Shopping around - the Open Market Option

The Association of British Insurers (ABI) introduced a new retirement choices code of conduct from 1 March 2013 which will help people who are approaching retirement. So what is the relevance of this code and what does it mean to MGM Advantage?

When people reach retirement and want to turn their pension savings into a retirement income they don’t need to stay with the provider with whom they have built up their pension. Instead, they may want to buy from another provider who offers better rates or a different type of retirement income product.

There has long been a requirement for all providers to tell people about this option to shop around for the best deal (known as the open market option or OMO). But, unfortunately, some providers have been less than clear, sometimes ‘hiding’ the OMO information within their retirement packs, which they are required to send out approximately 6 months and 10 weeks before retirement.

This is clearly illustrated by the fact that more than half of retirees simply buy their annuity from the holding provider, with many losing thousands of pounds each year as a result. This consumer detriment has been the focus of much pressure over the last few years – from media, Government, and organisations such as the Pension Income Choice Association (PICA) of which MGM Advantage is a founder member.

The ABI code is an attempt by providers to encourage more people to shop around for the best deal. The code requires providers to take a number of steps including clearly highlighting the ability to shop around. The code also means providers can’t include an application form or ‘tick here and return’ option within the retirement packs, which forces customers to take some action. Both through the retirement packs, and when approached by a customer about their retirement options, a provider must:

·       Explain the benefits of shopping around and that other providers might offer a higher level of retirement income;

·        Highlight that the provider might not offer the annuity options or product that best meets the customer’s needs;

·        Explain to the customer how to shop around and encourage the customer to seek further advice and/or information about this;

·        Ask various questions (about inflation, any partner or dependants, medical/lifestyle conditions) and highlight the risks of any answers. For example if someone says they are married but asks for a single life annuity the provider must highlight the risk this creates.

In addition providers are required to start communicating to customers between two and five years before their selected retirement age, which will hopefully encourage people to start considering their options at an earlier age.

MGM’s project to make the required changes to our customer retirement process was implemented on time, so our customers in heritage contracts such as personal pensions, stakeholder pensions and occupational schemes will receive retirement packs which meet the ABI’s new requirements.

In a wider context, these, and other related, changes mean more people approaching retirement will shop around for the best solution to meet their retirement needs. This means more people will consider our enhanced annuity and investment-linked annuity contracts. For example, where people shop around more people buy an enhanced annuity than a standard annuity.  However, where they stay with the provider with which they built up their retirement benefits only 4% buy an enhanced annuity. So if more people shop around, the enhanced annuity market will grow further and faster - it is already growing as more of the baby boom generation reach retirement, and more people have savings in defined contribution pensions and so need to turn those pots into a retirement income.