The UK Government is facing fresh demands to bring about an industry-wide annuity clearing house as part of radical new proposals to make shopping around using the open market option at retirement compulsory. The Association of British Insurers (ABI) is currently working through various details of a new so-called shopping around code of conduct for insurance companies designed to greatly increase take-up of the open market option by raising customer awareness through much improved communication and processes.
Centre for Policy Studies’ (CPS) Michael Johnson says that insurance companies should develop a new annuity clearing house system within which all insurance companies (the annuity providers) would participate. Under his proposals, a standardised form would be sent to the annuity clearing house, via the pension fund administrator, around three months prior to retirement detailing any health and lifestyle issues and the type of annuity actually required. Insurance companies would then bid for business on a daily basis.
Johnson states that this process should introduce what he calls pricing tension and, with all transaction prices being revealed at the end of the day, the transparency that is at the moment lacking, meaning that individuals would then have the correct information they require to choose the right annuity which best suits their requirements. He went on to say that if the financial services industry doesn’t establish an operative annuity clearing house within the next two years, the coalition should facilitate a national annuity support and broking service.
Johnson says that smaller pension funds should be packaged together ahead of bidding to encourage stronger bids from insurance companies, by giving them a package of smaller pension funds to bid for, rather than lots of individual ones. He says the annuity clearing house system would also create a properly tailored market for enhanced annuities.
Enhanced annuities pay higher retirement incomes to those indivuduals who have certain health or lifestyle issues, and could offer annuity rates up to 40% higher. The more serious the medical condition(s), the higher the annuity rates and the higher the retirement income. Unfortunately, at the moment, not enough people are aware of enhanced annuities and the benefits they bring – hence the need for change in the important at-retirement market.