FSA to review annuities pricing in competition test case

The Financial Services Authority has confirmed to FTAdviser that it is set to publish details of how it will examine pricing data in the £11bn annuities market in an insurance newsletter due to be published this morning (31 January).

The newsletter will reveal how the regulator will examine pricing data to determine how much pensioners are losing out by not shopping around.

According to annuity providers, there is currently a 20 per cent difference in the best and worst rates, which can mean a drastic reduction in retirement income.

According to FTAdviser sister title the Financial Times, the FSA plans to do its own pricing research to determine where there are sections of the market or groups of consumers more likely to be affected.

The regulator is understood to be seeking to identify providers who are on the bottom of the annuity ‘best-buy’ tables but have high levels of business.

It is thought the review could provide a test case for the new competition powers of the incoming conduct regulator that will replace the FSA, the Financial Conduct Authority.

Last year, Lloyds Banking Group launched an online annuity comparison service to encourage retirees to shop around for an annuity. Data from the bank revealed that failure to shop around could cost retirees up to £792 each year on a typical £50,000 pension pot.

The Association of British Insurers is introducing a new code of conduct, which becomes mandatory in March 2013, requiring pension providers to give their customers clear options regarding their annuity and information on the potential benefits of shopping around.

The new code also requires that pension providers highlight to customers the increased monthly retirement income that may be achieved with annuities that take into account underlying medical conditions and lifestyle choices which could reduce life expectancy.

The annuities review comes weeks after the Office of Fair Trading announced a competition probe into workplace pension charges, and at a time when annuity rates are at record lows.

Since 2002, insurers have been obliged to tell their pension savers of their right to use the open market option, or to shop around.

However, a 2010 FSA investigation discovered that only 40 per cent of consumers compared offerings while a majority simply accepted the rate offered by their insurer.