Take the following paragraph: “Buying an annuity is usually the culmination of a lengthy savings process. Given its importance it would be helpful to encourage people saving for pensions to think in advance about the choice they will have to make when they convert their saved pension fund into retirement income.”
It could well be from the recent FCA Thematic Review of Annuities (TR14/2) but is, in fact, from Modernising Annuities– a DWP and Inland Revenue Consultative Document from 2002.
What about the following: “Given the projected increase in demand for annuities, it is all the more important that the annuities market is working efficiently, and that consumers understand the choices open to them. Only around half of people take up the so-called ‘open market option’ (OMO) of shopping around for their annuity to get the best deal.
“The government intends to work with stakeholders to review the working of the OMO. It will also publish a long-term strategy for increasing financial capability in the UK which, among other things, is intended to boost consumers’ understanding of the financial issues arising from pension saving and decumulation.”
This must be from the recent thematic review? Again, you would be wrong – this is a paragraph from a Treasury Paper published in 2006 entitled The Annuity Market.
Look at these two papers from 12 and eight years ago and you will see that many of the issues raised today have been around for a long time, with solutions sought but perhaps not realised.
Aside from these papers we have had a report from the NAPF in 2012, and research carried out by the Financial Services Consumer Panel as recently as late 2013 (although they had perhaps pre-empted themselves with their presentation in 2010 entitled Annuitisation Process and Consumer Detriment – An Initial Investigation of Issues).
A quote from this work – be warned, it is not pretty: “The presentation highlights some key conclusions about the nature and scale of consumer detriment relating to annuities. Of particular interest to the panel are what the presentation says about the Open Market Option and the value for money associated with annuities.
“The estimates indicate that there is significant detriment associated with the lack of shopping around, which is seen as too complex by many (30 per cent of annuitants do not use the OMO or shop around at all), particularly those with smaller funds.
“Research suggests that one in five may not get the best annuity rate, with an average detriment of £200 a year in reduced income.
“Perhaps of greater significance is the failure to get what might be the most appropriate type of annuity. The point is made in the presentation that the perceived poor value of annuities may lead to poor choices. Failure to get the right product for the individual consumer’s circumstances would seem to be a difficult barrier to overcome.
“While advice services such as CFEB and TPAS work hard to educate, the innate complexity of annuities – issues such as longevity and inflation can be difficult for consumers to comprehend – means that finding ways of better informing consumers needs to be a priority for government and regulators alike.”
Add in some work from the Pensions Income Choice Association and the ABI (apologies to anyone that I have missed) and there you have it – the problem that will not go away.
In a few short paragraphs I have covered 12 years and a range of organisations, yet the conclusions are the same.
The FCA thematic review has the following objectives:
* To assess whether, and by how much, consumers would be better off buying an annuity on the open market rather than their existing pension provider.
* To consider the drivers of provider behaviour, including assessing, at a high level, the profitability expected from their annuity business.
* To review research on consumer behaviour and engagement to better understand how this affects shopping around and the choice of annuity.
The only new one is the second, looking at the profitability of annuity business. As we can see from the thematic review, this is not an easy thing to assess owing to the long-term nature of annuity business.
The findings were to be as expected:
* Parts of the market are not working well for consumers. For example, the majority of consumers (60 per cent) do not switch providers when they buy an annuity, despite the fact that an estimated 80% of these consumers could get a better deal on the open market.
* Consumers miss out on the benefits available from shopping around and switching due to their lack of engagement in pensions and annuities. Confusing trade-offs and the impact of behavioural biases make it difficult to understand the choices and may create barriers.
* Providers expect to make more profit on business sold to existing clients in comparison to business sold on the open market.
* Some annuity firms have high retention rates, perhaps due to active retention strategies. Such strategies could reduce the propensity to shop around.
* There are specific problems with small funds where there might be even less choice.
* There is a lack of access and knowledge of enhanced annuity rates for those annuitising with their existing pension provider and not shopping around.
So what next? Well, another study, it seems – and presumably no short-term actions.
My problem with all this is that it is not new – it is the same problem. What has changed over the past 12 years?
* We are living longer – so retirement is more than just a few years and therefore decisions need to be good ones.
* The babyboomer demographics mean that more people will be retiring over the next few years than ever before. Can we really let pensioners continue to make the same mistakes that have already been identified?
* Annuity rates have fallen and are unlikely to rise by much again – is innovation needed?
* Income drawdown is a mature option now – not just a means to annuity deferral but an option in its own right.
* There are alternatives, but each has issues – temporary annuities are often perceived as third-way type products with poor rates and are seen as complicated and expensive.
* Over the years the underwriting process for enhanced or impaired lives has increased dramatically. Surely everyone who buys an annuity should be told that certain circumstances could lead to a better annuity rate?
The final point to consider is the role of comparison websites and the question of advice or guidance.
The FCA looked at 13 websites with good and bad practice. For me the key is to clarify what execution-only websites are charging for an annuity, and the ongoing argument between advice and guidance.
So, another year another study? We will not do ourselves any favours if we do not take some short-term measures to address the problems that we have known about for at least 12 years.
Mike Morrison is head of platform technical of AJ Bell
Key Points
* The FCA’s thematic review into annuities harks back to papers published in the past about lack of choice with annuities
* The thematic review is designed to assess whether people will get a better solution by shopping around
* Annuity rates have fallen and are unlikely to rise by much again – is innovation needed?
