Why annuities could be the next big mis-selling scandal

The first came following last Saturday’s splash in the Daily Telegraph, which claimed that hundreds of thousands of people may be entitled to compensation over past annuity sales.

It was based on an admission from life company Aviva that it had already initiated a redress programme for around 250 customers who would have qualified for an enhanced annuity, but were sold a conventional alternative in 2013, following a telephone sales process which did not ask any health questions.

Aviva said it was making average back payments of £500 and uprating future income payments by around £120. It has closed the telesales operation in question.

You might think it a tad sensational to present this isolated case involving hundreds of customers as a portent of a restitution deluge to come. I do not.

According to figures published by the Financial Conduct Authority earlier this year following a review of 330,000 of the total 420,000 individual annuities sales from 2012, less than 14,000 people bought an enhanced annuity over that year. Studies suggest more than 125,000 should have.

Whether or not the 111,000 or so people that year - and similar numbers in other years - have been ‘mis-sold’ will depend, using Aviva’s logic as a case in point, on whether they were asked health questions and made properly aware they could shop around and possibly achieve a substantially higher rate.

I’ve mentioned the annuity sale to my father before and will do so again: no real mention of open market option, no health questions, no substantive reference to enhanced rates available elsewhere. Mis-sold.

The FCA is due to report findings from a second thematic review into annuities over the next few weeks. It could make the case for the sort of action Aviva has taken being applied on a much wider basis.

Government older workers ‘tsar’ Ros Altmann was quoted as saying annuities could be “possibly the worst mis-selling scandal ever seen in Britain”

What evidence there is appears damning - and intimations in the first report that profit incentives were skewed will have been lent credence by recent results from the likes of Prudential, which showed sales broadly flat, but earnings sharply down as annuities dropped as a proportion of new business.

There is also heavyweight support for many past sales to be treated as mis-selling, with influential pensions expert and government older workers ‘tsar’ Ros Altmann quoted in the Telegraph piece as saying this could be “possibly the worst mis-selling scandal ever seen in Britain”.

Ms Altmann added it could be more pernicious even than PPI “because it concerns people’s life savings and the sales are irreversible”.

All of this brings me to the second mis-selling warning of the week, from Labour shadow ministers in relation to the growing complexity in the upcoming pension reforms.

It was made following the inclusion of 33 new clauses and 72 technical amendments at committee stage to already abstruse legislation to inaugurate new freedoms from April.

The specifics of the clauses are not important. The complexity of the pensions landscape for customers from next year is plainly obvious and has prompted the Treasury to go to great lengths in establishing a free ‘guidance’ service for all savers.

Yesterday, the FCA published its standards for this support and revealed it will separately be consulting on fresh rules to, among other things, bring some regulatory rigour to bear on the ad-hoc lump sums option which some claim will make pension funds operate like bank accounts, as well as to tighten up on non-advised sales of drawdown.

Perhaps most importantly, the FCA said pension providers must ensure prospective retirees are referred to guidance, and in turn that guidance providers must refer consumers to further information, including “specialist advice” and “regulated advice”.

Some have argued, as Alan Higham did yesterday at the launch of a major report from the Pensions Policy Institute, which also warned of the difficulties in retirement decision making and probable poor decisions by consumers, that most consumers need proper advice.

Many of the above problems discussed in relation to annuities could have been avoided if advice had been taken. As Nick Bamford and others pointed out the last time I raised it, my father clearly did not take advice; had he done so I most likely would not have this unwanted personal proximity to the problem.

The question then is how to make sure that advice is affordable so that it is taken.

ashley.wassall@ft.com