Annuities are the ideal way for a great many pension scheme members to take their benefits, drawdown-loving sipphound makes no bones about it. Yet they are under-appreciated. So when I see the Pension Regulator saying in Money Marketing that the Open Market Option is not a priority, I can’t help growling. I can only hope that tPR expressed themselves very poorly to the journalist as frankly their comments come across as disgraceful and negligent.
There are many reasons why annuities aren’t popular. Some are misperceptions of very technical matters such as mortality cross-subsidy and longevity risk; others are that they are bad value. It is true that many members get bad value from their annuities but that’s because they are not buying the right type of annuity and not shopping around for the best value.
It is quite clear that members do not understand the OMO. I see people putting more time and thought into decisions at the supermarket – hmm, which snack bar has more vitamins and fewer calories … – than in choosing how to use their pension fund accumulated over 40 years! Ensuring take up of the OMO is one of the biggest wins available to pension scheme members and therefore one of the biggest obligations on tPR.
To prove the point, if a member were offered the choice of, say, £400pm pension income or £500pm pension income, they would have no trouble choosing the latter. Yet by not exercising the OMO, they choose the former to their detriment.
As lawyers might say, res ipsa loquitur (the thing speaks for itself) – tPR appears negligent for failing to prevent (financial) injury over matters which, as regulator, it has control. Economists might call this monopoly pricing since, when a member does not use the OMO, there is a single provider. Again, surely a situation tPR has a responsibility to address.
Sipphound simply says that OMO should stand for Open Market OBLIGATION.