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L&G interview: The fixed-term annuity is not a good product for consumers

Legal & General is warning that fixed-term annuities could create a misselling scandal and has hit out at rival providers’ price-matching tactics.

In an interview with Money Marketing, group executive director for protection and annuities John Pollock delivers a withering assessment of fixed-term annuity products, which are currently proving popular with advisers.

The fixed-term annuity market has continued to grow this year as providers look to offer consumers alternatives to conventional annuities.

LV=, MetLife, Just Retirement, Aviva and Primetime Retirement all currently have different versions of fixed-term products.

Pollock (pictured) says the provider has “deep concerns” that fixed-term annuities will be missold to consumers who are unaware of the products’ associated risks.

He says: “The fixed-term annuity is not a good product for consumers. They place a large bet on markets and longevity in a manner that is uncertain.

“While they may get an uplift for a period, and I stress the word ’may’, I do not think the fact they are betting the rest of their life against uncertain conditions is appropriate.

“Conventional annuities represent the lowest-risk way of ensuring the majority of people do not end up in poverty in retirement. We are strong supporters of the conventional annuity market and have deep concerns about fixed-term products.”

Pollock says the provider has raised concerns about fixed-term annuities with the FSA.

He says: “We heard Martin Wheatley talking about early intervention if they have concerns about particular products. We voiced our concerns and it would be up to them to determine whether it is worthy of review. One of the issues is whether or not consumers fully understand the risks they are taking on in a fixed-term annuity. Unless consumers are very aware of those risks and are assessing them from an informed perspective, the product is probably not appropriate for them. It is down to the regulator to determine what action, if any, they want to take.”

Pollock also claims rival providers are using aggressive “price-matching” tactics to encourage advisers to switch to potentially unsuitable savings products.

He says: “We are aware some players have said ’If you, as an adviser, are seeking an annuity for one of your clients and you come up with a price, let us know so we can see whether we can match that price.’

“The issue would be that if they select which customers to price-match on inappropriately, the customers could end up in the wrong type of product.

“It is a concern and in my view life companies have a lot of work to do to ensure the Government, regulators and, most importantly, customers can fully trust our behaviour. Anything that is seen as sharp practice needs to be exposed and stopped.”

One of the key challenges facing L&G this year will be adjusting the way it prices annuities following the Test-Achats ruling.

In March last year, the European Court of Justice ruled gender pricing for insurance products will be banned from December 21, 2012.

The ruling, based on a challenge by Belgian consumer group Test-Achats, followed an opinion from advocate general Juliane Kokott that using gender as a risk factor when pricing insurance is discriminatory.

The decision will affect the way insurers price annuities, life insurance, income protection and critical-illness cover.

Pollock says the industry has yet to make a decision on when to start pricing annuity business on a gender-neutral basis.

He says: “We are fully prepared for Test-Achats. The issue will be about timing and whether to wait until December 21 or move early.

“The market is likely to wait until fairly close to the deadline before offering gender-neutral annuity rates and I think we will end up as a market closer to female pricing.

“As the market grows comfortable with the mixed risks of gender-neutral pricing, we will see some rate improvements emerge in the fullness of time.

“My other expectation is that we will see a far greater percentage of annuities being underwritten individually. These will not be on a gender basis but will make sure the best possible price is offered to consumers.”

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  1. Absolutely priceless. The company who have been mis-selling annuities for years and billions of pounds worth. When the annuity mis-selling bandwagon does finally get rolling L&G will be paying dearly for the millions of annuities they have mis-sold over the last 10 plus years!

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