The Financial Services Consumer Panel, (FSCP) recently published a report which argued that the annuity market does not work well for the majority of consumers. The Panel felt that the “complex market” was “failing to deliver good outcomes for many consumers”. The value of annuities is increasingly being questioned by journalists and opinion formers. Rates are improving but have been relatively low and too few individuals exercise choice or have access to the advice they need. Those in favour of other alternative income options, such as income drawdown, have signalled that it is the end of annuities. Yet, annuities offer significant benefits over other forms of pension income. A guaranteed income for life is considered a better option by some customers. The debate, sponsored by Legal & General, a leading annuity provider, in conjunction with the International Longevity Centre - UK (ILC-UK) was held in the House of Lords, on Thursday 30 January 2014. During the event we explored what the industry, government and the regulator needs to do to respond to the FSCP challenges and whether annuities are still fit for purpose. Or does the industry need to innovate in product design and access to flexible solutions that meet future customers’ expectations? The event, chaired by Baroness Sally Greengross, firstly presented the views of a panel of six leading representatives from across the industry who have an interest in the at retirement market outlining whether they believe that annuities are still fit for purposes and if not, what other options they believe should be considered. The panel included Sue Lewis, Chair of the Financial Services Consumer Panel; Dan Hyde, Personal Finance Editor of the Daily Telegraph; Tom McPhail, Head of Research at Hargreaves Lansdown and Chair of Pension Income Choice Association (PICA); Ros Altmann, Economist and former Downing Street adviser; Jane Vass, Head of Public Policy at Age UK and Tim Gosden, Head of Strategy for Legal & General’s individual annuity business. Following the panel presentation the debate was then opened to the invited audience which included parliamentarians and senior representatives from across the industry. Senior representatives of charities, think tanks, government departments, regulators and selected media contacts who regularly write on this subject, were also invited.

1. Are annuities fit for purpose?
30th January 2014
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2. Welcome
Baroness Sally Greengross
Chief Executive
ILC-UK
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3. Welcome from Legal & General
Kerrigan Procter
Managing Director
Legal & General Retirement
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4. Sue Lewis
Chair
Financial Service Consumer Panel
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5. Annuity advice and purchasing:
the consumer experience
Sue Lewis
Chair, Financial Services Consumer Panel
www.fs-cp.org.uk

6. Background
 Approximately 400,000 annuities sold each year, £12 bn
 Expanding market:
 Maturing pots from personal pensions & GPPs (sold since 1987)
 Auto-enrolment
 “Small pots” problem
 Open market option (OMO) – take-up, weak rules

7. Finding 1: The OMO doesn’t work well
 Open market bewildering & feels risky
 Consumers ‘shop and stop’
 ‘Best annuity rates UK’ gets you nearly 1m hits
 Consumers do not drive competition
 Low consumer financial capability
 Fear of product complexity
 Fear of making an irreversible, high-cost mistake
 General distrust of professional advisers
 Inability to find appropriate advice at acceptable cost
7

8. Finding 2: non-advice driven by advisers not
consumers
 Major shift to non-advice due to:
 Light touch regulation; adviser not responsible for sale
 Lower costs (eg qualifications), higher profits via commission
 Big differences between advised and non-advised
services
 Whole of market; deep underwriting, checks for contract terms
(eg GARs); checks to ensure selection of right product
 Limited panels; limited support (annuity sales-driven); shallow
underwriting; no checks for GARs etc (can be a disclaimer on
site)
8

9. Finding 3: Introducers ‘masquerading’ as advisers
 Introducers sell personal customer details to firms
selling annuities
 Get around £250 for each subsequent successful
sale
 Websites look like non-advice and advice sites, but:
 Consumer doesn‟t know who they are dealing with
 Doesn‟t even know where the firm is based
 Result? Customers get phone calls, emails, texts
from firms they have never heard of and did not
contact, contributing to “shop and stop”
9

10. Finding 4: pricing and competition issues
 Excessive profits on annuity books?
 20 x profits on annuity books compared with all other lines,
including pensions
 Academic research on „money‟s worth‟ (90%), out of date
and only covered OMO rates
 Rollover pricing embeds cost of adviser commission even if
customer does not use OMO; cost not visible to customer
 „Rollover‟ annuities most pressing concern,
especially where provider is not in open market
10

11. Recommendations
 The FCA should:
 introduce a code of conduct for the non-advice market
 address the causes of the current regulatory arbitrage between nonadvice services and professional financial advice
 undertake a rigorous market study to examine possible exploitative
rollover pricing, annuity profits and the impact of tied relationships
between insurers and annuity providers
 strengthen the definition of the Open Market Option.
 The Money Advice Service should:
 develop its independent annuity adviser directory, and launch a targeted
education campaign
 The Government should:
 require employers and trustees to establish a high-quality, low-cost
decumulation service for members of workplace schemes
 establish a ‟de-NEST‟
 look at tax rules for multiple small pots
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12. Dan Hyde
Personal Finance Editor
The Daily Telegraph
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13. Tom McPhail
Head of Research
Hargreaves Lansdown
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14. Dr Ros Altmann
Economist and former Downing Street adviser
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15. ARE ANNUITIES FIT FOR PURPOSE?
ILC-UK/L&G Panel Debate
House of Lords
30 January 2014
Dr. Ros Altmann

16. ‘PURPOSE’ OF ANNUITIES
 Use pension savings to meet retirement income needs
 Provide good value, secure retirement income
 Offer mortality cross-subsidy to cope with uncertainty of lifespan
 Ensure pension savings support pensioners in retirement
 Insurance against living ‘too long’ so don’t run out of money

17. ARE STANDARD ANNUITIES FIT
FOR TODAY’S RETIREMENT?
 Standard annuities are single life, level and only address
one retirement risk – but there are many others during
longer retirement
 No inflation protection
 Usually single life, no partner’s pension
 Dying relatively young means losing all capital
 Never do better if health or other circumstances change
 Never benefit from good investment returns or rate rise
 Nothing left for care

18. ANNUITY INCOME FROM AGE 65…

19. THE REALITY OF ANNUITIES
 Unique financial product – complex and irreversible
 Asymmetry of information – poorly informed customers who
only buy once in a lifetime, often buy wrong product
 May be secure income, but all capital at risk, no risk warnings
 ‘Small’ funds can’t find value
 No controls on charges, rates, value for money, suitability
 Customers pay ‘commission’ even if no advice received
 Must live to 90 or even >100 to get value!

20. VALUE FOR MONEY – MIS-SELLING?
Name of insurer
Age when insurer pays more than original fund if earns
the assumed returns
Assume 3.5% return on fund
Prudential (MAS quote)
Abbey Life
MGM
Countrywide
Standard Life
Halifax/Clerical Med/Scot Widows
Pru/Royal London
HSBC Life
Sun Life of Canada/Phoenix
Aegon
LV
ReAssure
Legal and General
Canada Life
Reliance Mutual
102
100
97
96
95
95
95
94
93
93
92
91
90
90
89
Assume 4% return on fund
107
105
102
100
98
98
98
97
97
96
95
94
92
92
91

21. ANNUITIES SOLD AS ‘NO RISK’ REGULATORY FAILURE
 No controls on charges or value for money for customer
 High charges often hidden, pay for ‘advice’ even if none received
 No risk warnings or suitability checks – caveat emptor
 OMO not enough - shop around for better rate for wrong product!
 £1bn a year lost to future widows/widowers meaning more poverty
 RDR bias against advice people need before irreversible purchase

22. WHAT REGULATORS COULD DO
 Reform COBS rules so people not just offered an annuity
 ABI self-regulation failed – need controls on charges & value
 Information, risk warnings & advice before buying – explain options
 Do nothing option, benefits of waiting
 Leave money invested either in pension or drawdown
 Timing, type, rate – customers need much more than OMO
 tPR guidance to trustees to ensure information and value of advice
 Address ‘small’ pots – allow as lump sum not annuitise

23. WHAT THE INDUSTRY COULD DO
 Stand up against worst practice – dreadful value accepted by ABI
 Standard letters to explain all options
 Proper disclosure of charges, know your customer checks
 Develop decumulation options that fit better with people’s lives
 More flexible products, funds invested for longer, not all at 65
 Drawdown for smaller funds
 Annuitise later to allow life/market changes: adjust for health/care

24. THANK YOU FOR LISTENING…
Dr Ros Altmann
 Blog: pensionsandsavings.com
 Twitter: @rosaltmann
 Website: www.rosaltmann.com

25. Jane Vass
Head of Public Policy
Age UK
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26. Tim Gosden
Head of Strategy
Legal & General’s individual annuity business
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27. Are annuities fit for purpose?
30th January 2014
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