Following a year-long investigation, the regulator has today published its findings that the annuities market is “disorderly” and “not working well for consumers”.
Tell us something we don’t know.
The FCA’s thematic review of the annuities market, published today (14 February), found that as many as 80 per cent of people that cashed in their pension with their existing provider secured a significantly lower income than they could have by shopping around.
On average, shopping around could gain a customer £70 more per year of income, equivalent to about £1,500 more in savings.
The regulator even went as far as to state that there was a clear profit imbalance that provided an effective incentive for firms to push their own products to the detriment of existing customers, though it stopped short of accusing any of actually doing this deliberately.
Instead it has now launched another 12-month ‘competition’ probe. Most industry commentators have already gone on record that this is not good enough and that emergency measures need to be taken now to prevent further consumer detriment.
So what could the FCA do?
It is clear in the FCA’s review is that consumers have a complete lack of understanding about annuities. In relation to the open market option, 90 per cent are apparently ‘aware’ of it but at least 40 per cent do not shop around at all and as many as 60 per cent stick with their existing provider when annuitising.
Craig Palfrey, founder of independent pension advice website Increase Your Pension, recently carried out a study on this subject which found that one in four people believed they had to take out an annuity with their current pension provider.
We’ve heard some fairly strong suggestions for how to fix this, ranging from Labour’s pledge to force people to use at least a whole of market non-advised broker to the True and Fair Campaign’s unpopular-among-advisers call for the Money Advice Service to employ full service IFAs.
Others have said that commission for non-advised brokers should be banned to remove any lingering incentives that the Retail Distribution Review sought to tackle in the advice arena - and that ‘limited’ restricted advice panels should be banned.
In truth, these ideas need to be carefully thought out and introduced, but there are some simple measures the FCA could adopt right now while it goes ahead with its second study.
As of March last year, the new ABI code of conduct for annuities requires its members to “encourage the customer to gather comparative quotes from different providers”.
The ABI clarified that members need to explain the benefits of shopping around and that other providers might offer a higher level of retirement income. They are also not allowed to simply bung in their own application forms with these ‘wake up’ calls, though whether this prevents firms making very direct sales pitches is questionable.
In my view that does not go far enough and insurers should be required to state in unequivocal terms that consumers could be thousands of pounds richer by shopping around, that an annuity decision is final, and that a wrong decision will affect the income they will get for the rest of their lives.
This is precisely in line with the shortcomings the Financial Ombudsman Service said it identifies regularly with the 40-50 annuity complaints it receives a month. It said “the crux of the matter” is typically that the provider failed to “explain in plain English how the annuity works and what it is”.
Tom McPhail, Hargreaves Lansdown’s head of pensions research, argued there is already enough evidence that the current code of conduct is redundant.
He said: “We need to rethink the whole retirement journey and be far more radical, scrap the wake up pack etc. I think the ABI code of conduct was a sticking plaster solution. We need much more fundamental thinking in how we do this.”
Steve Lowe of Just Retirement said in particular that providers should not be able to sell standard annuities to customers who have health issues that would qualify for enhancements.
He pointed to Treating Customers Fairly principle two, which demands products are sold to ‘appropriate’ consumers, as already giving the FCA enough power to enforce firms to undertake some basic underwriting and to pass on those that should not be left with just a default product.
Mr Lowe is spot on. Given that 10 of the 25 firms representing 98 per cent of sales in the market by value do not offer enhanced annuities, this measure would go a long way.
The FCA must investigate annuity pricing properly to identify excessive profitability and investigate why companies offer poor rates. Its competition study is necessary.
But given some of the failings identified and the rules already in place, there are measures that can be taken right now to ensure companies put consumers at the heart of their proposition.
