Advisers will need to review their sales process ahead of new regulation designed to increase competition in the shrinking annuity market.
The FCA published a policy statement in May last year setting out requirements for firms to tell consumers how much they could gain from shopping around before they buy an annuity. The directive comes into force on 1 March.
Guaranteed annuity quotes will include a comparison to the best market rates available, on a like-for-like basis, providing consent has been given by the client to use their data for such a purpose. This will apply both to advised and non-advised sales.
On the face of it, advisers may think this will have little impact on them, as many already source quotes from across the market.
But there are concerns that, in some cases, the way this legislation has been drafted could lead to a more drawn-out advised process, and additional paperwork.
Retirement Advantage pension technical director Andrew Tully says: “It is clearly a step in the right direction to encourage more shopping around. This directive will help those that don’t currently seek advice and buy an annuity from their ceding provider.
“But, from an adviser’s perspective, there are significant flaws around the design and implementation of the new regulations.” He says most advisers will need to amend their processes in light of this.
In future, if customers do not consent for their data to be used for a comparison, they will simply receive a templated quote urging them to shop around.
More significant is the fact that advisers will be prompted to include details of all protected benefits the retiree is entitled to in order to generate an annuity quote.
This will include details of guaranteed contracted-out benefits, guaranteed annuity rates, guaranteed minimum pension or enhanced tax-free cash.
Development director at whole-of-market annuity portal AMS Retirement Phil Dawson says: “Not many advisers will collect this information at the quoting stage, so processes may need to be amended.”
Dawson says this new directive will also affect advisers who use a panel for their annuity business.
Annuity provider Just’s proposition marketing manager Tony Clark explains: “Advisers who are restricted by a panel may notice their quote is not the highest if a specialist provider that has topped the list isn’t included on their panel.”
In these instances, he says, advisers will need to inform the client that this other rate is available, although not through their business. Clients will be referred to the Money Advice Service for more information.
Tully points out that this legislation potentially creates further problems if there are delays in transferring pension funds. He says many pension providers have improved transfer times, but delays still occur with older DB schemes and closed with-profits pensions.
He says: “It can take several weeks before the funds are received by the chosen annuity provider and the amount is inevitably different to what was originally quoted, so the provider will also have to prepare a final illustration showing the actual income the customer will get.”
The illustration will also need to include a comparison. Given the frequency with which rates change, this may show the chosen rate is no longer the most competitive on the open market.
This is likely to create additional work for advisers: checking the difference and discussing with clients whether to re-broke their package. It also raises the spectre of adviser and client being stuck on an “annuity merry-go-round” chasing but failing to secure the market-leading rate.
However, Dawson says this new regulation will impact annuity providers more than advisers.
The sector has undergone radical change in recent years – before pension freedoms, annuity sales were running at around 350,000 a year, but today, they are just 80,000 a year, according to latest figures from the Association of British Insurers.
Since 2014, eight major providers have pulled out of the open market for annuities – including Prudential, Aegon, Standard Life, Friends Life and LV=, and opinion is split as to whether this additional legislation may exacerbate this trend.
Dawson says: “This is a big change for providers, on top of other industry-wide legislative changes.”
He believes that the extra work involved may encourage more providers to withdraw from the open market, or at least focus on niche “hotspots” where they can provide more competitive deals.
However, Tully doesn’t expect to see more providers quitting this market. “We seem to have a core number of providers, which is still providing competition on rates,” he says.
The annuity market may have shrunk, but advisers still have a vital role to play, according to Better Retirement’s retirement director William Burrows.
He says: “These annuity comparator quotes ignore medial underwriting and only take into account very limited health or lifestyle factors that could mean clients qualify for an enhanced rate.
“Advisers have a vital role to play in helping clients understand the different annuity options, and how a guaranteed income form part of their retirement plans.”