3rd October 2011

LV: A tale of small steps and nudges

The ABI has identified 'customer inertia' as a key problem saying that the presence of an application form in the pre-retirement pack from their existing provider means that 'many simply complete and sign the application form and send it back to their existing provider, rather than shop around for a better deal.'

So the ABI have simply said that it would ban its members from including annuity purchase forms with the information packs sent
to customers about to retire. And that's it.

The NAPF have described this new code of practice as a 'helpful step' that will 'nudge more people into shopping around, ultimately securing them a better income
in retirement'.

However, my PICA colleague, Tom McPhail of Hargreaves Lansdown, has called the ABI's proposals a 'fudge' pointing out that insurers would still be able to include a quote for their own annuity in pre-retirement packs, increasing the likelihood of the lack of an application being seen as an error.

I suppose taking the application out of the current process does suggest that there is more to annuity purchase than simply signing a form and waiting for your income. If this is a step, then it's a very small one - akin to that of a reluctant child on their way into a maths exam they haven't done any revision for. But can we be sure that everyone retiring will recognise the subtlety of this and realise that they are being 'nudged'?

Could qualify for enhanced rates. However, just 1% of those buying an annuity from their existing pension provider benefits from an enhanced annuity.
Some have defended their position by saying that many people will forgo a higher income to avoid having to wait a month or more for their money. But when you consider that delays of that length of time could well be caused by the original provider being slow in turning around discharge forms and sending transfer funds to the new annuity provider it's effectively becomes a self-fulfilling prophecy.

The lack of an application form in an information pack could easily be seen as an administrative error - easily rectified with a phone call or e-mail. There is no compulsion on the original provider to advise clients asking for an application form that they do actually have an alternative that could potentially give them more income.

PICA has called for compulsory'Pre-retirement packs' to go to everyone approaching retirement. They should present shopping around as the default option, and should not include either an annuity quote or an application form from the pension provider.

Leaving aside the fixed term annuity temporary solution, the decision to purchase an annuity is irrevocable. The buying process should reflect this and place the onus on the pensions industry to ensure that consumers are getting the best deal available. We appreciate the intent from the ABI to do something and with further measures and controls then this can improve things for consumers. However, an easier way to produce this is to provide clear tools to make this the outcome
every time.

The aforementioned reluctant examinee has scraped a pass mark this time, but more work needs to be done to ensure good grades from our customers in the future.

Pensions