Pension Schemes Bill

Written evidence submitted by Partnership Assurance Group plc (Partnership) (PS 12)

About Partnership

1.1 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. It is a leading provider of enhanced annuities; typically, our average customer will receive approximately 18% extra income for life, compared to a standard annuity provider, and for those with more serious conditions, potentially much more. We estimate that over 50% of people at retirement could qualify for one of our annuities.

1.2 Medically underwritten annuities allow insurers to take into account a person’s lifestyle and medical history to determine the probability of them living through each future year and therefore the rate at which they can be provided with their retirement income when they buy an annuity. An enhanced annuity can potentially offer consumers significantly higher levels of guaranteed income in retirement.

Executive Summary

2.1 Partnership welcomes the opportunity to respond to the House of Commons Public Bill Committee’s call for written evidence on the Pension Schemes Bill (‘The Bill’).

2.2 Partnership welcomes the Bill as we believe that more choice for those entering retirement is a good thing and increased choice should help to enable people to save for, and make informed decisions in relation to, their retirement income.

2.3 However, we believe that consideration needs to be given to the risk around levels of financial literacy and understanding which may lead to a number of people not being able to manage their funds very well over retirement. Therefore, the need for meaningful support and guidance for consumers in making complex retirement decisions is imperative.

2.4 Many consumers will still want, or need, a predictable, guaranteed retirement income that they can rely on for the rest of their life. Underpinning the concept of pension saving is the wish to provide income security for the whole of one’s retirement and to ensure that the individual does not run out of retirement funds before the die. We believe that it is essential that this should be the overarching objective of the guidance guarantee.

2.5 We believe the guidance guarantee should be regularly reviewed to be certain that it provides suitable information to ensure that people can make the important decisions that best suit their needs.

Financial products

3.1 As a provider of enhanced annuities, Partnership believes that this form of financial product will remain the most appropriate product for many people. Underpinning the concept of pensions saving is the wish to provide income security for the whole of one’s retirement and to ensure that someone does not run out of retirement funds before they die. Annuity providers take on the investment, credit, inflation and longevity risk for the consumer and provide an income that will last for life regardless of changes in circumstances or investment markets. Research conducted by Partnership found that 64% of people listed a guaranteed income for life as the top characteristic of a "perfect retirement product."

3.2 Research conducted among Partnership’s customers in 2012, to ascertain what they spent the additional income received from an enhanced annuity on, demonstrated that a significant proportion spent the extra money on higher food bills (61%), heating and electricity (57%), and on meeting the costs of higher council tax and other bills (53%). We believe that this research signifies the importance of the guidance guarantee in outlining the importance of securing critical income in retirement.

Guidance Guarantee

4.1 Partnership supports the decision that the guidance is to be provided by independent, impartial organisations. This will help to ensure that as many people as possible ‘shop around’ and avoid the inertia that has in the past led to consumers taking out inferior products from their pension provider.

4.2 However, we also believe that the below issues need to be addressed ahead of its introduction in 2015.

Timing

5.1 Partnership agrees that in the immediate term, signposting should be aligned to the current wake up pack process. However, in the long term, we believe that at a minimum reference to the guidance guarantee should be made at least 24 months prior to the consumer’s retirement date, in all regular correspondence, such as annual statements. This would provide the consumer with sufficient time to start to consider their retirement and research the options that they have. However, Partnership would go further by suggesting that engagement 5 years or potentially 10 years before the earliest access age may be particularly useful. We believe that at its most basic this should, at least, involve a simple ‘wake up’ communication offering consumers the option to call in to start planning their choices and highlight the need to ensure a suitable investment strategy is in place, for instance a service like the free ‘age 50 NHS health check’.

5.2 We would suggest that the Committee looks to the system in place in Denmark, which has been voted as having the world’s best retirement regime. In Denmark decisions about annuitisation are made during the savings process.

Engagement

6.1 We believe that proactive engagement with consumers is required to ensure good take up of the guidance guarantee service. To address this, we would strongly recommend targeting a model whereby the guidance provider proactively contacts consumers at agreed points pre-retirement rather than the onus being on the consumer to contact the guidance provider. Consumers would still be able to decline the opportunity to have a guidance discussion but we believe that if consumers are not strongly encouraged or ‘nudged’ to the guidance provider then there is a high probability that they simply stay with their existing provider or take the cash from their schemes and put it into bank accounts. This may not always be a good outcome for consumers, their dependents or the wider society.

6.2 In terms of providers, we believe that there should be a mandatory code enforced by the FCA along similar lines to the current voluntary ABI Code that contains a simple checklist of questions to ask the customer that they have considered, ranging from consideration of health, longevity, death benefits and spousal benefits. Also, whether they are aware of the free guidance service and have they received their guidance yet. Additionally, providers should not interact with their customers in the period between engaging with the guidance services and booking their session and actually receiving the session.

Pension Passport

7.1 Partnership believes that ‘Pension Passports’ should be introduced to help inform people about their pension savings and empower them to make decisions in relation to their retirement income by presenting all of the essential information in one place in an easy to understand format. This would be a single document given to people at retirement containing details about their personal circumstances and their different pension pots. This could potentially be given to a guidance provider or an independent financial adviser, who would be able to guide them on how to get the best retirement income for their needs.

Components of the guidance guarantee

8.1 In order for the guidance session to be meaningful to consumers, the discussion needs to be around a number of issues. There will be a need to discuss relevant options and the key facts and consequences of each option with the consumer. In particular, personal factors such as life expectancy, potential long-term care needs and the risk of running out of money in retirement are key to informing consumers’ choices as to how they invest and fund their retirement. Covering these factors with consumers will play a vital role in ensuring that the guidance discussion is meaningful and genuinely useful for consumers.

8.2 It is important that the risks the consumer faces are explained in plain English and not using industry technical terminology. Partnership also recommends that within the guidance framework a budgeting tool is provided to the consumer to encourage people to work out and plan for what they need to spend on a weekly/monthly basis to maintain their minimum/expected lifestyle. In particular, it is important that they understand the cost of their critical costs of living (eg, heating, food, utilities and those which they feel they would not wish to do without).This will make for a more informed discussion on how they use their pension to fund these ‘fixed’ outgoings. This information, together with what the consumer state pension will be, should provide consumers with a very clear picture of what their ‘expenditure gap’ will be (if any). The guidance scheme should then outline how consumers can manage or mitigate that shortfall by a simple explanation of what various different products can offer.

October 2014