PensionsMay 31 2017

New FCA annuity rules branded not tough enough

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New FCA annuity rules branded not tough enough

Pension professionals are concerned a rule change which will see annuity providers forced to inform their customers how much they could gain from shopping around and switching provider before they purchase an annuity, do not go far enough.

Despite the advent of the pension freedoms, which essentially scrapped the need for people to buy an annuity, 50,000 people a year (60 per cent of the market) still buy the product.

But many do not currently shop around, with the risk that they will receive poor value from failing to review all of the annuity offerings of other providers.

Under plans announced on last week, the Financial Conduct Authority (FCA), wants to change this, by forcing providers to tell their pension customers what alternatives are available, a rule change which takes effect from 1 March 2018.

But some in the industry feel this doesn't go far enough.

"The FCA has missed a trick here" says Darren Philp, director of policy and market engagement at The People’s Pension.

"They could have made a real difference to the pension outcomes of millions of people. While the proposed solution will have some positive impact, it just doesn't go far enough and many consumers will still potentially miss out on thousands of pounds of future income by sleepwalking into an annuity that does not provide them with the best deal," he said.

“Simply giving consumers ever more information doesn't always work. We've been here before when it comes to the selling of annuities.

“With an ageing population and an increasing cost of retirement, it is critical that consumers achieve the best possible outcomes if they are purchasing an annuity.”

Stephen Lowe, director at annuity provider Just Group, said he is “ disappointed with the FCA’s decision to prioritise controlling costs to businesses over providing a meaningful level of consumer protection".

Previous FCA research has illustrated the improved value customers receive when they go through a full underwriting process, he said, adding it is "unconscionable" for the regulator to disregard this knowledge when they are proposing to take steps to improve consumer outcomes in the retirement income market.

 He added: “The rules have been built around the business model of the firm and fail to put the consumer at the heart of the solution.

“Hopefully many firms will implement standards beyond this low bar and do the right thing for their customers."

“The problems are deep rooted,” said Andrew Tully, pensions technical director at annuity provider and equity release firm Retirement Advantage.

“Far too many people continue to receive poor value from their annuity due to the lack of shopping around. Ironically, since the introduction of the pension freedoms, the situation has  got worse, so we need some radical thinking.

“There are numerous issues to overcome in the practical implementation of a comparator tool which genuinely helps customers get the best deal, taking into account their individual circumstances. The FCA has recognised this by requiring information to be included highlighting the benefits of taking health and lifestyle into account.

“However, the monetary figures given to customers will simply show a comparison of standard rates and won’t show the additional money a customer could receive every year through an enhanced annuity. We would encourage the FCA to continue to monitor appetite for enhanced annuities to consider how effectively this prompt is working."

He added: “The FCA should also explore whether it would be possible to make shopping around compulsory, as this is likely to produce the best customer outcomes.

"Our research [a survey of 1,009 UK adults aged 50+ who have a DC pension and who are not in retirement shows that two thirds of people aged over 50 agree you should have to shop around for retirement products rather than simply buying a product offered by your current pension company, compared to less than one in ten who disagree.”

From the adviser perspective,  Ben Simpson, head of wealth management at Menzies LLP, stressed that fundamentally, "it really does pay to “shop around as far as annuities are concerned".

"However, this is particularly true for enhanced annuities where the uplift in income can be material. Clearly, an independent adviser would be looking for the best annuity rates as part of their advice process, including whether the individual might qualify for an enhanced annuity."

He adds: "When we give advice on drawdown, as part of our advice process we investigate whether the client would qualify for an enhanced annuity, such is the potential benefit of an enhanced annuity.”