The UK Labour Party has published an amendment to the Pensions Bill, making it a statutory requirement that all auto-enrolment schemes provide their members with a suitable annuity broking service at the point of retirement.
Tom McPhail (pictured), head of pensions research at Hargreaves Lansdown and chairman of PICA, says: “This is a vital amendment to the Bill as without it millions of investors would end up receiving sub-standard incomes from their auto-enrolment schemes when they reach retirement. The amendment ensures that investors will be given a decent chance of buying the right annuity at a competitive rate. A good shopping around service at retirement adds as much value as if you increased the contribution rate on pensions from 8 per cent of earnings up to 11 per cent.”
Following lobbying by PICA (The Pensions Income Choice Association), over the past three years the joint-led DWP/Treasury working group on the Open Market Option has been looking for ways to make shopping around for a retirement income the default for all defined contribution pension investors. This has led to the ABI Code of Conduct, which includes minimum standards to govern the sale of annuities direct from insurance companies to individuals. The problem is that the code only partially addresses the question of ensuring investors get the right type of income and does little to ensure they will get the best possible rate. In addition, many pension investors will be auto-enrolled into schemes which are not covered by the ABI Code of Conduct.
This amendment provides an effective shortcut, ensuring at a stroke that all auto-enrolment schemes deliver a good value conversion of investors’ pension savings into a retirement income.
Recent ABI consumer research shows that only 22 per cent considered buying an enhanced annuity and just 16 per cent actually did so.
Hargreaves Lansdown, the UK’s largest independent annuity broker, has found two thirds of its customers in June used health and lifestyle when shopping around to increase their income in retirement.
PICA is developing a directory of annuity brokers and has already identified suitable minimum standards for annuity broking services.
The amendment says: “Any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such brokerage services itself. Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with an assisted path through the annuity process, ensuring access to most annuity providers, and minimising costs. The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation, reviewed every three years, and updated, if required, subsequent to such reviews.”