Does the annuity market work for consumers? This is the fundamental question the FCA has been asking during a 12-month thematic review of the market.
The answer is no. People are missing out on (at least) hundreds of millions of pounds in retirement income every year. In fact, the latest analysis from MGM Advantage suggests in the first nine months of 2013 savers could have received an extra £435,809,472 if they had shopped around.
The regulator’s review of the market will, in effect, confirm what we already know – that the behaviour of market participants results in people making poor buying decisions. There is, as an industry expert told me last week, a “smoking gun”.
And as Annuity Direct chairman Alan Higham pointed out on Twitter: “In other news…bears sh*t in woods.”
He’s right, of course – people have been failing to shop around for years and, despite vociferous campaigning from Hargreaves Lansdown head of pensions research Tom McPhail and Pica (among others), little has changed.
The fact the FCA’s conclusions are obvious to those in the industry does not make them any less significant, however.
I would point to the Office of Fair Trading’s review of the defined contribution market last year, which recommended the Government tackle governance in contract-based schemes, legacy charges, small trust-based schemes and active member discounts.
Is any of this new? No. Surprising? Not at all. But the review resulted in the Government proposing a cap in pension charges and a ban on active member discounts. The ABI is also undertaking a review of legacy pensions and has agreed to establish independent governance committees to ensure members of contract-based schemes are getting a good deal.
I expect the FCA’s findings to act as a similar catalyst for change, both for the industry – which too often hides behind regulatory requirements when sending out unreadable retirement ‘wake-up’ packs – and the Treasury, which has done too little for too long to tackle the problems in the annuity market.
Sensible reform ideas are out there, from improving communication at retirement to forcing consistently uncompetitive providers out of the market. Annuity brokers should rightly be subject to greater scrutiny too, with standards brought into line with the advised market.
While none of this will happen immediately, the regulator’s findings could finally light the blue touch paper for meaningful reform of the annuity market.
Tom Selby is deputy head of news at Money Marketing