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FSA to investigate annuity pricing


The FSA is set to investigate the annuity market due to concerns people are failing to shop around when they reach retirement.

The regulator will today unveil plans to examine pricing data to determine how much pensioners are losing out by not shopping around for a retirement product.

The review is expected to be conducted in two phases.

The first phase will analyse the level of detriment consumers suffer from not shopping around, and whether there are firms or particular groups of consumers where this detriment is more likely to occur.

This will involve a pricing survey of all annuity providers, and will compare the rates available to consumers through a range of distribution channels, including rates available through the open market option and those only available to existing pension policyholders.

The second phase will consider whether firms’ processes for providing annuities facilitate or inhibit shopping around.

FSA head of life insurance Nick Poyntz-Wright says: “The FCA has set out its vision to make sure markets work well so consumers get a fair deal. An annuity purchase is an important one off decision that has long term consequences for individuals if they get it wrong.

“We want to understand the level of the potential detriment for consumers if they do not shop around to see if there are ways to make this market work better for consumers.”

Hargreaves Lansdown head of pensions research Tom McPhail says: “The open market option agenda has always been about improving investor’s incomes and the FSA is right to scrutinise this area of market failure.

“With auto-enrolment under way it is essential that investors get the best possible value from all stages of their retirement saving.”

Providers have been coming under growing pressure from the Government to increase the number of people who shop around.

In response, the Association of British Insurers published a compulsory code of conduct which requires its members to improve the way they promote the open market option.

In November last year, the ABI confirmed it also wants all annuity providers to publish the rates they offer to consumers as part of the code.

ABI director of life, savings and protection Stephen Gay says: “Any review of annuities would be timely. The annuities market is changing with ABI initiatives set to provide people approaching retirement with greater clarity and confidence as they prepare for retirement, and we are pleased that the FSA recognises this.

“With 400,000 people buying an annuity every year, it is vital that we do everything we can to enable customers to make an informed decision.

“ABI members will work with the FSA as it undertakes this project and look forward to its findings.”


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There are 17 comments at the moment, we would love to hear your opinion too.

  1. Not before time either !!!

  2. Perhaps the reason that too few shop around is because they don’t currently receive or seek independent advice. I wonder why that situation might be exacerbated in the future?

  3. Govt QE and EU equality pricing have caused the biggest ever drop in annuity rates punishing thousands of pensioners.

    I doubt the FSA will be mentioning this!

  4. The open market option is by far the best but with RDR how many IFA’s are going to waste time for little or no return as clients with small pots will not or cannot pay

  5. Ok, so it is a bit late for the FSA to realise that there is a problem. However, let’s welcome it, if it result in more people being aware that they can look around for a better outcome.

    I do suspect that some insurers will resist any change in delivering poor value annuities to their own pension clients, as there is a huge margin available to them.

  6. I think the rates have dropped because they’re all acting as a cartel. The EU age directive was used by them all to create panic and drop rates for profits (the mortality pool has to be 95% male in my experience)

    It should be the OFT looking at rates not the FSA.

  7. Re small pots – use of the Open Market does not necessitate advice. There are non-advised OMO services to which retirees with small pots can be referred. These services will source competitive rates for those customers and conduct the transfer at cost akin to the old commission basis. Providers simply need to make retirees aware of this.

  8. Valid comments, but there is another side to the coin. Those who have decent pots are also disadvantaged. (At least my customers are). Take an OMO or an IVPP. For a straightforward OMO from one provider with a pot of say £100k – commission used to be (say) 1% = £1,000. My fee was invariably less than this. On a nil commission basis it would have taken the annuitant about 13 years to catch up. (In other words the annuity providers were not exactly generous in enhancing the income for no commission). So taking the commission and then rebating the balance to the client from my own chequebook was a satisfactory outcome for all concerned.

    Now the providers don’t even have to pretend to provide better terms for nil commission and the client is out of pocket anyway.
    Fundamentalist thinking from a Taliban regulator?

  9. Don’t forget the saying ‘you can lead a horse to water but you cannot make it drink’.

    Service and customer loyality still mean a lot to a section of this age group.

  10. Good to see the FSA on the ball again, consumers failing to shop around has been an issue for at least 10 years.

    They continue to demonstrate how assertive they are when dealing with institutions “The review is expected to be conducted in two phases, with the first phase focusing on pricing and the second on communication”.

    Just get it done all at once.

  11. This could be resolved at a stroke by stopping the incumbent provider from offerring annuity terms at maturity.

    If the member was simply told, “you have a fund of £50,000 now go and buy an annuity” the ‘open market option’ would be the default.

  12. Hopefully yhey also look at some of the murkier practices in the impaired/enhanced markets

  13. Consumer apathy is often an issue and annuity purchase is a clear example.

    The difference between those providers quoting for such business is stark – then consider providers who offer rates on their existing policies but who aren’t in the market for ‘new’ annuity business – the gap is often ever more eye opening.

    Another issue we’re seeing is where GARs apply whereby pre-RDR commission would have been paid at the point of annuity advice being given whereas we’ve already seen and heard evidence that insurers are not amending the rates to reflect the fact commission has been saved and are effectively absorbing those funds and keeping it themselves. Clearly it’s not surprising, but it does seem a bit off!

  14. Anonymous of 9.34 – “cartel” is a ridiculous assertion. Try working out what YOU would offer a customer. Then look at the assets you would use to back that offer. Julian Stevens did just that c. 6/7 months ago on this site – and came up with an answer similar to the providers.

    Anonymous of 11.34 – two potential issues with this. The first is for the customers being offered a competitive rate by their provider. Not all internal rates are bad. The second is the advice gap. Where do you propose the customers with less than £30k go (where £30k is the widely touted point at which advice becomes financially viable)?

    The providers vested interest in this is much-publicised and well-understood. Less well understood is the impact these “non-commercially advisable” customers will have. What proportion are likely to go via, say…the Hargreaves Lansdowne website…on a non-advised basis…generating a healthy chunk of commission for Mr McPhail et al, at no extra effort?

    This needs more thought than the knee-jerk “everyone OMO = good” solution that seems to be the norm here.

  15. Once again the FSA is playing the soundbites game.

    Fiddling while Rome burns.

  16. Why do we even need phase 1? We all know that woefully few people are aware of their options or where to find help if they are not confident in their understanding or ability to maximise income from their pension.

    It’s not always about advice. It’s about changing peoples thinking which may take generations before OMO is common place.

    I dont like regulators tinkering but just maybe we need these bottom dwellers to pull out, or be pushed out, of certain annuity markets to clear some of the wood from the trees?

  17. It’s the same old story, seen so many times on so many issues with which the FSA is faced. If there’s a straightforward, cost-effective and practical way of addressing something (in this case, just making the OMO the default option) or an alternative that’s long-winded, costly and needlessly complicated (as in a two stage review just to establish what everyone already knows), you can bet your bottom dollar which one the FSA will go for. Is it any wonder the FSA/FCA is set this year to cost the industry £578m? Talk about not being able to see the wood for the trees ~ isn’t it dismal?

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