This time last year in his Budget statement, George Osborne dropped a huge bombshell into the landscape of the at-retirement market. He announced that from April 2015 all policyholders with defined contribution pension pots would no longer be required to purchase an annuity – thereby introducing a huge amount of freedom for pensioners to invest, or spend their accumulated pension pots as they see fit.
The Budget announcement changes the landscape considerably for all DC policyholders and the actuaries developing new products for them. In the current environment DC policyholders wishing to retire have very little choice.
They know they have to take an annuity, unless their pots are below the de minimis levels, or are above perhaps £150,000 where drawdown is already available, and the only real freedom or choice is which annuity provider is the most appropriate.
However, as the FCA’s thematic study on annuity sales practices has revealed, many consumers do not shop around and switch provider, even when a high proportion of these would be better off doing so.
In our view even this limited degree of choice represents a challenge for quite a high proportion (the FCA thematic review in December 2014 suggested maybe 60 per cent) of retiring policyholders and they do not bother, or do not know how, to research the market to seek better rates or even explore whether, if in poor health, they might get a specialist impaired or enhanced annuity.
While annuities have had a bad press from regulators and commentators alike they have acted to remove all risks around investments, longevity, tax and the associated costs from the policyholder. Insurance providers and their actuaries have taken responsibility for all of these and have been required to provide additional capital to support these payments even if conditions are adverse.
In the new world there would appear to be risks all round for policyholders, and new risks for insurance providers and their actuaries. Probably the most fundamental risk for all parties in the retirement process at this stage is sheer lack of knowledge and certainty about what is available, what is legally permissible and what the regulator(s) expect.
We have now seen the launch (in “beta mode” – so still under development) of “Pension Wise” (www.pensionwise.gov.uk) the Treasury-developed website to assist pensioners to make decisions about what to do with their pension pot. The website sets out six steps to follow, which we have considered to see how and where the main risks that actuaries would need to assess might arise:
Check list
These are:
1) check the value of the pot;
2) understand the options at retirement;
3) plan how long the money needs to last;
4) work out how much income they will have in retirement;
5) be aware of the tax implications;
6) shop around for the best deals
These steps sound quite straightforward at first but once you dig underneath the surface the risks start to emerge.
Step 1) should be reasonably easy for a defined contribution pension pot, you would think – the insurance company should provide details of the estimated value of the pot based, hopefully, on a recent valuation date. One or two issues will need to be explored here, however. This value will not be guaranteed and it will vary in future depending upon the investments the policyholder has selected. So the first area of risk to explore will be how volatile are the current investments and to what extent is the estimated value likely to change – up or down – in the period until the selected retirement date. Second, the value of the pot may not tell the whole story – there may be valuable options attaching such as, in some older pension policies, guaranteed annuity options which will give a very favourable annuity rate for the policyholder in today’s conditions.
