UntitledThe Annuity market has hit the headlines in recent weeks, with many people questioning the fairness of the current system. However, it was still a surprise when it was revealed last week, that Frank Field, Labour MP for Birkenhead and former Minister for Welfare Reform under Tony Blair, has written to the Office for Fair Trading (OFT), requesting a full investigation into the non-advised Annuity brokerage market.

In his letter to the OFT, Mr Field said: “I am writing to you about the UK pension Annuity brokerage system, which looks as though it is operating as a ‘cartel’”.

The letter continued: “With the introduction of auto-enrolment into pension schemes, I believe it is exactly the time to examine the high costs of both purchasing an Annuity and engaging an Annuity broker. These costs currently lack transparency.”

Mr Field goes on to outline “three key misunderstandings”, which, “leave customers in the dark over whether they are securing the best annuity deal possible”:

Frank Field, Member of Parliament for Birkenhead

Frank Field talks to Investment Sense

www.frankfield.co.uk

  • Many believe (wrongly) that the Annuity broker is working solely for them;
  • Many believe (wrongly) that the broker will always obtain the best Annuity deal in the market; and
  • Many believe (wrongly) that the broker is providing “advice”

Mr Field also addresses the issue of commission paid to non-advised Annuity brokers. The letter, which Investment Sense has seen, continues: “(Non-advised) Annuity brokers are exploiting a loophole in the retail distribution legislation to charge these fees. By not officially ‘providing advice’, (non-advised) brokers are not subjected to the new ban on charging commission. “

The letter concludes: “I feel strongly that pensioners are getting a raw deal here, and this must be put right.”

As long standing advocates of the benefits of advice at retirement and also due to our own concerns about non-advised Annuity sales, we were keen to learn more about Mr Field’s views and sent Phillip Bray to meet Mr Field to discuss his concerns.

Phillip Bray:

You’ve recently written to the Office of Fair trading about non-advised Annuity sales, what’s brought it to your attention now?

Frank Field:

If you look at my website there is a long history on pensions and I was certainly one of those who campaigned against having to annuitise when you drew your pension, I thought that was unfair and we had some success on that. I was also behind the move that if you could show you would not need to claim on welfare, you need not ever annuitise, so there have been changes here which is really good.

But the next stage is about how good is the market in selling you a product. The letter is asking for an enquiry and one of the things they need to look at is not how many companies are providing Annuity broking services, but how many have got interlocked directorships so, they can appear to be freestanding, but not if the same people are running these companies.

I just hope the OFT will give us a proper review. It’s incumbent upon the Government to make sure that it’s a good a market as possible and it may be for the Government itself to enter the market as a provider.

Phillip Bray:

Of Annuities?

Frank Field:

Yes, that was Gladstone’s original proposal through the Post Office.

Phillip Bray:

Clearly there are three ways someone can buy an Annuity; direct from a provider, through a non-advised broker, or through an Independent Financial Adviser (IFA) are you limiting your call for an OFT to the non-advised sector?

Frank Field:

Yes.

The crucial business is about looking at whether the same group of people run a whole series of Annuity brokerages, which could mislead the consumer into thinking there are more options than there actually are.

Phillip Bray:

You were quoted as proposing stricter regulation of the Annuity market, where do you believe the rules are deficient and what would you like to see done about these deficiencies?

Frank Field:

I’m not sure whether they actually are, I just want an investigation and then we’ll know.

There have been some responses which have said “just Google this, there are 10 of us”, but this isn’t the case if a number of Annuity brokers are interlinked. I have actually looked at the composition of who is on which board and we have found examples of interlinking.

Phillip Bray:

What chance do you think there is that the OFT will launch an investigation?

Frank Field:

I have no idea, I just think given that there’s a Government drive to save more into pensions, it’s beholden on them that we make sure people get the best deal possible at the very end.

Phillip Bray:

You talk in the letter about Annuity rates falling, where do you lay the blame for this?

Frank Field:

I think generally speaking it’s because we’ve been printing money like there’s no tomorrow, which has driven interest rates down.

Most of the talk is about the terrible deal savers get, and it is a terrible deal, but there’s another group of people whose actual income is affected by these policies.

Phillip Bray:

Do you have a series of reforms you’d like to see in the Annuity market?

Frank Field:

Not at the moment, first of all we need to study very carefully what the OFT comes back with.

Phillip Bray:

You also mention commissions and fees in your letter; do you think they are too high or fair?

Frank Field:

Again, I think it would be good to hear back from the OFT and get their comments on it; they are in a position to take an overall view of the market.

The important thing is to get a debate going.

Phillip Bray:

Widening the conversation out if I may, what do you see as the main challenges to someone retiring over the next couple of years?

Frank Field:

One of the challenges, and it may be sooner than the Governor of the Bank of England thinks, is that interest rates will rise and consequently so will Annuity rates. Therefore there must be people thinking whether they will be able to hold on long enough to get the improved rates.

Phillip Bray:

Why do you think so many people buy Annuities, 400,000 a year at the last count, when there are so many alternatives?

Frank Field:

I think because in a sense an Annuity has a ‘trademark’ and people think it is a safe haven for them, because at least when they buy, the terms on which they have bought, will be honoured.

Whether they get the best deal at the beginning is the question which is for the OFT.

Phillip Bray:

Finally, widening the conversation even further, each year as we lead up to the Budget and the Autumn Statement, rumours abound that higher rate tax-relief and the tax-free lump sum from a pension will be abolished, where do you stand on these issues?

Frank Field:

I’ve always thought the only way is for people to build up their own pension or investment incomes. However, part of any reform to bring in a minimum adequate pension, would be to realise that providing for gigantic pensions is none of our business and that the duty of taxpayers is to ensure that no one falls below a minimum line. How they deploy their savings beyond that level ought not to be rigged by tax concessions. People should be free to choose how they plan for their retirement.

I have always been in favour of phasing out all the tax breaks and to get the (tax) rates as low as possible, to give people as much freedom to choose what they want to do. The State has a job of ensuring that you are in a compulsory scheme, so that you are not a drain on welfare in the future, but above that level it’s nothing to do with the State.

To think we are subsidising huge pensions, by people who will inherit poverty in old age, seems to me to be grotesque.

But I do think the big welfare question we have to face, is that we are past the age when we thought we could build these structures of welfare going right up into the sky. I think the job is how we get everyone up to a minimum level; we’ve never achieved that before.

The idea that you surrender part of the tax base by giving people incentives to save gigantic pensions I don’t think is a proper legitimate function of the State.

The single aim should be to get people off means tested benefits, beyond that I don’t think it is the Government’s business to put their sticky fingers into people’s private lives.

Phillip Bray:

Finally, back to the letter to the OFT, do they have a timescale for coming back to you?

Frank Field:

Unfortunately no, we shall just have to wait for their response in due course.

You can learn more about Frank Field by visiting his website, which can be found by clicking here.