PensionsNov 24 2014

First wave of redress in annuities mis-selling ‘scandal’

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A first wave of compensation to hundreds of customers who were ‘mis-sold’ their annuity could open the door to mass claims, on the eve of a major report from the Financial Conduct Authority into failings in the sector.

The front page of the Daily Telegraph on Saturday proclaimed the potential for “thousands” of pensioners to receive payouts, after Aviva become the first provider to issue backdated payments to customers who were not asked key health questions before being sold conventional annuities.

The life insurer told the paper the redress originated from a routine check on annuities sold through a telesales operation in 2013, which found 250 customers would have been entitled to higher income.

On average affected clients, who are being contacted by the firm, have received £500 to top up past payments and will get £120 more per year. The telesales operation has been closed down.

Earlier in the year, FTAdviser reported on a major report by the Financial Conduct Authority, which found up to 134,000 customers a year who bought their annuity from their existing provider could have secured higher income on the open market.

The review of providers accounting for 330,000 of the 420,000 annuities sold in 2012 found on average shopping around could gain a customer £70 more per year, equivalent to about £1,500 more in savings. Five per cent could have received up to £200 a year more.

After splitting a follow-on competition review into the market in the wake of the Budget, the watchdog pledged to complete a second thematic review into annuities before the end of the year. The findings, due to be published next month, could demand broader compensation.

The Telegraph quoted figures from the earlier FCA report which stated just 13,774 annuitants received an ‘enhanced’ rate in 2012 to reflect health or lifestyle conditions which will limit lifespan, much lower than the 125,000 which studies suggest should have qualified.

On Friday (21 November) FTAdviser reported figures published by the Association of British Insurers which show sales of enhanced annuities are falling ahead of next year’s reforms, while ‘internal’ sales to existing customers, typically less likely to reflect impairments, have remained steady.

The ABI said the statistics most likely reflect savers taking advantage of guaranteed annuities. Andrew Tully, pensions technical director at annuity provider MGM Advantage, instead expressed concern that the ‘open market option’ appears to be lost in the ‘freedom and choice’ agenda.

Some will further argue recent results announcements across the industry lend credence to suggestions by the regulator at the time of its earlier report that profits were disproportionate on some annuity sales.

FTAdviser reported last week on Prudential’s most recent third quarter results, which revealed sales overall were down by just three per cent as a sharp 46 per cent fall in sales of individual annuities was offset by increases in income drawdown and onshore bonds. New business profit, however, was down 22 per cent.

Pensions minister Steve Webb has previously raised the spectre of past annuitants unable to access new freedoms from next year being able to ‘unwind’ their annuities.

While many have branded the idea unworkable, some have suggested it could apply at least to those potentially ‘mis-sold’ conventional or single life annuities. Others have said such claims should simply be a matter for the ombudsman.

A landmark first ever annuity refund was paid earlier this year by Prudential, after a man referred through a tie-up with Royal London who had informed the latter of his cancer diagnosis was sold a conventional annuity through a sales process which similarly eschewed health questions.

ashley.wassall@ft.com