The FCA is investigating the negative impact of the government's decision to scrap the secondary annuity on pension policyholders with guaranteed annuity rates, according to annuity provider Just Retirement.
The firm's communications director Stephen Lowe said pension customers of life companies who have been guaranteed an annuity at a high fixed rate are not able to access that annuity's true value.
This, he said, meant life companies were holding on to money that was set aside for their pension customers.
This would have been solved by the secondary annuity market, had the government not decided to scrap the policy last month.
Guaranteed annuity rates (Gars) were marketed in the 1980s and 1990s, when annuity rates were far higher than they are today. They give pension policyholders the right to buy an annuity from their pension provider at a guaranteed minimum rate - on average between 9 per cent and 12 per cent, according to Just Retirement.
In those days, it was compulsory to buy an annuity, making it likely that consumers would stay with their own pension provider if they had a Gar, according to an FCA report released in 2014 (prior to pension freedoms).
However, the latest post-pension freedoms figures from the FCA show the vast majority - 68 per cent - of people with Gars are not taking them up. That figure is even higher for people with balances of £30,000 or less (79 per cent) and higher still for balances of £10,000 (90 per cent).
With annuity rates as low as they are, Mr Lowe said that meant people were missing out on considerable value.
“If you are one of those aged over 55 who is thinking about taking some pension cash from a plan offering a generous guaranteed rate for life then you are very lucky – only about one in eight have this high performance option and giving it up could prove an expensive mistake,” he said.
However, for customers who need to take advantage of pension freedoms but don't want to miss out on the value of their Gar, Mr Lowe said the secondary annuity market would have allowed them to do so. He claimed up to 1.5 million consumers would have been able to activate their Gar, and then sell it on the secondary market for a higher price.
He said the Financial Conduct Authority considered the issue an "emerging risk".
"There's a consumer protection issue that isn't yet being socialised. The FCA are aware of it, they're investigating it, they're looking at the consequences of it. Because the people who are cashing out are potentially giving up very, very, very serious value."
He said the current situation was particularly unfair, because life companies' capital reserves were based on the annuity rather than the basic lump sum, meaning they were benefiting from the trend away from taking up Gars.
The FCA declined to comment.
Mr Lowe said the rules at the moment require the provider to inform a customer considering cashing out that they have a valuable guaranteed annuity as part of the policy. But he said there was no requirement to provide a cash value of that annuity.
He argued this should be made mandatory.
Mr Lowe said cashing out a pension with a Gar should be treated with as much regulatory oversight as defined benefit transfers, because they were essentially the same thing. That could mean forcing the life company to value the pension as an annuity, through something akin to a transfer value analysis.
james.fernyhough@ft.com
