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
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