One of the many FCA initiatives currently affecting the retirement market is the introduction of an annuity comparator from 1 March 2018.
The aim is one I wholeheartedly support, as it seeks to help consumers shop around for the best annuity rate. For years – and in spite of the pension freedom changes – a great many people have lost out by taking the offer from their holding provider without shopping around first.
That said, the implementation of the annuity comparator has flaws, which will have an impact not just on consumers and providers, but on advisers as well.
The concept behind the comparator is simple. Any guaranteed annuity illustration must either confirm the rate shown is the best in the market or indicate the customer could get a higher annual income elsewhere (when it should show that income and the difference in pounds and pence).
For advisers, the most significant impact is likely to be towards the end of the process. Let’s assume an adviser has shopped around for their client who wishes to buy an annuity. The relevant paperwork is completed and a few weeks later the funds are received by the chosen provider, which prepares a final illustration showing the actual income the client will get.
This illustration also needs to include a comparator but, as the annuity market is constantly changing, it may show said provider no longer offers the best rate.
So what does the adviser do? One option is to invoke cancellation rights, re-broke the case and pass it to the new best provider. But by the time the funds reach that provider they may no longer be best in the market either. Adviser and client could be caught in a never-ending loop, chasing their tail.
Alternatively, the adviser could proceed with the originally chosen provider. But what does that mean from a TCF point of view? Perhaps they could have a de minimis limit, going ahead with the original quote if the difference is minimal, and re-broking if it is a larger amount. We need to remember that many clients need the income as soon as possible, so may not be able to wait another few weeks while the case is re-broked.
It might be found to be more sensible if a comparator is not required at this late stage. However, if the rules proceed as they are, advisers will need to give thought to their preferred process before March and tailor their client communications appropriately.
There is also a flaw in the comparator requirement itself. Figures must be shown on a like-for-like basis which, on first reflection, sounds entirely appropriate. However, this may not help consumers understand the true benefit to be gained from shopping around.
Let’s say the holding provider offers annuities only based on postcode and does not take wider health or lifestyle considerations into account. The comparator within their illustration will show the best income available using postcode only. This may lead a consumer to think the potential benefit of moving is not worth the hassle. But if they have various health and lifestyle issues, they could gain many thousands of pounds by shopping around.
This is much more likely to be a fundamental flaw for non-advised consumers. Advisers will help people consider their individual circumstances, including health and lifestyle, so their clients should end up with the best deal, even if that is not shown on the comparator.
Even for advised clients, though, there is potential for much confusion, with illustrations received from different providers having different comparator figures.
All of this demonstrates a key problem with pension regulation. Policy proposals can have the best possible intention – and few will argue with the aim of helping people get a better deal. But given the complexity in the market, it is easy for that initial aim to get lost in translation.
The industry is still discussing some potential changes with the FCA but whether that results in any tweaks or not, advisers need to start considering how they will deal with this significant change to the annuity process.
Andrew Tully is pensions technical director at Retirement Advantage