In February, the FCA published a thematic review paper, TR14/02, on the annuities market. The headline finding was that the annuities market is not working well for many consumers and most would get a significantly better deal if they bought an annuity on the open market.
In the FCA’s own words “Consumer inertia plays a significant role and some providers may be benefiting from this through the expected profitability of the annuities they sell to their existing customers”. It is arguable that the FCA is significantly understating the position.
The open market option, that is the ability to purchase an annuity other than from your pension provider, was apparently introduced in 1975 (I was only three years old at the time), and for around 10 years pension providers have been required by the regulator to tell retirees that they have the option of taking their pensions savings and purchasing an annuity on the open market.
The FCA has spent a year looking at the annuities market in order to publish these findings. Based on those findings the FCA has serious concerns about the annuities market and is going to conduct a further competition market study on products for retirement income.
The wheels appear to turn incredibly slowly at the new and more dynamic regulator, even where there is significant evidence of consumer detriment.
Some key and frightening statistics from the FCA’s work over the past year are as follows:
- A study in May 2013 found that 63 per cent of annuitants genuinely “shop around” when purchasing an annuity
- A similar study in November 2003 found that 59 per cent of annuitants shopped around – this indicates that little has changed over the last 10 years and serious intervention is required
- Notwithstanding the above, 90 per cent of annuitants are aware of the open market option, but a significant number of those are simply choosing not to shop around
- The FCA found three providers which offered enhanced annuities on the open market but not to existing customers
- Where firms use a third party to offer annuities to their existing pension customers, it is not uncommon for that third party to offer those “referred” customers a worse deal than the same third party would offer to the open market. Again this does not look like a great deal for those customers?
- Of those purchasing from an annuity from their existing provider 80 per cent could get a better deal on the open market receiving between 6.7 per cent and 8.3 per cent more income annually.
Some obvious conclusions can be drawn from these findings.
1. The rules requiring providers to give information on the open market option have been in force for over 10 years yet have had a negligible effect. This failure is even more surprising when you consider the significant drop in annuity rates over the same period.
There appears to be a consistent one third of annuitants to whom the message is simply not getting through. Drastic action is needed.
2. The regulator has been incredibly slow to act, despite what appears to be significant evidence of market failure and consumer detriment on a very large scale. TR14/02 also indicates that the FCA may have identified some evidence of malpractice at a small number of firms.
An interesting comparison can be drawn with, for example, the Arch cru debacle.
Whilst the facts here are different and we are not suggesting that the FCA should use the same enforcement powers (or indeed that the decision by the FCA to use a s404 scheme in that case was correct), it is interesting to note how quickly the FCA moved to act in imposing a s404 redress scheme on a large group of adviser firms and drove that through to its conclusion.
Compare that to the regulator’s apparent reluctance to tackle this issue as quickly – the overall losses being suffered by consumers in this case must be far greater. The population of firms operating in this market is also smaller – just 25 firms conducted 98 per cent of annuity sales by volume in 2012.
There is an argument that the regulator could and should have been far more nimble in dealing with a smaller number of firms. Given the nature of some of the findings in TR14/02 it would not be surprising if some firms were subject to enforcement action, but will it be too little too late.
3. When you look at the information that must be provided to customers about the open market option it is hardly surprising that it has little effect – it is 28 pages long! Time and again research has showed that the average person on the street does not engage with their own finances – the solution is not to send someone a 28 page document.
The key message – you are unlikely to get the best deal by buying your annuity from your existing provider, you should shop around and here’s how to do it – should be able to be reduced to one side of A4.
As someone famous once said (exactly whom is disputed – Blaise Pascal anyone?) “I’m sorry this document is so long, I didn’t have much time” – the recommended 28 page document smacks of something designed by committee.
4. The key issue is not awareness of the open market option but genuine engagement with it by consumers. This is the blockage that the FCA really need to focus on.
5. These findings yet again bring home the value of obtaining unbiased advice.
If the regulator can stimulate interest in the stubborn last third of annuitants who currently buy from their existing provider, and firms can find an efficient way of providing advice/information on the open market option, there is money to be made for both customers and firms.
Last week, the Government announced in the Budget that retirees would no longer be compelled to buy an annuity. Shares in insurance companies fell and commentators are hailing this as a seismic shift in the pensions market.
The Government itself has recognised that retirees will need impartial advice on retirement and are setting aside £20m for that purpose.
The long term effect on the annuities market remains to be seen but it will present yet another opportunity for planning firms as retirees accessing their entire pension pot at retirement will need to plan ahead and the coming months will no doubt see firms developing innovative new planning structures to take this into account.
Alan Hughes is partner at Foot Anstey