the fact that the shop is shut and you can’t find it anyway. So there is demand for a service to help people but they can’t find it. So unless the supply side is fixed you are going to have providers starting to actually push customers at retirement and say ’no we don’t have enhanced annuities and you are a fat Glaswegian, so go away’.”

The poor outcomes achieved by individuals with longevity factors that would clearly give them improved rates have been the basis of claims in some quarters that trustees could be exposed to legal action over the way annuities are currently delivered. Riddoch sounds only half-joking as he quips about the legal exposure trustees, employers and consultancies could have exposed themselves to over the years through poor annuitisation practices. “If this business fails I am going to go into business suing people for wrongful annuities. I have got a black box with every annuity rate from every provider for the last seven years and I know what people should have been getting,” he says.

That may not need to happen. If Tomas can secure a bulk of the annuitisation business of intermediated workplace pensions it should grow exponentially as pots grow and auto-enrolment expands the pensioned workforce. It is one of several businesses out there looking to bring scale to the mid-market at-retirement space. Whichever cracks it looks set to dominate what is set to be a new market over the next decade.