The FCA is shortly to publish its findings from a year-long study of the annuity market. This follows a previous year-long study to identify the problems consumers face when securing their retirement income from their pension savings.
Many consumer champions have long called for the regulator to intervene in the market to force providers to reform their sales practices. But what form of intervention would actually work given the huge inertia and complexity involved?
As always, these issues become more visceral with personal experience and so it was with helping my Dad put his pension into payment recently.
Now, he is with one of the better companies in this area but they made an error in failing to disclose the commission they pay on setting up an internal annuity.
Making an error is not unique to this company and while it’s not great, even if the relevant detail had been in there, it would have likely been two paragraphs tucked away in 80 pages. It may as well not be there for all the notice anyone would take of it. Even in the pensions industry, people do not know how commission works on annuity sales.
If you are advised on an annuity, the IFA must agree an explicit fee with the customer. If there is no advice, then commission can be paid (and is) but it must be disclosed (but no explicit agreement is required). Few people know that commission is still paid even if you buy direct from your own pension company.
The FCA should make two immediate changes to empower and inform customers.
1. Instead of disclosing commission at the end of the process, firms should disclose the existence of commission in the form of a voucher to pay for expert help at retirement. The voucher could be used with any broker or financial adviser but would have no monetary value otherwise.
2. Whilst brokers and internal annuity sales teams can still be paid by the new voucher commission system, they should be required to obtain explicit consent to charge from the customer, just like advisers do.
This would immediately create a level playing field between advice and non-advice as well as empowering the consumer to seek expert help by making it clear that there is financial support to do this.
The voucher’s value would be set at the standard level of commission normally paid. There would be no extra costs involved to the consumer as it is just using the commission charges that were going to be paid anyway.
It could, along with good guidance from newspaper articles, TPAS, Citizens’ Advice and other consumer-focussed bodies, change the way people engage with their pensions at retirement.
Alan Higham is retirement director at Fidelity Worldwide Investment