Consumers aren’t shopping around for annuities and it’s costing them money. The FCA is failing to tackle this pressing problem
How long can it possibly take to establish that consumers are getting a poor deal from annuity providers?
It has taken the FCA two years to affirm something that is universally recognised: that consumers’ failure to shop around is costing them money.
Next, the FCA is asking annuity providers to investigate whether people who may have been eligible to buy enhanced annuities have missed out on a higher retirement income by failing to shop around.
The answer to this question is clearly yes, the vast majority of those people have missed out. The FCA even answers its own question on p3 of its review. It estimates that an incredible 91% of people who could be eligible for enhanced annuities would get a better deal if they shopped around.
“After two years the FCA has still not completed its full review of the annuity sales process”
So why, having already found that firms’ sales practices are contributing to a general lack of shopping around, has the FCA decided to ask providers to conduct yet another review of the same problem?
As Malcolm McLean, senior consultant at Barnett Waddingham puts it: “It is disappointing … that after two years the FCA has still not completed its full review of the annuity sales process and will still be conducting further investigations into the workings of the market, which back in February they described as a “disorderly market”.”
The FCA has moved too slowly on its reforms. What’s more, an endemic institutional failure to tackle annuity reform has left the market with bigger problems. By failing to act earlier, the industry and its regulator have ended up being pre-empted by the government.
Chancellor George Osborne’s decision to liberalise the retirement market in this year’s Budget has resulted in a sharp fall in annuity sales. There was a 56% drop in the third quarter of 2014, compared to the same quarter in 2013. Many people will opt to take cash at the point of retirement instead.
The irony is that despite annuities’ poor reputation, they can be a good choice for the right person in the right set of circumstances. Fundamentally, they are a certain source of income in an uncertain world. But given annuities’ woeful reputation, savers may not realise that they are not always a poor value option.
The Budget also means that annuity providers will have to get creative, which may further enhance the attractiveness of these products.
“There are good reasons to believe that purchasing an annuity at some point still makes good economic sense for many”
A consultation issued by the mastertrust Nest hints at what is still to come. Nest proposes that it may make sense for people to draw down their money in early retirement before buying an annuity later in life, for instance.
More innovative type of phased annuities which reduce, as Nest puts it, “the one-off conversion risk that has characterised annuitisation to date” are also likely to grow in popularity and availability.
“While it remains to be seen if consumers can be persuaded to continue to purchase annuities en masse, there are good reasons to believe that purchasing an annuity at some point still makes good economic sense for many,” Nest concludes.
It is a shame that the government has been forced to compel the market to get creative with its liberalisation of at-retirement options for savers. Meanwhile, the FCA’s seemingly endless cycle of reviews is not getting the market any closer to a more competitive state.
A regulatory imperative
In a separate market study which was published at the same time, the FCA’s recommendations make more sense. It proposes creating individual retirement dashboards, so that people can see all the pension savings they have accumulated in one place.
“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,” said Mark Stopard, head of product development at Partnership, an enhanced annuity provider.
“In Denmark, the PensionsInfo service allows savers to log onto a secure website using their social security number. Here they can view in one place their state entitlements and the amount they have saved in all of their others schemes. A retirement income projection is also provided,” says Morten Nilsson, chief executive of mastertrust NOW: Pensions, whose parent is ATP, the giant Danish pension scheme.
Nilsson concludes: “While the development of a Pensions Dashboard in the UK will be complex due to the high number of pension providers in the market – done successfully it will build engagement and encourage savers to think about consolidating their own pension pots.”
The FCA also plans to review the current system where consumers reaching retirement receive “wake-up packs”, detailing their at-retirement options.
The FCA has also recommended that firms must show consumers how their quote compares with other providers within the market. “This simple single step will ensure many more individuals make the right decision when they secure their retirement income in the firm of an annuity,” said Mark Wood, chief executive of JLT Employee Benefits.
These changes are all welcome and sensible, but they haven’t happened soon enough to protect short-changed retirees who have already bought annuities. Nor will future retirees be protected from these problems immediately.
“The findings confirm that customers are still too often being short-changed, yet the recommendations fail to ensure proper protection is put in place straight away”
The review lacks a clear call to action. “The FCA is seeking views on its initial findings and will consult at a later date if any potential rule changes are needed,” the review’s covering press release states.
That is just not a strong enough regulatory imperative, especially when coupled with the FCA’s own acknowledgement that “competition is not working as well as it could for consumers, with many continuing to miss out on a higher income by not shopping around”.
As Ros Altmann says on her blog, “The findings confirm that customers are still too often being short-changed, yet the recommendations fail to ensure proper protection is put in place straight away.”