Let’s just start by reminding ourselves firstly that the retirement income market is probably the most advantaged sector of financial services. It is a multi billion pound market that is guaranteed to continue growing over the next 5 years as a result of the core demographic drivers and the structural change across the industry as the DC sector replaces DB. For a market that is so advantaged the natural laws of economics would suggest the market would be operating efficiently with lots of innovation and high levels of competition. But that has not been the case, and particularly so in the corporate market.
There are many indicators to highlight this point and to illustrate potential customer detriment. Let’s look at one such indicator, the proportion of people across the market who currently benefit from obtaining an advantaged retirement income by selecting an enhanced annuity. Of all annuity purchases across the market approximately 1 in 6 customers currently purchase an enhanced solution. However, in the corporate market only a fraction of this number purchases an enhanced annuity solution. When you consider up to 3 in every 5 customers could qualify for an enhancement and therefore a higher income in retirement, you should conclude the retail and corporate markets are operating sub-optimally. Why is the corporate market underperforming the total market and what solutions could deliver a positive change?
The answer is not single dimensional but there are two higher order solutions that would make a significant improvement in the way the corporate markets operate more effectively.
Firstly, changes to legislation. The Pension Income Choice Association, of which Just Retirement are management board members, have developed a new three step retirement process to replace the current open market option system. The proposal makes shopping around the default, and seeks to create clear blue water between the savings phase of retirement and then the decision of how to choose the best retirement income solution. Its proposal would make it unlawful to include a default quotation for an annuity early on in the employer – customer engagement process. A new set of simple customer communication tools, including a device known as a ’Pension Passport’ has been built and tested with customers up and down the country with outstandingly favourable feedback. PICA is in active dialogue with government ministers and their teams to demonstrate how the proposals would benefit customers and the UK economy.
Secondly, the development and installation of improved technology based solutions that provide support to trustees and their members to facilitate improved engagement at the point when a member is required to make a product selection. Platforms such as The Open Market Annuity Service (TOMAS) are now a reality and are delivering non-advice based solutions within the retail and corporate markets. Adoption by trustees is gaining pace as trustees come to understand these practical solutions offer a controlled method of improving their member’s retirement income outcomes by delivering a shopping around process without introducing risk to the trustees.
There are many other factors that would contribute positively to improving the outcomes members of corporate based schemes could attain. I have highlighted two that are within reach, that I believe would deliver a step change in customer outcomes.
2011 will be an excellent year for all those communities involved in the retirement income market. Whether you are a retail or corporate adviser, a product provider, client or public policy maker, 2011 will be the year where more innovation than ever before will be created and in part deployed.
The consultancy, Oxford Economic, evaluated PICA’s new retirement process proposals and cautiously estimated, if the proposals were implemented, additional income of c. £2.7 Bn would be available to retiring customers.
At a time when household incomes are under pressure there has never been a more important time to unlock the innovation agenda in the corporate market.
Stephen Lowe
Group Director of External Affairs and Cus