The findings of the FCA’s thematic review will have surprised nobody remotely connected with the pensions industry. But its launch of a ‘significant’ competition study into the annuity market last monthIndustry has thrust the issue back into the spotlight.
The FCA’s decision to deliver a final market study 12 months from now, after it found eight out of 10 people could get a bigger income by shopping around, has left many commentators baffled.
Critics argue the current findings reflect findings of other research that has been carried out in the area in previous years. They argue another year’s wait before action will mean a majority of the 350,000 or so people who will buy an annuity within the next 12 months will get the wrong product.
The FCA says it needs time to properly assess the state of the market before outlining proposed remedies that could include rule changes designed to stimulate competition in the market or to constrain the behaviour of firms.
Barnett Waddingham consultant Malcolm McLean says: “The FCA report confirms what we already knew – or at least strongly suspected – that the annuity market is not working well for consumers.
“It is disappointing that after a full year we still have to wait many months more for a second stage investigation by the FCA before regulatory action of some description can be initiated.
“In the meantime the industry – pension schemes as well as providers – must redouble its efforts to encourage individuals to seek advice and support in determining the timing and type of any annuity needed as well as the best provider.
“The idea of providing a passport setting out all the relevant facts including health considerations should be actively considered. The government should also urgently review the trivial commutation rules with a view to increasing the limit on “stranded pots” from the present £2000 to at least £5000 – thus enabling better value to be obtained from the annuity process.”
Pensions campaigner Ros Altmann says: “If the FCA knows that many companies do not offer annuities suitable for people in poor health, why does it not ban them from selling a standard annuity to such customers? Why not introduce compulsory questions to ask about health?”
The FCA’s review of the annuity market found an average pot of £18,000, but they could have got income equivalent to, on average, an extra £1,500 in their pot by shopping around. Four fifths of consumers who bought their annuity from their existing provider would have been better off if they had shopped around and switched provider.
The research, which did not look at enhanced rates but instead focused on rates that were not medically underwritten, found that only 20 per cent of customers purchasing their annuity from their existing provider got the best deal, with 32 per cent losing out by 5 per cent, 32 per cent losing up to 10 per cent, 11 per cent using up to 15 per cent and 5 per cent losing out by up to 20 per cent. A further 1 per cent could have got a non-enhanced annuity more than 20 per cent higher than the one they got off their home provider.
But the review found that there was no differential pricing by providers between the rates they offered their existing pension clients and those available on the open market.
The FCA also found there was no real market for small funds of under £5,000, with only three providers operating in this space.
Now: Pensions chief executive Morten Nilsson says the opacity of the system is baffling, given the significance of annuity purchase. Nilsson says: “In recent months, the attention of the government and the regulator has been focussed on raising standards and driving down charges in the pensions industry. But, all of these efforts will be overshadowed if, at the end of the day, savers end up with a poor value or unsuitable annuity.
Improving competition and encouraging consumers to shop around for their annuity is imperative. It’s truly bizarre that you can’t buy home or pet insurance without disclosing relevant information yet you can do so when buying an annuity, which is one of the most important financial purchases you’ll ever make.”
The FCA review was also critical of annuity comparison sites, which it says are used by 6 per cent of annuity purchasers. It found problems in all 13 of the sites it reviewed, with one found to have failed to meet its requirement to be ‘fair, clear and not misleading’.
The regulator will now issue financial promotions guidance for consultation setting out the improvements it wants to see from websites.
FCA chief executive Martin Wheatley says: “Our research showed that there is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.
“There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers. This is a very significant piece of work for the FCA.”