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Stay of execution: Have providers dodged a bullet on annuity misselling?

Pension providers’ failure to alert customers to the benefits of shopping around have been exposed yet again by the latest FCA investigations into the retirement market.

Insurers have so far escaped regulatory sanctions, despite claims annuity “misselling” has cost savers billions of pounds. The FCA has not, however, ruled out future enforcement on the back of its latest review into providers’ sales practices.

So is the industry guilty of ripping off customers on a massive scale? And if it is, why is the regulator only now addressing a problem which it has been warned about for years?


Insurance companies may have been given a stay of execution for now. But there is growing expectation providers found to have steered customers away from annuities that would have boosted their pensions by thousands of pounds will be hit by fines and left exposed to compensation bills.

Last week, the FCA published an interim report from its retirement income market study and a thematic review into annuities sales practices.

The market study concluded “the right annuity purchased on the open market offers good value for money”, but the thematic review uncovered poor practice, particularly where providers actively discouraged people from taking up enhanced annuity products.

The regulator will investigate post-2008 annuity sales to determine whether there was a “widespread” misselling problem before clamping down on firms.

Speaking to Money Marketing, FCA long-term savings and pensions director Nick Poyntz-Wright says: “We have collected evidence that seems to suggest providers are not meeting the standards we expect.

“But we have to act proportionally and see if there’s a more widespread problem. We have to go through a further stage and if it is, we will take account of the situation and may have to go further.”

Bigger than PPI?

Pensions experts believe insurance companies could eventually be hit with fines and compensation claims running into billions of pounds.

Pensions Institute director David Blake says: “We had pensions misselling in the 1980s, that cost the industry £13bn, and then we had PPI.  How many times will it take before insurance companies realise they can’t continually do this?

“I’m now very much supportive of people claiming they’ve been missold and asking for compensation.”

LEBC divisional director Nick Flynn agrees firms will be forced to pay up down the line.

“The reality is providers will be asked to review annuity sales and correct or compensate,” he says.

“It’s building up very quickly, especially when you start looking at enhanced annuities. I’m sure over 50 per cent of IFAs’ clients now get enhanced rates. Most of the big insurers have only recently started giving enhanced terms to their existing book – in 2008 there were hardly any offering them, now they’re obviously realised they’re going to get in trouble and have started.”

Before the Budget reforms cut the market in half, about 300,000 annuities were sold every year. Of those about 60 per cent were ‘rollover’ deals purchased from existing providers.

A further 80 per cent could have got a higher income by switching provider, according to the regulator’s previous thematic review published in February.

MGM Advantage pensions technical director Andrew Tully says there could be half a million cases where people should have bought an enhanced annuity but did not.

He says: “Potentially we’re talking a lot of cases. About 45 per cent of internal sales are not getting an enhanced annuity when they should do, so we’re talking about 500,000 sales since 2008.

“But it’s not entirely clear where the regulator’s going at the moment. In previous situations they’ve been clear cut and said they are going to take action. It would have been nice to have a roadmap of what they are going to do.”

It is clear the regulator’s plan for reforming the annuity market was blown to pieces by the March Budget.

Speaking to Money Marketing, FCA director of competition Mary Starks says the regulator would have been more interventionist in the “old world”.

She says: “If we were still in the old world where nearly everybody bought an annuity at retirement, we’d be thinking more seriously about the more intrusive remedies – we’d have no reason to think the annuity market would be as big as it ever was.

“But on the brink of the reforms it feels like a slightly odd moment to do something heavy handed just on the annuities market when we don’t really know quite how that market’s going to go.”

Regulating the regulator

Fidelity Worldwide Investment retirement director Alan Higham wants an end to FCA-led reviews, and instead calls for the Treasury to launch an independent investigation into the regulator’s failure to police the market.

He says: “My impression is the regulator is struggling to pin down bad practices against its rulebook. Which rules were broken? When? How?

“For me, it creates a doubt about whether the rules are adequate. But it’s not reasonable to expect the regulator to review itself.

“The Treasury must see that the regulator has taken this as far as it can.”

However, Poyntz-Wright says the idea of a review of the regulator itself is “unrealistic” and defends the FCA’s progress.

“I don’t see there’s a case to answer,” he says. “We are taking action now in spelling out more clearly than ever before what we expect as good practice and what is poor practice.”

The regulator is also proposing to bring the Association of British Insurers’ code of conduct detailing how firms should communicate with customers into its own rulebook, following its finding that insurers are ignoring the code.

TUC pensions policy officer Tim Sharp says this shows the “messy compromise” of self-regulation has failed.

But Poyntz-Wright says the decision to assume greater responsibility for policing insurers’ actions does not necessarily mean the regulator will become more prescriptive.

“We don’t have a regulatory framework in this country where everything is policed to the nth degree and that allows innovation and competition to flourish. That’s something we particularly need in the coming years.”

Providers may take comfort in the regulator’s assurances that it is not planning on intervening any time soon. But when it does act, insurance companies will have to brace themselves – the cost could be astronomical.

Reports in a nutshell

Retirement income market study

  • Proposes to require firms to highlight how their quotes compare with the open market
  • Update “wake-up pack” design
  • Calls for development of a “pensions dashboard” where consumers can see all their pension information in one place

Annuities sales practices

  • Concludes firms are contributing to consumers not shopping around and missing out on higher income
  • Enhanced annuities market is of particular concern
  • To varying degrees, firms will have to review sales since 2008 to see whether people with medical conditions lost out by not buying an enhanced annuity and not using the open market

Expert view


After a two-year probe into the workings of the annuity market it is disappointing to find the review is still not fully complete and further investigations and possibly more consultations are necessary.

The FCA’s latest report does set out details of proposed actions, which at first glance seem eminently sensible. The intention to force firms to publish alternative annuity quotes alongside their own, showing how much more or less the customer could get by shopping around, is an excellent idea.

Scrapping the often lengthy and jargon riddled wake-up packs and their replacement by new, easier to read communications promoting the benefits of shopping around and the securing of better value enhanced annuities has to be welcomed. And in the longer term the development of a “pensions dashboard” is certainly the way forward to show people the value of their total pension wealth including the state pension.

Much less clear, however, is what the FCA can and will do to deal with the poor sales practices and failings from the past, which directly or indirectly have contributed to many thousands of savers receiving less from their pension saving than they could  have done.

Will this be classified as misselling?  Will some or all of those who have lost out since 2008 be entitled to receive compensation? And if so, from whom and on what basis? What will be the impact on annuity providers’ finances and long term viability? Plenty of questions but as yet no definitive answers.

The storm clouds are gathering on all of this, with consumer groups and other external commentators looking to the FCA to act in the best interests of vulnerable consumers. Indeed it could be argued the FCA has contributed to consumer detriment by continuing to procrastinate during a period of what they themselves described back in March 2014 as a “disorderly” annuity market.

The image and reputation of annuities have taken a tumble in recent times and there is a need to restore public confidence in annuities and those who provide them. The eventual outcome of the FCA’s current review could well have a material influencing effect.

Malcolm McLean is senior consultant at Barnett Waddingham


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There are 26 comments at the moment, we would love to hear your opinion too.

  1. YES is my response, having been a victim of poor advice in 2008, for which i am being punished now.

  2. Thanks for making me giggle with that choice of stock photo.

    “Are you telling me I can dodge CMCs?”

    “Neo, I’m telling you that when the time comes, you won’t have to.”

  3. Fines in this case are fatuous. Use the fines for additional compensation. And what about a review into With Profits – that was mooted previously? Insurance companies are not only guilty of ripping off with annuities – they have been ripping off on everything and anything they could get away with for years.
    Look at all those who have failed or been taken over, over the past 20 years or so. Windsor Life, Abbey Life, LAS, Providence Capitol, Manufacturers Life, NPI, Refuge, Scottish Mutual, Target, Royal Life, Lincoln, Laurentian – the list is almost endless. The majority make Arthur Dailey look respectable. Their inheritors are around today.

    Exposure really started with Equitable Life. A company revered by the professional classes who were as gullible as any of the public. Equitable were at last found out to be first class con artists. Now for the others.

  4. Surely if a client buys direct from the provider having been given all the literature from the provider (yes there is a lot of it) and chosen not to take up the OMO then the provider can not be held at fault for this and therefore not be liable to pay any compensation.

    I’d like to think most people at retirement are big enough and daft enough to read the literature they are sent regarding one of the biggest investments they will make and if they choose not to take advice then that is their problem.

    From the literature I have seen sent to clients approaching retirement it has always said “You may get more by utilising your Open Market Option” or words to that effect. Based on this how can the regulator possibly hold the provider responsible if the client chooses to ignore it and purchase an annuity direct with them?

  5. @ Tricky D. If you bought direct from an insurer, you were not advised, you made a purchase. Caveat Emptor.

  6. @Tricky D – Can you elaborate? If you were given poor advice then you should make a complaint to the provider of that advice.

    I have a tendency to agree with Neil Walker, i am yet to see any literature from a provider at the point of retirement that does not state “You may get a higher pension income by shopping around”. This element of the retirement pack is mandated by the FCA. I know of one specific client who visited an adviser to get help filling out the form and when the adviser pointed out he should shop around his reply “I can’t be bothered, just tick the option for me to take what they are offering”. Some people simply can’t be helped.

    Whether the FCA should mandate that inhouse annuities can not be offered unless requested is another question. Personally i believe they should as the principle of ‘buyer beware’ or taking responsibility for you decisions simply doesn’t exist when it comes to pensions or the wider financial services industry.

  7. Not sure why the inertia/apathy of people is the fault of insurers?

  8. Changing contracts after the event when the law of the land at the time of the contract is a slippery slope to anarchy or Oligarchy. We either have the rule of law or we don’t.

  9. Sean

    Because the insurers take advantage of this. Wouldn’t you be a bit miffed if your Mum (who for the sake of example knows nothing about cars) went to buy a new car and the salesman sold he one with pedals instead of an engine?

  10. Unfortunately the public are often their own worst enemy. Thay are provided with the detail, yet apathy and a view that ‘all companies are alike’ means they simply sign the forms from their own pension provider to buy their annuity and ‘bob’s your uncle!

    Not the providers fault in that instance!

  11. @Harry Katz

    Your analogy is flawed. Surely a better one in this case would be that mother dearest goes looking for a BMW but can’t be bothered to look anywhere other than the Skoda dealership.

  12. If caveat emptor has a breaking point it has to be with annuities. With any other purchase, if you make a poor choice, and you aren’t covered by the Sale of Goods Act and the shop won’t replace it, you can at least sell it second-hand and recoup part of the value. With annuities you are stuck. Forever. No other purchasing decision has such a long-lasting and irreversible effect.

    Insurers are making big profits from their customers’ lack of understanding. They have not simply benefitted from consumer apathy, they have gone out of their way to actively conceal the possibility that the consumer may be able to get a better deal. Then, when the regulator attempted to prevent them from doing so, they took the other route of swamping the client with useless information to achieve the same end. This part is fact – the only point of contention is how much they are to blame and how much the consumer. If they end up taking more of the blame than they should, they are going to have to go to the back of a very long queue for my sympathy.

  13. How long will it be until we are satisfied that the Providers have been bashed enough and we move onto the real mis-selling culprits, the Non Advised Brokers?
    I dread to think how many Annuitants have unknowingly surrendered Protected benefits, frightening…

  14. Funny that the original rules said that to offer a pension in the accumulation phase you had to offer an annuity even if it was uncompetitive and now we are talking compulsory OMO (which I agree with). Skandia realised they didn’t want to do annuities early on and so although the rules said they still had to offer one, they also offered L&g as execution only which was a step in the right direction for small pots where the cost of advice on OMO tf would outweigh the benefit to the consumer. Having to offer competitive yourself OR access to a provider who is (not the best, but amongst the best) would have been necessary had the chancellor not ripped up the rules last March as now, for small pots for a basic rate taxpayer taking out of aspersion over 2 or 3 years and investing in a plan tomprovide secure lifetime income which is NON annuity looks like the default for many people.

  15. We have learnt nothing from the banking crisis after all we are allowing insurance companies to get larger and have more control e.g. Aviva and Friends Life merger which will result in less competition in the marketplace.

    We have a regulator that is still reactive to situations rather than proactive and the review of the annuity market is a good example of this.

    For years advisers have been criticising insurance companies for their lack of action on OMO and the total nonexistence of referrals to IFAs.

    We have a regulator who is meant to protect the interest of consumers but in the same breath doesn’t even have as easy to understand website individuals to find a registered adviser.

    Instead the FCA seems to want to work with every organisation it can possibly find that is not regulated in the area of pensions and investments advice e.g. Which, Money Saving Expert, Daily Mail and many more.

    Oh I forgot the reasons why the FCA doesn’t take any action against insurance companies and its vested interests on both annuities and close book is that many of the individuals at the top of the FCA have an eye on a lucrative board or compliance job with the same insurance companies. (Surely not I hear you say, remind me where did Hector Sants go after LIBOR scandal).

  16. Sorry Harry but whilst I agree with a lot of your comments I cant on this one.

    For years people have received paperwork pointing out the open market option but chose to ignore it because they didn’t want to or couldn’t be bothered engaging an IFA as they didn’t feel that the extra ‘income’ was worth the hassle.

    You can take the horse to water but you can’t make it drink!

  17. The FCA need to ensure that any action they take on annuity sales post 2008 is at least broadly consistent with FOS assessments during the same period.

    FOS decisions shape industry practice every bit as much as guidance from the regulator, particularly now that FOS publishes cases.

    If the FCA decide that cases routinely considered compliant by FOS are now considered “mis-selling”, that can only be retrospective regulation.

    Make no mistake, the FCA (and its predecessor) are under the spotlight every bit as much as the providers.

  18. Tricky D – did you take your case to FOS? If so, what was the verdict? If not, why not?

  19. Sean

    Like all of you I have seen this paperwork. Nowadays I’ll admit it is a lot clearer, but I well remember the sort of guff being sent out in the past. It may as well have been written in Serbo Croat.

  20. I’m listening to all that is said…

    But we must remember rules of business are to make a profit, not to say in ones literature ‘Are annuity rates are crap, you are better off going elsewhere’. Secondly these companies have been regulated and advised on the content of their literature by the ‘Powers That Be’. So to that end, if a provider writes to their policy-holders (note I didn’t use the word ‘client’), with all the approved wording and the policyholder decides not to venture in to the market to source a better deal, why should the provider be held responsible, if no advice has been sought?

    Have a great weekend all…

  21. It’s interesting to see all the comments condemning the providers as a whole class as being bad, reprehensible, mendacious, etc.

    Different story when Nic says the same about IFAs, they’re all whiter than white of course…


    Compliance Consultant: Do not try to bend the FCA. That’s impossible. Only try to realise the truth.

    Neo: The truth?

    Compliance Consultant: There is no FCA.

    Neo: There is no FCA.

    Compliance Consultant: Then you’ll see that it is not the FCA that bends, it is only yourself.

  23. I am not condemning the providers (Grey Area), I think the majority have worked within the rules laid down by the Regulator, but unfortunately the Regulator is more often than not 1 step behind. For example, if the Regulator was ‘On the Ball’, would they have allowed PayDay Loans?

  24. @Grey Area

    I see where you are coming from, but I also think that many advisers come from a Life Office background and have difficulty shaking off the programming. I have seen too many examples of life office winding up advisers to do their dirty work.

    I’m afraid that in my opinion that the traditional life office have a great deal to answer.

  25. Have I missed something here? For the last 10 years or more the problem of not shopping around or using the OMO have been known and highlighted extensively in the press and advice community. Where was the regulation and the requirement of pension providers by the FSA to disclose all options notably enhanced annuities? If there was a failure of disclosure there was a failure of regulation and the FCA should not fine life companies and order them to pay compensation. It would pass the buck from regulators who once again have failed to take pro-active measures to ensure full disclosure to policyholders and advise them to seek independent advice. The FSA certainly have not been backward in coming forward to legislate on other disclosures be that on financial adviser status, charges (remember average and maximum commissions on 2005 Menus), hard disclosure of commission in cash terms and own charge illustrations. So why not with annuities?

    A further point to make is that life companies are not responsible for at retirement advice to policyholders. The former have been entrusted primarily to build a retirement fund not provide holistic advice on what to do with that pot. Yes they provide information on options but that is not the same as advice.

  26. “Poyntz-Wright says the idea of a review of the regulator itself is “unrealistic” and defends the FCA’s progress.

    “I don’t see there’s a case to answer,” he says. “We are taking action now in spelling out more clearly than ever before what we expect as good practice and what is poor practice.”

    No case to answer? Why didn’t the FSA mandate OM as the default option a decade ago? Why isn’t the FCA proposing to do that now (even 10 years late would be better than never)? There’s something VERY peculiar about the regulator’s continuing silence on taking such a clear and straightforward step, which would solve at a stroke this perennially festering issue.

    The ONLY information on annuities that providers should be allowed to provide is to draw attention to the availability of possibly advantageous GAR’s. And that would be it. Otherwise, seek advice. A very small number of policyholders might ask if they can buy their annuity with the host provider, to which the answer would be Yes ~ but not without advice.

    WHY won’t the regulator take this step?

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