Fresh annuity-related redress puts spotlight on review

In another revelation as part of the Daily Telegraph’s ongoing ‘justice for annuity victims’ campaign, the paper on Saturday reported Friends Life is to compensate 1,200 customers whose funds were seriously misvalued.

Specifically, 3,000 people who held with-profits funds originally purchased from insurer Winterthur had their final bonuses mis-calculated. Four in 10, or 1,200 customers, were left with a smaller pot than they should have been when they purchased their annuity.

In one case highlighted by the paper, a customer was shortchanged by £2,889, or six per cent of the overall fund value.

Friends Life is contacting the customers concerned and has offered “unreserved apologies” for a catalogue of “human and systemic” errors, uncovered by what it termed a routine “spot check”.

The aforementioned customer, as an example, is to receive a higher monthly income from a second annuity taken out in his name, as well as a backdated lump sum payment, including lost interest of £3,113.

Winterthur was acquired by Friends Life in 2011, while Friends Life itself is about to be acquired in a £5.6bn deal by Aviva.

Ironically - and perhaps not coincidentally - Aviva recently hit the headlines as the first major provider to begin paying redress to hundreds of annuity customers who were mis-sold conventional policies through a now defunct telephone sales service.

What ties the two cases is not just the impending merger of the parent companies, but the apparently isolated and idiosyncratic nature of the failings.

In Aviva’s case the errant telesales operation was only in existence throughout 2013 and an internal investigation found 250 affected customers. Friends Life said the issue was with a system unique to these 3,000 cases and thus it is “confident” this is “the full extent of the issue”.

For me, another similarity is the insouciance which characterised the insurers’ past behaviour, which I would suggest is not confined merely to these two instances.

Telesales operations are inherently pressurised, but Aviva’s operatives compounded this by asking no health questions in the pursuit of sales. It has behaved in an exemplary fashion since uncovering the issue, but I suspect its transgressions are more common than the industry would like to admit.

As for Friends Life, a systems error is obviously only indirectly an annuities concern.

More troubling is that after an initial call with the case study customer in July 2014, it reneged on a promise to pay a generally assumed eight per cent annual interest and made an offer based on a measly 0.1 per cent rate. It took the Financial Ombudsman Service’s intervention to eventually get the offer revised.

Friends Life also did not purchase the annuity it said it had to provide top-up monthly income and, again, the Fos is to decide the rate at which this will be set. In all, the firm has admitted to 14 “huge” errors; it could be argued this evinces complacency in relation to legacy annuitant complaints.

I also find myself asking why these companies are suddenly finding issues which, in the latest case for example, date back more than a decade.

As intimated above, the due diligence related to the Aviva takeover could be a factor here. I’d also wager that the FCA’s demand for insurers to conduct a “statistically significant” review of enhanced sales in particular over the past six or more years has set some on edge.

There is still a very real chance the regulator will decide, based on the evidence it is eventually presented, that a wider review of annuities sales and the culture in which they took place is required to remediate this “dysfunctional” market.

It has ruled out an exhaustive retrospective action, but something more comprehensive and costly than these insulated paroxysms of compensation could yet ensue.

ashley.wassall@ft.com