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FCA targets providers in annuity competition probe

The FCA plans to investigate insurers’ sales and retention practices as part of a 12-month review of competition in the annuities market.

The regulator’s thematic review of the market, published today, reveals 80 per cent of people who buy an annuity from their existing provider would be better off if they shopped around and switched provider.

The FCA has identified two groups of customers who are particularly at risk of not getting a good deal – those with small funds, who are generally offered a lower rate than those with larger funds, and people who are eligible for an enhanced annuity but do not explore this option.

The FCA is also concerned that providers may be incentivised to prevent consumers from shopping around. A review of 10 firms’ annuity books found business sold to existing customers is more profitable than business sold through the open market option.

Early analysis from the regulator also suggests profits from standard annuities may be higher when compared to enhanced annuities.

FCA chief executive Martin Wheatley says: “For most people getting the right annuity could mean the equivalent of an extra £1500 in savings – so we need to understand why they aren’t shopping around and switching.

“But this isn’t true for everybody; our research showed that there is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.

“There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers.”

The FCA will publish its final competition study report in 12 months. Following this, the regulator will outline proposed remedies that could include rule changes to stimulate competition or constrain the behaviour of providers.

Click here for all our news and analysis on the FCA’s annuity findings 

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Derek Bradley ceo Panacea Adviser 14th February 2014 at 8:46 am

    The Waterbed effect is a phenomenon that should increasingly cause concern to those who regulate the industry and those it regulates in regard to pricing and the unintended detriment has wrought upon the intended beneficiary- the consumer.

    This will be another example I fear.

    The Waterbed effect is the natural but not necessarily intended potential to squeeze one part of a complicated and complex regulated business model (and the attendant regulatory processes) to cause a serious bulge elsewhere in the process.

    As an owner in the 70’s of a waterbed (with the attendant fond memories) the metaphor of the water-filled mattress seems to be a common sense albeit simplistic description supported by a little known mathematical formula called Bode’s Sensitivity Integral.

    The Waterbed effect is already well illustrated in the mobile phone and utilities industries where regulation and political interference fixes or manipulates the prices of basic products and services only for consumers to see complicated pricing structures ensue by way of significant increases in the price of peripherals and additional services as a direct consequence.

    So, the Waterbed effect theory in a post RDR world dictates that in achieving:
    • the elimination of bias in the market
    • ensuring the adviser is the true agent of the consumer
    • clarity over the costs of advice
    • and various other factors,

    We will no doubt see the bulge appear somewhere else.

    And this will be seen in costs in every conceivable way and particularly for consumers. Cost is something that the FCA incurs for firms, often with little thought of logic or affordability and with little benefit analysis being done on the consumer impact and detriment it created. And none is being considered politically at least until 2015.

    So how else will the Water Bed effect manifest itself?

    To see a better deal for consumers in the annuity market, which is laudable, the reality is that the mass-market, small pot consumer will not, does not want to pay for advice that has previously been seen as free. Why do you think the banks bailed out of the crashing plane, much to the annoyance of Martin Wheatley, who felt they had 5 years to prepare?

    For clarity over the annuity market, sadly that clarity will be that for the mass market, cost equals no advice sought if they have to be seen to pay for it, even indirectly by way of fund deduction.

    When a consumer is able to obtain better annuity terms, is it possible that other consumers, with different financial services needs, will have to pay more as a result?

    Is this bad for consumers?

    The asymmetric exercise of regulation and consumer power can lead to consumer detriment through raising other consumers’ costs- the Waterbed effect.

  2. Oh God, yet another slow and costly thematic review. For Wheatley to be admitting that the regulator doesn’t know why people aren’t shopping around beggars belief. Isn’t it obvious? The reason is that the FCA, both in its latest and previous incarnations, has FAILED to mandate taking one’s fund to the OM as the default option.

    Providers should be barred from quoting any annuities at all, even those based on GAR’s. All they should be allowed to do is point out that (if it does) the policy includes GAR’s and that they may be better than the best alternative available in the OM. Everything in every near-to-retirement communication should major on the OMO.

    The solution to the problem is SO straightforward that for the regulator to have FAILED to enact it and even now still to be claiming not to know why people aren’t shopping around displays a truly extraordinary level of either ignorance or incompetence or downright negligence.

    Why hasn’t APFA been pushing the regulator to take action on this? Maybe it has but, as with so many other issues, its representations have just been ignored or brushed aside. APFA never tells us. So come on APFA ~ tell us now what you’ve tried to get done and how much, if any, progress you’ve made.

    Not that it’s likely to be of much practical value, but why hasn’t the TSC raised this with the regulator? Again, maybe it has, but, if so, it wouldn’t surprise me to learn that the regulator just gave it the brush-off with some vague undertaking about “looking into it”. It’s all just a pathetic little merry-go-round of questions with no meaningful answers.

  3. Derek, one alternative is that the insurance company’s profits fall (and hence the shareholder suffers rather than the consumer).

    Another alternative is that they pull out of the market completely and focus on other areas (eg Asia). This will allow more efficient companies to service UK customers more effectively. If those companyies think they can make super normal profits by screwing other customers in other parts of the world, then good luck to them.

  4. Gosh when will Panacea stop beating about fees? It isn’t fees per se which is the problem but the size of the fee. If you look at the recent figures provided by MM on the fees charged by the big boys for fund management it is hardly surprising that some may baulk if equivalent rates are charged across all subjects.
    I can assure you that I have no trouble charging for those rare small pots I come across. Last month there was a triviality case – and they happily paid my modest fee.
    However I do concede that small pots are a potential problem. This can be overcome, but unlikely with disingenuous Governments who prefer crocodile tears to real solutions.
    Why not make the triviality amount £25k instead of the present £18k? – That would solve a lot of problems.
    The next thing is that the Regulator should look at comparison sites (including Assure Web). The ideal is to have all possible available annuity providers listed. In the case of Assure web I suspect this is not necessarily their fault as some providers don’t want to pay for the privilege of being listed. Simples – make it compulsory that they do and then control the charges that the site levies.
    We are getting to a Control Economy – so why not the whole hog?

  5. The BBC have been running this story in every news item on Radio 2 since 7am. Consequently a few things are annoying me about it and i apologise in advance for using this forum to vent.

    1. – The FCA is stating that 80% of people taking annuities with their pension provider would be better off using the OMO. No shit sherlock, the adviser community has been trying to let everyone know this for years.
    2. – Actually it states on the correspondence that clients receive at retirement that they might be better off utilising the OMO especially if they have health issues. So providers are already telling clients what the FCA is only just realising. What is really weird is that the wording is a regulatory requirement so for the FCA to spend 12 months trying to figure this out is idiotic.
    3. – The FCA claims that this is a market failure, i disagree. It is the market working naturally. Of course companies are going to offer worse rates to clients if they can get away with it, after all they aren’t charities. A companies main driver will always be profit. Having said that i don’t think it’s right.
    4. – The FCA releases these statements to the press with no consideration to the wider impact on financial services. The public is already sceptical of pensions and retirement saving in general, this sort of statement from the regulator is going to compound the problem.
    5. – It is incredibly simple for this issue to be sorted. All the FCA has to do is step up to the plate and regulate what providers send to their clients at retirement, other commentators have put forward ideas as to what this would look like but a ban on your existing provider giving you an annuity quote would be a start.

    Again, i apologise for ranting but stories like this annoy me as the main stream media only report half stories. Already i’ve heard the BBC telling listeners that 75% of their pension fund HAS to be used to buy an annuity 3 or 4 times today and the FCA neglecting to tell the press that a significant proportion of the public would get a better retirement income if they weren’t lazy and actually utilised the OMO as the paperwork they get suggests they should.

    …………………………………….and breath. Rant over.

    All the above is my humble (if slightly angry) opinion only.

  6. Julian has summarised the market solution I thought of as well. Clearly it is the answer. Job done – 5 minutes.

    John Anyeo and the BBC and all the rest of the media and the FCA PR department need to stop frothing at the gills from a position of seeming ignorance because in many cases the poor default option many providers offer is not because they are trying to rip people off but because they are often in run-down mode and don’t want a fresh new long tail of annuity business. Equally the FCA place heavy capital demands on providers with small books of annuities. In both cases, the annuity actually ends up being underwritten by a reinsurer, creating two layers of cost.

    The problem is much deeper than reaching for the old “racketeering” default position. Regulation and the gradual contraction of the financial industry have brought the problem on as muich as anything else. The solution…? Well, as Julian has set out. The accumulation phase provider does not provide the annuity unless it has won the business in the open annuity market fair and square, which it can do if it is interested and tooled up to do so.

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