Annuities for Pensioners

David Rutley Excerpts

Tuesday 7th January 2014 Westminster Hall

[Mr Mark Hoban (Fareham) (Con)]

I congratulate my hon. Friend the Member for Gloucester (Richard Graham) on securing this debate. He is spot on in saying that annuities represent an important market and that we must ensure that it functions properly, fairly and to the benefit of those who have saved for their retirement and done the right thing but now face the second most difficult financial decision of their lives. The cost of getting that decision wrong is clear.

The National Association of Pension Funds has suggested that, every year, pensioners lose between £500 million and £1 billion by not shopping around for the best annuity rate, and that they make the wrong choices for a variety of reasons. We must tackle that. The research suggests that more than half of retirees do not shop around for an annuity but roll over to one of their existing pension provider’s annuities.

When I was a Treasury Minister, I worked with the Association of British Insurers in drawing up its code of conduct, which helps to shift the balance away from the default option of staying with the pension provider and towards shopping around. My hon. Friend the Member for South Derbyshire (Heather Wheeler) referred in her intervention to the change in the wake-up pack and the forms in it. However, I question whether that code of conduct is working; we must look carefully at whether the effective default is to shop around. I am not sure that the evidence exists that the code has been as effective as it should be.

My second point, raised in the report produced by the Financial Conduct Authority’s consumer panel, is about what happens when people do shop around. It is clear that the quality of help available is variable. There are some good sources of advice, but too often they are less than satisfactory. Some websites are not clear about the charges and commission earned from putting someone in contact with an annuity provider. It is sometimes not clear whether the website is offering a view of the whole market or just part of it. I looked at the Money Advice Service’s website this morning and it is clear that its comparison tables draw information from a panel of annuity providers. Firms must be much clearer about what service they are offering when people are shopping around.

We must consider whether consumers are being ripped off by hidden charges when they are shopping around, whether they are comparing the whole market or a segment of it, and whether they understand the regulatory protection when using such websites. We must ensure that consumers are properly protected and think about existing sources of information and whether they are adequate. My hon. Friend the Member for Gloucester referred to the Pensions Advisory Service. The Money Advice Service also provides information on annuities; one recommendation from the consumer panel was that the support given through the Money Advice Service and the Pension Advisory Service should be beefed up to help consumers.

We need to bear employers in mind, as they are another important player in the market. The reason why our constituents have to make difficult decisions about how to spend their pension pot is that employees are moved away from defined benefit schemes to defined contribution schemes. We are putting much more risk on the shoulders of employees. Although a large number of employers support their employees in making such choices and put them into contact with a pension adviser at retirement, we need to encourage more employers to do that, so that more employees who are coming up to retirement know exactly what they should be looking for and who they should be consulting.

We need to look at how the annuities market functions, because a poorly performing market has a detrimental effect on income for pensioners and also, in the longer term, reduces the incentive to save. If people feel that they will not get good value for money when they retire, they think, “Why should I put money into a pension? Why shouldn’t I put money into a house instead, or into an ISA?”

We need to make sure that we have a properly functioning market. That is not to say that all that providers should be doing is the bare minimum set out in regulation. Providers should recognise that they have a role to play in having high standards, so that consumers feel that they are being treated fairly and they know, for example, what they are being charged, that they have the best possible rate and that they have explored all the options. Providers have a role to play, too, in ensuring a high standard of conduct in those sectors. A low standard of conduct will lead to potential mis-selling risks in future and, as we have seen in the banking sector, that costs the industry dear.

[David Rutley (Macclesfield) (Con)]

I congratulate my hon. Friend the Member for Gloucester (Richard Graham) on securing the debate. My hon. Friend the Member for Fareham (Mr Hoban) is making a compelling argument about the need to open up the market. I have been doing some research and it is clear that more than 400,000 people a year are making this decision. That is a huge number and it makes the case for opening the market up even more important. He talked about trying to delink product choices; we can look at what has gone on in the mortgage industry, for example, in decoupling household insurance. If we move forward to a more retail approach to the segment, it will help more people have a wide range of options as they consider this very important decision.

[Mr Hoban]

My hon. Friend is absolutely spot on. We need to ensure that there is a more retail-type approach. One reason why people are able to shop around and compare mortgages is that there is good-quality information out there.

It is easy to compare the different rates on mortgages and the monthly payments people will make on different mortgages. The charges are very transparent as well. We can learn things from the mortgage market and its transparency that can be applied to the annuities market. I do not often disagree with the pensions Minister, my hon. Friend the Member for Thornbury and Yate (Steve Webb), but I am not entirely convinced that being able to trade in annuities will work and be effective. There are some comparisons with the mortgage market that we cannot necessarily draw.

Finally, I want to make a broader point. Over the course of the past decade, there has been quite a lot of focus on, to use another bit of jargon, the accumulation phase—what happens when people build up their pensions savings. The previous Government commissioned Lord Turner to look at pensions. I think there was some dispute between Tony Blair and the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) about whether Lord Turner’s recommendations should be implemented, but they were, with cross-party consensus. There is considerable consensus over the introduction of the single-tier pension. One area that we have not debated in enough detail today starts that process. What happens when people spend their pension pot? What choices are available to them?

My hon. Friend the Member for Gloucester talked eloquently about an asymmetry of knowledge between someone seeking an annuity and an annuity provider, and about the circumstances that people face. Alternative products, such as income draw-down products, are out there, but that transfers both the investment risk and the longevity risk to the investor—the pensioner. We need to look carefully at the products out there, recognising that this very polarised market, with annuities on the one hand and draw-down products on the other, may not necessarily be in the interests of consumers. Other alternatives might be out there.