Following initial findings in February 2014 that annuity customers were being poorly served by providers, the FCA’s latest long-awaited Thematic Review report clearly outlines evidence of ongoing mis-selling.
Disappointingly, the report is not proposing positive and immediate action to protect customers and stop this happening any more. It found that 60 per cent of annuity customers are just buying the annuity offered by their existing pension company even though 80 per cent of them could get a better rate by switching to another provider. It also uncovered inappropriate sales practices but no changes are being introduced yet.
For example, not all companies were clearly explaining the advantages of the open market option either in written materials or over the phone, despite this being required. In some cases, call centres were being incentivised to sell internal annuities with staff earnings linked to the number of annuity customers who did not move away. This is clearly against customer interest.
The report reveals similar failings to those uncovered six years ago – that customers in the worst health were most at risk of losing out from poor annuity sales practices. In 2008 the then FSA found pension firms were not telling people they could achieve much higher income from an impaired-life or enhanced-rate annuity by shopping around if they had health problems. Even though the FCA believes more than half of customers could qualify for health-related annuity rate enhancements, the rules regarding selling standard annuities are not being changed to protect the most vulnerable.
The FCA is merely asking them to look back at a sample of their sales since 2008 “to do further work to determine if the findings of this thematic review in relation to the sale of enhanced annuities are indicative of a more widespread problem”. This could lead to compensation if a proper assessment were made, which would be a good outcome for many. However, the regulator needs to stop future unsuitable sales immediately.
Given the falling numbers of people shopping around and the low proportion of enhanced annuity purchases, it is blindingly obvious that there is a widespread problem. Financial advisers report that around 60 per cent of their customers generally qualify for health or lifestyle-enhanced rates.
This shows the advantage of taking financial advice before annuitising, yet the FCA has not highlighted this. Indeed, it has found significant failings in the non-advised annuity sales process, yet still does not extol the virtues and value of using an adviser.
Shockingly, the FCA report also fails to take into account the commission customers pay to purchase annuities, whether in-house or non-advised. This can often cost them more than using an adviser who charges a time-based or flat fee. If the full costs of purchase are not disclosed to customers, how can they properly assess the value of independent financial advice to ensure they buy the right product and get best rates?
The regulator should require companies to declare up-front how much the customer will pay in pounds and pence to purchase an annuity, so customers realise the purchase is not ‘free’, and so may be more likely to take expert financial advice.
It is vital that annuity sales processes are changed immediately. Annuities are a unique financial product. The standard products are irreversible – and are also complex – with many different types, and those who buy the wrong kind usually cannot change it.
Many people reaching pension age are still buying internal annuities because pension providers are not yet allowing customers to benefit from the new freedoms – indeed, the proportion has increased from around 50 per cent to more than 60 per cent since the Budget. It is, therefore, particularly disappointing that the FCA is not showing the required sense of urgency to ensure customers are properly protected before purchasing.
The problem is not the customers’ fault. They cannot be expected to understand all the jargon. Providers understand all the details, but customers do not. They often buy an annuity at a time of their life when they do not have time to wade through reams of impenetrable paperwork full of terms they have never encountered before. Most people have no idea what ‘single life’, ‘joint life’, ‘escalating’ or ‘enhanced’ mean in the context of annuities. The FCA is relying on disclosure and paperwork to inform people rather than directly explaining in clear English what the implications of standard annuities are.
The FCA’s requirement that consumers are “given sufficient information with which to make an informed decision” is simply not enough to protect customers. What is clear information to a pension provider or a regulator is not clear to most customers. A second line of defence is required.
A duty of care should be imposed on all companies selling annuities to ensure customers have a fair chance of making the best choice for their own circumstances.
Insurers should also be required to issue clear risk warnings and ask basic questions that would reduce the risk of unsuitable annuity sales. For example, to protect widows or widowers, firms should tell someone buying a single-life product something along the lines of: “This annuity assumes you do not want to ensure your partner will carry on receiving income from your pension fund if you die before they do”, and the customer should be asked to respond by saying: ‘I confirm that I do not want my pension fund to keep on paying a pension to my partner if I die first.”
Similarly, before selling an annuity that assumes someone is in excellent health, the company should explicitly state: “This annuity assumes you are in excellent health. If you have had any particular health problems it may not be suitable for you.” The firm should then also ask: “Are you in good health, have you had cancer, heart problems, high blood pressure, diabetes, been a heavy smoker or had other serious health issues?”
It does not seem as if the FCA has really recognised the urgency of reforming annuity selling processes. Just suggesting that annuities may be good value relative to income drawdown ignores the impact of low interest rates, poor health, inflation and unsuitable product sales.
Annuities are basically insurance products that protect against running out of money if you live a long time in retirement. They are not an investment product, and people need to understand that there are other risk factors they may want to protect against in retirement – such as inflation, rising interest rates or dying young.
I would have liked to see the FCA focus more on the needs of consumers than the interests of annuity providers, and more emphasis on ensuring people recognise the need to take financial advice. Banning commission on annuity sales (whether internal or otherwise) and requiring full disclosure of any fees in pounds and pence before quotation would level the playing field somewhat between advice and non-advice.
A second line of defence is also required to ensure those selling annuities have a basic duty of care to avoid unsuitable sales, by clearly warning of risks and asking basic questions. Customers are still at risk of being poorly served by a market that has failed its customers for far too long.
Annuities can be a useful part of some people’s retirement income planning, but customers will undoubtedly need help to assess when, what type and how much of their fund to commit. The sooner we end the scandal of unsuitable annuity selling, the better.
Ros Altmann is an independent pensions expert
The FCA’s latest long-awaited Thematic Review report outlined evidence of ongoing mis-selling.
The FCA report fails to take into account the commission customers pay to purchase annuities, whether in-house or non-advised.
It would have been good to see the FCA focus more on the needs of consumers than the interests of annuity providers.
