FCA: annuity practices need "significant improvements"

The Financial Conduct Authority has today published the findings of its review into annuity sales and the retirement income market to see how the pension reforms would develop the market.

Related topics:  Retirement
Rozi Jones
11th December 2014
FCA

The study confirmed that while customers are continuing to miss out on a higher income by not shopping around, for people with average-sized pension pots and low risk appetite, the right annuity offers good value for money relative to alternative drawdown strategies.

The report also addressed the need for consumer support following the pension reforms stating that "the Guidance Guarantee will perform an important role, but firms’ own communications with their customers will remain of central importance".

Christopher Woolard, director of policy, risk and research at the FCA said:

“The Budget reforms are a game changer for the retirement income market. People will be given more choice and many will want some support to ensure they make the right decisions for them.

“The Government’s new Guidance Guarantee, with the standards we have already proposed is a vital part of this, now firms need to play their part.”

“We want to see firms improving the way they communicate with their customers. In order for the pension reforms to work and for people to have trust and confidence in the products they are buying firms need to act now.”

The FCA has also identified future risks to monitor as the market develops. Their principal recommendations include requiring firms to make it clear to consumers how their quote compares relative to other providers on the open market, the introduction of a behaviourally trialled alternative to the current system of wake-up packs, and recommending that the pension guidance service and firms take account of the findings of the market study on consumer behaviour when designing tools to support decision-making.

In the longer term, the FCA have suggested the development of a ‘Pensions Dashboard’ which would allow consumers to view all their lifetime pension savings in one place.

The FCA also conducted a review of annuity sales practices, finding that firms‘ sales practices are contributing to consumers not shopping around and switching, and that significant improvements are required.

The FCA identified particular areas of concern in relation to enhanced annuities, where customers are often not informed of shopping around or encouraged to do so to get a higher income and where some firms are failing to tell customers other providers may offer enhanced annuities for medical conditions that they do not underwrite.  

The FCA has since asked the majority of firms involved in the review to do further work to determine if the findings in relation to enhanced annuities are indicative of a more widespread problem. Initially, this involves a sample of relevant sales since May 2008 rather than a full review, and will involve individual firms gathering more evidence to determine whether customers with certain medical conditions or lifestyle factors missed out on a higher retirement income.

Mark Stopard, Head of Product Development at Partnership, said:

“When it comes to retirement a significant proportion of over-40s just want to feel that have made the most of what they have got (24%) and fully understand their choices (20%). Today’s Market Study Proposals are a small step towards ensuring that this is possible and that more customers are in a position to take the most appropriate action for their situation.

“We are particularly pleased that the value annuities hold for people with average-sized pension pots and low risk appetite has been highlighted. With enhanced annuities paying the typical 65-year old an average annual income of around 6.5%, those who are eligible will be able to get even more value from their pension pot. It also clearly highlight just how important it is that people are offered the option of applying for an enhanced annuity if they do decide to choose a guaranteed income for life.

“As a founder member of PICA, we are particularly pleased that the Pensions Dashboard – a concept that the organisation has championed – has been included.   Allowing people to view all their pension information together will not only ensure that they can make informed decisions but will also encourage them to take a considered look at all their options at retirement.

“Perhaps – most importantly – it will also facilitate shopping around to ensure that they make the most of their retirement savings. Too often people simply take what is offered by their existing provider as they perceive it to be easier and not overly detrimental to their finances. Today’s announcement will encourage people to engage and achieve the retirement income they deserve by making their pension savings more tangible and visible.”    

Andrew Tully, pension technical director, MGM Advantage, commented:

"This review shines the spotlight firmly on poor market practices – primarily people rolling over into the holding provider’s own annuity - and the resulting customer detriment. This is an issue many in the industry, including ourselves, have known about and been highlighting for many years.

"The FCA evidence shows annuities have provided good value when people have used the open market to shop around, and are receiving a higher income through enhanced annuities, which take into account health and lifestyle. Unfortunately the vast majority of people buying from their holding pension provider do not benefit from these higher rates, and there is typically a 30% gap between standard and enhanced annuity rates. Given up to 60% of people can benefit from a higher income from an enhanced annuity, this affects a huge number of retirees and equates to a significant difference in income over a typical retirement.

"Unfortunately, the changes coming in April next year do not automatically mean better customer outcomes, as the choices at retirement will become a whole lot more complicated. The guidance guarantee will help some people, but given the likely low initial take-up we need a second line of defence. This will minimise the number of people who end up being sold solutions that do not meet their needs or pay out significantly less than the competitive deals available in the open market.

"My fear is we will look back on these pension reforms in years to come and see that the fundamental problems that exist have not been adequately addressed. People who seek professional financial advice are likely to continue to have the best outcomes at retirement."

Otto Thoresen, Director General ABI said:

“The two documents the FCA published today identify a number of important issues. The market report recognises that annuities bought on the open market can be  good value for money. We have always stressed the value of shopping around and the need for consumers to have the right information about their retirement options, which is why the industry introduced the ABI Retirement Choices Code. Providers recognise that in the new pensions world of greater choice more needs to be done to ensure good outcomes for customers. The ABI had urged the FCA to replace our Code and we are therefore pleased the FCA plans to develop the Code into rules that will apply across the entire pensions market.

"Pension providers are working hard to prepare for Budget changes coming into force at April 2015. The development of enhanced annuities and the ABI Code were both driven by the market to improve customer outcomes and providers are fully committed to the further improvements needed to ensure customers can navigate the new retirement market successfully. Customers must be clearly informed about their options, particularly if they may be entitled to an enhanced annuity or other products the industry has developed to meet customer needs.  Looking forward, we agree with the FCA that building a new system which focuses on customer behaviour is crucial  and the industry will be looking closely at the report findings, and working  with the regulator to address areas of concern.”

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