The FCA’s year-long thematic review into what it described as the “disorderly” annuities market, published today (14 February), found that it is “not working well for consumers”.
It is now launching a further “extensive” 12-month competition probe into annuities after uncovering profit imbalances at the heart of a sector in which more than 80 per cent of those who do not switch provider - more than 130,000 retirees each year - could get a better deal.
Most experts welcomed the FCA’s review and its findings that many consumers are worse off, especially those that would qualify for an enhancement to their income or that have a small savings pot.
However, several railed against the FCA for setting aside a second year to conduct a further study and argued in favour of immediate action to address the issues raised.
Andrew Tully, pensions technical director at MGM Advantage, said: “The FCA review doesn’t go far enough, or act quickly enough. This will potentially leave many thousands of retirees high and dry when navigating the annuity minefield.
“So often we see poor consumer outcomes through a lack of awareness or understanding of the options available. Although the review puts the spotlight firmly on the issues that need to be addressed, another year or two of customers sleepwalking into retirement is simply not good enough.
“There are some simple and practical steps we can take now to help those people looking to take benefits from their pensions. This could be done in tandem with the competition market study which will take some time.”
Enhancements
Stephen Lowe, group external affairs and customer insight director at Just Retirement, said: “Clearly there are opportunities for the FCA to act now without gathering more information.”
He highlighted that the FCA’s existing Treating Customers Fairly ‘outcome two’ requires product providers to make sure products brought to market are targeted appropriately for the right audience.
Mr Lowe said: “If a consumer tells [a product provider that] they have a health issue but are sold a standard annuity, that’s not in the FCA’s rule book for TCF. Emergency measures must be put in place to stop bad practice taking place.
“There needs to be put in this immediate action to say you must do some basic underwriting and you can’t just flog a standard annuity.”
Andrew Megson, managing director of retirement at Partnership, agreed, adding: “Getting quotes from a variety of providers and finding out if they are eligible for an enhanced annuity should be part of everyone’s retirement planning.
"The financial services industry needs to provide [consumers] with options and opportunities to do this as easily as much as possible.”
OMO overhaul
Hargreaves Lansdown’s analysis of published annuity rates has established that the average potential income uplift for someone on the lowest internal annuity rate compared to the best rate they could get on the open market is around 20 per cent. In extreme cases the difference could be in excess of 100 per cent.
Tom McPhail, head of pensions research at Hargreaves Lansdown said: “Insurance companies have been the principal culprits in selling poor value products over the years and annuity brokers are working towards adopting minimum standards in how they deal with their customers.”
He added that the FCA is now looking at the behavioural aspects of this “conundrum”, saying the outcome of this in a year’s time will be for the regulator to announce what “we already know” that conduct of business rules on the open market option “need rewriting”.
Ros Altmann, consultant and pensions expert, agreed, saying that conduct of business rules must be re-written “so that pension providers do not automatically offer annuities to all those reaching pension age” and “customers should have to decide what is best and find help or advice for this”.
She said: “Require all annuity providers to treat customers fairly - which means mandatory suitability and know your customer checks including checking for health issues, trivial commutation and whether to cover a partner.”
Non-advice and commission
Another widely held view is that commission payments to non-advised brokers should be banned and the annuity market should be brought in line with the Retail Distribution Review principles.
Nick Flynn, divisional director for longevity at LEBC, said: “Without a clear steer the industry will continue to stumble along with consumers paying the price. Consumers should be directed to whole of market advisers; limited annuity provider panels and commission payments should be banned and brought in line with the RDR.”
Alan Higham, head of retirement insight at Fidelity, said: “The FCA should look at the impact of the aspects of its regulatory policies that create bias in the at retirement market.
“Despite the RDR, the annuity still suffers from commission bias and it is now time to remove that from the process by requiring all firms to agree their charges with a customer regardless of whether the product is sold as a result of advice or not.”
Ms Altmann added: “Ban commission on the sale of annuities by any party, not just IFAs and do not permit non-advice services to hide their costs until the point or purchase while advertising ‘free’ services.
“All costs should be disclosed up front in order to remove current bias against individual financial advice.”
Barry O’Dwyer, Standard Life’s managing director for the adviser and workplace, said: “70 per cent of our customers currently choose a retirement option other than a Standard Life annuity.
“We do our utmost to ensure every customer has a conversation with us or their financial adviser about the options available to them and this is how we ensure every customer is aware of the open market option.”
