The FCA has estimated that about 10.5m consumers have defined contribution pension savings that will need to be converted into an income at some point.
There are two ways of doing this: buying an annuity or using income drawdown. In the market, annuities are still the most common product with the FCA stating that in 2012, 420,000 annuities were sold, 16 times more than income drawdown products.
In January 2013, the FCA began a thematic review and subsequently analysed 78 per cent of annuity sales in 2012. The FCA recently posted a report setting out its findings (Thematic Review of Annuities 14/2). A key FCA concern is the role played by consumer inertia in the sale of annuities. While it could be argued that consumer inertia is nothing new (in 2012 the FSA found that around 60 per cent of annuities were purchased from consumers’ existing pension providers or through a third party arrangement), the FCA found that 80 per cent of consumers who purchase their annuity from their existing provider could get a better deal on the open market.
At the time of writing, the consultation period had just closed on FCA Guidance Consultation 14/1: Annuity Comparison websites. GC 14/1 was published following an FCA review of 13 websites that offered a full annuity quotation. The FCA found good practice in the presentation of alternative options to buying an annuity but also had a number of concerns. In particular, in all the websites reviewed bar one, the key requirement to be “fair, clear and not misleading” was not satisfied.
Linked to this point was that key information and risk warnings on the websites were often missing or insufficiently prominent. In chapter 2 of GC14/1, the FCA sets out a proposed list of issues that should be covered to rectify this.
These issues include:
- What the open market option means for consumers in terms of being able to shop around and change provider.
- How annuity income may vary according to the type of annuity product purchased.
- That single and joint annuities offer different benefits, and in particular that single life annuities provide no further income for surviving partners.
- How the decision to purchase an annuity might fit in with a consumer’s overall financial circumstances and retirement plans.
The FCA intends to conduct further work in the annuities space and those providing services in this area would be well advised to look at their business and critically assess it against the FCA’s rules (particularly the financial promotion rules).
The FCA has said that its next steps will involve:
- A competition market study into retirement income to assess competition and gain a better understanding of why consumers do not shop around.
- Further supervisory work within the study to look into how pension provider sales teams conduct themselves when selling annuities to existing customers.
This will include retention teams who try and keep existing customers.
Simon Lovegrove is a lawyer with the financial services team of City law firm Norton Rose Fulbright
