My Lords, Amendment 67ZA is in my name and that of my noble friend Lady Sherlock. It proposes the addition of a simple clause to the Bill which would require the provision of an independent annuity brokerage service or the offer of such a service to all members pending retirement. Later provisions set out how best practice should be defined and maintained in the brokerage service offered to the retiring member or to which he or she is directed; in other words, it calls for an independent brokerage service to assist people to annuitise at the point of retirement.
This is hardly a radical proposal. It is best practice. It is what many employers with DC pension schemes already offer. The ABI code of practice says that providers should tell people who are decumulating that they can shop around and transfer their funds to another provider and that they should seek advice
before so doing. But that is not enough. As Dan Hyde, in an article in the Telegraph on 10 December last year, wrote:
“The process starts with a ‘wake-up’ pack sent to savers … in which pages of often unintelligible information, packaged in unhelpful ways, baffle even the well-informed”.
Of course, people can purchase their own independent financial advice but the majority do not retain or use independent financial advisers or accountants. Even a one-off appointment would be expensive, equivalent to a week’s take-home pay for workers on the average wage, even if they knew where to go.
The scandal of annuities is well known and widespread. When this amendment was debated in the House of Commons, Steve Webb, the Pensions Minister, used the same diversionary tactic as did the Minister, Mark Hoban, who responded to the later Westminster Hall debate on annuities. It is all very well to suggest that those reaching retirement age can do many things other than plan for an annuity, but it is insufficient to say that people should have many different opportunities and lots of different advice. The fact is that the variety in the kinds of annuity that are offered and the variety of deals available is considerable and an annuity is invariably the default position of most of those retiring. They need independent support at that time.
The need for that independent support at this point may be obvious but the reasons for it are worth repeating. The first is the complexity of choosing the right annuity option. Annuities are complex products and decumulation is a complex process. Comparison between providers is very difficult. I saw a recent quote for an annuity pot of only £30,000. In one short e-mail the following terms were contained: single life; level escalation; anticipated bonus rates and required smooth return rates, all without explanation. It offered four alternatives to a conventional lifetime quotation, annuity was described as income choice annuity or with-profit annuity, and out of nine total options the rates varied between £700 and £1,400, with most about £1,200. With this complexity no one should exercise a choice without independent support, so no wonder more than 50% of people—according to the Telegraph—go with their existing provider.
I understand that the first comparator website has been launched, and I suppose that is a step in the right direction, but Ros Altmann, the independent pensions consultant who gave evidence to the Commons committee, did not think that it was particularly simple. She said that it was disappointing and not easy to use. Annuities are complex products with multiple options and it may be that there never can be a simple comparison website. Does the Minister accept that annuities are complex and people need independent brokerage support at the point of decision-making? Does he accept that obtaining that support is beyond the grasp of most people, particularly those with no knowledge of investments? If he does accept that, how does he suggest that those who need that support can be guaranteed to get it?
The variety in the kinds of annuity that are offered and the deals that people can get is just bewildering. The NAPF and others have said that annuitising with some pensions scheme providers pays on average 20%
less than shopping around. Ros Altmann said on “Newsnight” that if you had an annuity with the worst performers you would have to live until you were 100 to get back the money that you paid in. In effect, inertia or, alternatively, being overwhelmed by the complexity of making a choice, is exploited by pensions providers. Insurers are making excessive profits from purchasers failing to shop around. Inertia is a powerful force that results in excess profits for insurers. They penalise, not reward you, for loyalty. Perhaps it was that which drove the Pensions Minister, Steve Webb, to make his announcement on portable annuities last week—a Statement, by the way, that went down like a lead balloon in the industry. Well, it would, wouldn’t it?
The current system is a lovely little earner, as they say in my new adopted home in the East End of London. The FSCP report published in December made many points. To assist my analysis of it, I have drawn the following points from the report which states that the tactics used by insurance companies and brokers are “tantamount to burglary” of old age pensioners, and that it is nearly impossible for pensioners to know whether they are getting a good deal. Pensioners are hit by excessive profits and exploitative pricing. Insurance companies make 20 times more profits on annuities than on any other financial product. There are poor returns: on a pot of £100,000, Clerical Medical offered £4,664 per annum, while Reliance Mutual offered £6,111. Over their expected lifetime, the pensioners would have been just over £36,000 worse off with one rather than the other.
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There are opaque charges. Brokers are incentivised to sell particular products. In some cases they make 6% or £12,000 on a pot of £200,000. There are sharp practices with brokers shopping around, resulting in a referral fee from each. Many have exploitative pricing: that is, they sold a product for a fit person when the individual was not fit, or an adviser neglected to tell them of other products such as income drawdown as the profit margins were slimmer.
Companies can make £35,000 profit on £100,000 in the pot over 25 years. That figure is denied by the ABI, despite the report. Importantly, it has not said what profit is made—presumably that information is known. We should also be aware that the pensions Minister, Steve Webb, commissioned a review of annuities from the FCA. That is due to report in February. We welcome that. Never has a case for a review been better made than the FSCP report. People have gone without who have diligently saved throughout their working lives. They are being systematically burgled, to use the FSCP word, by a profit-hungry industry and its associated sales force. The issue has been comprehensively covered by the Telegraph but in its articles of 9, 10 and 13 December it also concluded that the complexity of the products, the sharp practices, excessive charges and profits, and incentivised sales forces all point to the need for independent brokerage service support.
In the Westminster Hall debate on annuities on 9 January, the Government fielded a Treasury Minister and the Opposition a shadow pensions Minister—my
honourable friend Gregg McClymont. That alone highlights another problem with annuities: policy in government is split, with regulation and policy lying mainly with the Chancellor. It is a tiny part of his remit and hardly the top priority when we face sorting out the aftermath of the financial crisis. Yet it was the Pensions Minister who announced the review of annuities.
If we do not sort out annuities, we will undermine auto-enrolment. Annuities are building up to be the next scandal and mis-selling crisis. The sector will not sort itself out. We need to strengthen the buyer side and Parliament needs to take action on behalf of savers. When the Minister has taken a week off after this Bill receives Royal Assent—as we all hope it will—I urge him to move on to annuities, wrestle the policy-making from the Treasury and sort out the annuity market. In the mean time, this amendment—if accepted—would provide people with access to an independent advice and annuity brokerage service on decumulation options. It would strengthen the buyer side.
Annuities are one area of pension policy where the buyer deals directly with the provider and makes choices. With independent support, those choices would be informed ones. Independent support would protect savers from making poor choices that could reduce their income by up to 20%. Also, it might help divert us away from the next financial mis-selling scandal, or at least protect Parliament from the criticism that it failed to act when presented with evidence of the need to do so.
The information I have laid before your Lordships’ Committee makes the case for the need to provide access to an independent annuity brokerage service to help people at the point of retirement to make wise choices. Already, 400,000 people each year annuitise. That number will escalate from 2020 onwards, when the impact of auto-enrolment starts to kick in. Annuity policy might yet be the next pension Bill before us and that would be the place to address unscrupulous practices and to make sure that the industry is fit for purpose and puts the interests of savers first. This element of independent support falls firmly within the remit of this Bill. I urge the Minister to accept the need for it now and in future. I beg to move.