Pensions Bill

Written evidence from Partnership Assurance (PB 75)

About Partnership

2. 1 Partnership is a long established UK insurer specialising in the design and manufacture of financial products for people whose health and lifestyle means that their life expectancy is likely to be reduced. Partnership aims to offer higher retirement incomes than traditional providers through undertaking a detailed assessment of people’s health and lifestyle conditions.

2. 2 Partnership has a broad offering in the retirement sector and offers a full range of Enhanced Annuity solutions, from clients who smoke or have minor health impairments, through to serious conditions such as cancer. Partnership is also the largest provider of annuities for Long Term Care funding in the UK. It also offers specialist protection solutions for clients who have been declined cover from standard providers and entered the equity release market in 2011 with an Enhanced Lifetime Mortgage.

2. 3 Partnership believes an efficient and transparent annuity market is one of the essential building blocks required to enable UK pensioners to meet their financial needs in retirement and that increased transparency will help create a more efficient market from which customers, distributors and providers will all benefit. Partnership is a member of the ABI, represented on the board of the Pensions Income Choice Association and has been active in sponsoring research and broad industry initiatives with the Pensions Policy Institute, International Longevity Centre and others to determine solutions to current challenges in the retirement income market.

2. 4 Partnership feels it can best add value to the debate by considering the accumulation of funds which are ultimately used to purchase an annuity to provide lifetime income. Our submission to the Pensions Bill Committee is therefore focused on the discussion about small pots and automatic transfers.

Small Pots and Automatic Transfers

Summary

Partnership welcomes measures to consolidate pension funds held by job changers on a rolling basis. We believe the option for the funds following the member is most likely to achieve the objective of helping scheme members attain worthwhile pension funds and envisage the transfer becoming a routine element of a recruitment process.

We think it is important that members can opt out of a transfer and do not believe it would be appropriate to transfer in or out of defined benefit pension schemes automatically.

2. 1 Partnership provides retirement annuities and, while alternative options exist for drawing an income from retirement funds, an annuity is the most common means for people with a typical value fund. As such, we recognise problems retirees may have achieving value for money from a small retirement fund. Specifically, retirees have the following 2 problems:

a. A fixed transactional cost creates a disproportionate charge on the funds; and

b. The amount of funds cannot support the cost of advice or intermediation so that the annuity can be selected on the open market - The Open Market Option (OMO) – or establishing whether an annuity is the most appropriate option to meet an individual’s needs.

2. 2 We support the consolidation of multiple funds into a single annuity purchase to mitigate these problems. Nonetheless, consolidation at the time of retirement requires that multiple funds are held and maintained throughout a working life and fixed cost product expenses may erode smaller funds disproportionately.

2. 3 To the extent that providers do not apply fixed cost charges, the providers’ costs will be increased by the maintenance of multiple small value policies. This inefficiency ultimately increases the charges for all policy holders, particularly when some providers refuse to administer small pots so that the burden is spread across a smaller pool of savers.

2. 4 Partnership supports the abolition of short service refunds as the refund of several small pots could prevent  a total pot of reasonable value. However, we consider that the current position is undesirable and will worsen when auto-enrolment is widespread. We agree with the Department of Work and Pensions (DWP) [1] that the administration costs could restrict the value of retained small pots in a pension scheme and would further add that the inconvenience to scheme members retaining records for multiple pots is a burden. For the stated Policy Objectives of supporting low cost savings provision to be achieved, we believe it is vital that a mechanism for rolling consolidation of small pots is established. We therefore consider Policy Options 1 [2] and 4 [3] to be unsatisfactory.

2. 5 As stated in Partnership’s response to the DWP consultation [4] we believe that automatic transfer has the potential to meet the stated Policy Objectives although both options have pros and cons. An aggregator scheme as proposed in Policy Option 3 [5] may achieve the stated Policy Objective but it is a major product and infrastructure development and we agree that the set up costs would be significant. Establishing the required profitability for the private sector to operate the scheme would take many years and the administration cost, particularly in the early years, could result in members experiencing charges that result in little saving from holding multiple pots.

2. 6 Partnership considers that Option 2 [6] is most likely to achieve the stated Policy Objectives. We consider that, in an environment where all employers operate a pension scheme or NEST it will be possible to transfer funds and bringing past accrual to a new employer’s scheme will become a routine part of the employment process. As stated in our response to the small post consultation, we believe it is important that members can opt-out of automatic transfers so that member engagement from the process is not discouraged.

2. 7 However, we believe an automatic transfer is only feasible between money purchase pension schemes. Schedule 16 of the Bill includes reference to "a pension scheme of a prescribed description" being subject to the automatic transfer Regulations. Transfers out of defined benefit scheme are notoriously risky as evidenced by the FSA response to the pensions mis-selling scandal of the late 1980s and early 1990s. The switch of investment risk from the Trustees of a defined benefit scheme to the member of a money purchase scheme is critical but, in all likelihood, would not be appreciated by the majority of transferees. We consider that the automatic exchange of a guaranteed future income for an unpredictable outcome would be unsatisfactory and result in unwelcome commentary. For similar reasons we consider that schemes offering a guarantee annuity rate should be exempt from an automatic transfer.

2. 8 Partnership has concerns that the administration costs of the transfers could reduce or eliminate any savings made from not maintaining multiple posts. This concern is increased by the possibility that some employers’ scheme will be administered without government support whereas employers using NEST may be supported. Partnership would like to see a level playing field for schemes, and therefore scheme members, and request that the Secretary of State includes some support for transfer facilities in the Regulations.

2. 9 Finally, Partnership recognises that any additional pension funds accrued by members as a result of the proposals could be eliminated if an uncompetitive annuity is purchased with the funds. The ABI has acknowledged that one third of retirees do not shop around to purchase their annuity [7] and it is thought to be a higher proportion for members of occupational schemes. The NAPF estimates [8] that the variation between a good annuity rate and bad rate can be up to 20%, and it could be considerably more if the member has medical or lifestyle conditions resulting in a lower life expectancy. Partnership would support a measure in the Bill that encourages administrators of occupational DC scheme to promote "shopping around" by the membership.

Other objectives

3. 1 Partnership recognises that the Bill contains many other measures about pensions which indirectly connect with the Partnership business of providing income in retirement. We state above that we support the abolition of short service refunds. However, we have no comment on the other impacts which we consider to be matters of public policy beyond our influence.

July 2013