PensionsOct 7 2014

Regulator proposes 100% FSCS cover for annuities

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Annuity clients could in future be able to claim back 100 per cent of the outstanding value of their policy should their provider go bust, under new plans unveiled yesterday (6 October) by the Prudential Regulation Authority.

In one of the four consultation papers it released yesterday, the PRA stated that the long-term locked-in nature of annuities means that many policyholders have a lower capacity to protect themselves or seek alternative cover.

Currently annuities are covered under the Financial Services Compensation Scheme’s insurance rules, meaning 90 per cent of the value of eligible claims will be paid with no upper limit on redress.

The new rules would increase this to 100 per cent coverage, but it is not clear what would be covered. No annuity provider has gone bust since the FSCS was set up so how the value of a claim would be established or whether features such as index-linking would be included remains untested.

The PRA’s policyholder protection paper stated that policyholders can be dependent on annuity payments as part of their regular income and can be affected by any delays or missed payments.

It added that new products which may come onto the market in the wake of wide-ranging reforms to the at-retirement market would also be covered, as long as “the product continues to pay benefits falling due in the form of income or other regular payments”.

Malcolm Kerr, senior adviser to Ernst and Young, commented that the proposal makes sense given that these contracts could remain in force for 30 years or more and cannot be surrendered.

“The paper shows that the Bank of England recognises there will be innovation in the annuity market and have factored this into their thinking.”

He told FTAdviser that while this is not an enormous step, it does show that the Bank of England is on the front foot in offering protection for the new annuity-like products that are being developed ahead of next April.

In contrast to the changes for policies in payment, the PRA proposed to maintain 90 per cent cover for both pension life savings and investment life savings wrapper products.

The consultation stated: “While the product is in the accumulation phase and policyholders are not yet receiving income, policyholders are not yet dependent upon life savings policies to the extent that annuitants are, nor are they locked in over the long term to their policies to the same degree and so are not as vulnerable to a sudden reduction in income.”

The consultation will close on 6 January 2015. For more details on FSCS compensation limits and to earn 60 minutes CPD, click here.