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One winning claim of annuity misselling could open the floodgates
The litmus test
John Greenwood Greenwood’s View
For all the criticism of the ways in which poor value annuities are foisted on unsuspecting members of the public, I am yet to come across a single report of a legal challenge on the matter.
But a successful claim could open the floodgates for compensation for misguided annuity purchases for hundreds of thousands of pensioners.
Imagine the scenario - a pensioner successfully argues before the ombudsman that their pension provider failed to communicate the importance of taking the open market option. Or a disgruntled pensioner claims scheme trustees failed to highlight the potential income uplift his triple heart bypass entitled him to.
The tribunal in which such cases could be brought would depend on the type of pension. For occupational schemes, the pensions ombudsman would make the determination, while the financial ombudsman would deal with contract-based arrangements.
I recently asked pensions ombudsman Tony King how he has dealt with claims relating to individuals given unsuitable annuities. To my astonishment he told me he has never come across a single case.
There have been reports in the press for years about the risks trustees are exposing themselves to by recommending annuities to scheme members without finding out if they are entitled to an impaired life annuity, yet it appears nobody has taken them to task on it just yet.
The trust document may not require trustees to ensure members take health and lifestyle into account when issuing annuities, but they do have a legal obligation to communicate relevant information. That a scheme member could get a third more income by shopping around is surely relevant information.
Maybe no one has claimed yet because those same people who are unlikely to know their rights when it comes to taking benefits are even less likely to see the light when they retire.
But it would take just one bright spark from a price comparison site to find an unhealthy recent retiree and help them make a claim to the pensions ombudsman. There is no guarantee such a claim would work, but for a run-of-the-mill pot of £30,000, an income uplift of a third could equal compensation in the region of £10,000, making it worth the effort trying.
Claims relating to personal pensions would be based on different legal arguments, relating to clarity of information provided and complexity of process. Providers would argue that people taking in-house annuities were told about the Omo in the small print. Whether the FOS could be persuaded providers had done enough remains to be seen if any such claim arises. But a little more than a year ago the FSA found the marketing material of a significant minority of annuity providers had failed to meet FSA regulations. The FSA also identified a complex process and confusion caused by the diversity of forms used.
Further grounds for complaint could include the 1-2 per cent commission taken from annuitants’ pots, even though no advice is given. For a cash-strapped pensioner, an extra £600 would be most welcome.
Maybe pensioners who have not exercised the Omo are happy with the annuities they have. Maybe they would have no legal leg to stand on if they did try to claim. But with so much at stake I am surprised the matter has not yet even been put to the test.
John Greenwood is editor of Corporate Adviser
Readers' comments (6)
Julian Stevens | 27 Nov 2009 2:43 pm
I cannot understand why the FSA hasn't issued a simple, clear and unambiguous directive to all providers that all pre-retirement packs must include an unmissably bold statement pointing out to the recipient that s/he could well achieve better benefits by seeking advice on how to apply his/her fund/s in the open market.
How difficult can that be for heaven's sake? Perhaps the fact that this would mean that seeking the advice of an IFA would have to become the automatic default option might have something to do with it.
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Steve Hunt | 29 Nov 2009 10:10 pm
At last someone talking sense! This is a ticking bomb and the sooner the whole industry and the regulators embrace the option to shop around at retirement as the default the better for everyone.
Governments existing or new may feel they don't want to 'nanny' people coming to retirement, that is what they said in 1988. Insurance companies may feel they are legally covered for any possible mis- selling but that is what they said in 1995. And then we had the pensions review !
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Phil Castle | 30 Nov 2009 9:22 am
Even simpler. The insurer knows the date of birth and the FSA has the data on moneymade clear for the annuity tables.
If teh FSA truly believe in TCF and not just as a stick to beat IFAs for, when the provider gives their own quote, instead of just mentioning the OMO, they should HAVE to show the comparison run on the annuity tables on the same day as their quote.
This would undeniably be TCF and would act as an encouragment for AVIVA and the PRU to give meaningful data to the FSA to go on FSA tables as people will soon start contacting whoever is top of the list or if they are sensible, they'll contact an IFA who would check those like AVIAV and Pru using postcodes and impaired life providers too....
Why use a hammer to crack a nut...
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Richard Brydon | 1 Dec 2009 7:00 pm
Most, if not all, personal pension providers make the business of shopping around so difficult that the public have no idea of what they are looking for. The FSA, who clearly must OK the paperwork involved, are culpable but will hardly be punishing themselves over this. I mean, who pays in the end, the public and poor sods like me unfortunately!
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Lee Duff | 2 Dec 2009 5:06 pm
@ Phil Castle:
The reason Aviva and the Pru do not appear in the FSA tables is due to the FSA-specified tolerances. If you offer a postcode- or lifestyle-rated annuity which can go up or down (as opposed to L&Gs, which can only go up), you do not fit these criteria.
The FSA are currently looking for a solution to this so they can offer a realistic expectation to the consumer - and get Pru and Aviva back into the tables.
However, this would still not be a suitable solution. FSA tables take no account of impairments, and are effectively "straight-line" projections between illustrative quotations. Annuity rates are not calculated using DoB alone.
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Phil Castle | 2 Dec 2009 6:12 pm
@Lee - Yes I know there is a lot more to an annuity than just date of birth. Decumulation advice is a complicated issue and clients should seek advice and the provider just having to show what was on the FSA tables compared to the rate they are offerring for an existing fund may spur someone to take advice or at least to look at the FSA tables themselves and play around with the figures until they realised they need advice. I have also said on many occassions elsewhere, the trivial limit should be 2 or even 3% of lifetime allowance and NOT a paltry 1%. It's not as if HMRC don't still take the income atx they would otherwise have had if the person had taken it in pay!
It's very easy to knock my suggestion when not making a suggestion yourself which may be an improvement.
What would YOU suggest Lee?
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