Retirement Puzzle - RDR and the Annuity Market

Back in 2012 a survey* found that the TV character most closely associated with a "financial adviser" was Del Boy in Only Fools and Horses. Perhaps a little unfair but this was partly due to intermediaries offering ‘free’ advice and their customers assuming they paid next to nothing because of a mystical commission that was paid to the intermediary by the product provider. Another aspect was the larger the commission offered by product providers to intermediaries the more they were influenced to sell products that might not be appropriate to their customers circumstances.

 By Tim Gosden, Head of Strategy for Legal & General’s individual annuity business

 From a regulatory perspective this didn’t go unnoticed and the result was the Retail Distribution Review (RDR), the recommendations of which were implemented on 31st December 2012. The key objective of the Review was to make the cost of advice transparent to consumers and eradicate product/provider bias. For advised sales this was achieved by replacing commission payments from providers with an ‘adviser charge’ where the intermediary charges or fee for advice and their customer has the choice of paying the fee out of their own pocket or electing to have it deducted from their pension fund.

 Effect on the Annuity Market

 There is no doubt that RDR has brought about considerable change to the annuity market. To facilitate adviser charging, annuity providers now produce different annuity rate sets for advised and non-advised business . ‘Factory gate’ pricing applies to advised sales where the commission allowance is stripped out of the annuity rate as it is not applicable when a fee is charged. However, somewhat bizarrely commission can still be paid to intermediaries that offer non-advised services and in these circumstances annuity rates are more or less the same as they were pre RDR. So on the face of it a ‘factory gate’ annuity rate will appear more competitive than an equivalent non-advised commission rate because it contains no allowance for commission. However, all other things being equal, if the fee charged for advice is equivalent to commission and the fee is deducted from the customers pension fund, then in theory the resulting annuity will be the same

 The best laid plans of mice and men…..

 Whatever the best intentions of the RDR there are some unintended consequences that are peculiar to the annuity market. On the one hand consumers now know what they are paying for financial advice but on the other hand the potential for providers to roll out different sets of annuity rates has reduced transparency. In the pre RDR world of annuities, by and large, annuity providers only offered one annuity rate set. Post RDR, as well as producing different rate sets for advised and non advised sales, some providers have complicated the situation further by introducing multiple factory gate rates. This is because pre RDR it was usual to award volume producers of annuity business with improved commission terms but in the new regime that is not possible for advised business where a fee is charged instead. So some providers are rewarding volume producers with more competitive factory gate rates to try and reflect the terms they offered pre RDR.

 For consumers shopping around the market, comparing the different services, charges and annuity rates they may be offered means it could be a very confusing experience. Below are some of the factors that could potentially affect their annuity outcome:

 • The difference between advice and non advice which is not as simple as it may appear
 • Their perceived value of advice
 • Deciding whether or not to take advice
 • The fee charged for advice and whether it is reasonable
 • How the advice fee is paid for e.g. out of their pocket or from the pension fund
 • The factory gate and/or commission terms that the intermediary has obtained from the annuity provider.

 In addition, to these factors a multitude of different rate sets also introduces the possibility of confusion in respect of annuity comparison tables, both online and in the press. Simply because if the rates displayed in tables are not consistent and not explained properly there is real scope for misinterpretation. Arguably, for consumers the current world is more arduous and much less transparent than it was previously.

 Post RDR experience so far

 Prior to the introduction of RDR there was a lot of speculation about the negative impact the changes might have on the annuity market. This was based on the premise that many consumers would be unwilling to pay a fee for financial advice, particularly those with smaller pension pots. The general feeling was that financial advice would only be available for those with larger pension pots, leaving many consumers stranded without access to advice.

 Certainly, from Legal & General’s perspective we were expecting non advised sales to account for the bulk of our business. However, in May this year our experience was that approximately 60% of applications were on an advised basis. The view from the MD of an intermediary firm that specialises in the retirement market is that the move from commission to adviser charging was actually quite an easy transition. Their customers are happy to pay for good service and advice but perhaps not surprisingly they don’t like writing a cheque for that advice. So the fee for advice is generally deduced from the pension fund or paid for by the employer if it is a group arrangement. For those customers with smaller pots a minimum fee applies to cover costs but even here that doesn’t appear to be a problem. So for this intermediary the RDR changes appear to have bedded in well but the MD of the firm also raised real concerns about non advised sales which he expects to be a ‘hot topic’ .

 Watch this space!

 In May the FCA announced that it will review the progress made by firms in complying with the RDR in 2014 to decide whether the initiative is working and may even implement some changes before then. So with RDR implementation still in its infancy it is very much a case of watch this space!

 * Research by financial planning website

 Tim's Retirement Puzzle.

 Which TV actor played Granddad in Only Fools and Horses?

 a. John Challis
 b. Jim Broadbent
 c. Roy Heather
 d. Patrick Murray
 e. Buster Merryfield
 f. Lennard Pearce

 Highlight white text below to reveal answer:

 f. Lennard Pearce

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