FCA reports on failings in the annuity market
The Financial Conduct Authority (FCA) has revealed its concerns about the annuity market, as it publishes both a market study and a thematic review into the issue. The regulator says that annuities can be a good option for those with modest sized pension pots and cautious attitudes to risk, but also says that many pensioners’ annuity income is restricted because they either do not shop around, or they fail to obtain an enhanced annuity that could take into account their medical situation.
The executive summary of the market study says “that competition in the retirement income market is not working well for consumers.”
As a result of the market study, the FCA has announced a number of initial proposals. If it later wishes to make any formal changes to its rules it will conduct a consultation at that time. The proposals include:
- Providers to be forced to tell customers what level of annuity they could receive by shopping around, i.e. using the ‘open market option’.
- The development of a ‘pensions dashboard’, making it easier for customers to see details of all their retirement savings in one place
The thematic review revealed that many firms were failing to inform customers that they could shop around, and in particular were failing to inform customers that enhanced annuities for certain medical conditions could be available with other providers. It is estimated that customers who are eligible for enhanced annuities, but who purchase standard annuities, are losing out on up to £175 of retirement income per year.
The majority of the firms visited in the review will now be required to complete remedial work, under the supervision of the FCA.
The FCA assesses firms offering annuities against four key ‘consumer outcomes’:
- Whether customers are actively encouraged to shop around
- Whether customers are given sufficient information about the existence of guaranteed annuity rates or market value reductions in their existing pension contract
- Whether customers are informed that they may be eligible for an enhanced annuity, and the benefits of these products
- Whether customers are informed of the different types of annuity available, e.g. joint names, single names, escalating and guaranteed
Annuity sales have already fallen ahead of the April 2015 introduction of new freedoms as to how pension income is taken.
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.”
Some commentators have predicted that an annuities mis-selling scandal is coming, the scale of which could even exceed the payment protection insurance saga.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.