The proposals impact a little over 30,000 Scottish Life policyholders who now come under the Royal London banner.
“Across the industry, roughly three in five people with pension pots with GARs attached are choosing to simply encash them at retirement, thereby getting no greater value from them than if there hadn’t been a GAR,” Steve Webb told International Adviser.
“People are losing the value of their guaranteed annuity promise because they are so focused on converting their pension pot into cash.”
The move to cash in pensions was triggered by the ‘pension freedoms’ introduced by George Osborne in the 2014 budget.
To provide safeguards for policy holders looking to convert their GAR into cash Royal London is working closely with the Financial Conduct Authority, employing an independent actuary to sign off on the calculations; offering a free guidance telephone line and offering ‘heavily’ subsidised financial advice.
Royal London said there has already been a “high level” of interest from policy holders and so it is going to the High Court on 25 June to test their proposals, which include plans to ask all members to vote on receiving ‘cash uplift’ as a block.
“This process only works if the default option is to take the uplift, because at the moment the behavioural bias is to take the cash,” said Webb.
“So assuming this goes ahead we will give everyone a cash uplift instead of their GAR, but there are absolutely entitled to decline this and to retain their GAR if that is what they want.
“By this route, those who really want the GAR can keep it, and those who were planning to throw it away with no cash uplift will get a cash uplift.”
Webb stressed the move was driven by a desire to see members receive full value for their policies.
Interest rates, a key indicator for an annuity rate which is set when a policy is taken out, varied from 7% to 15% between 1985 and 1992 and only dropped below 10% for 17 months over those eight years. The rate of 15% was held for 12 months between 1989 and 1990.