'Urgent' regulatory change needed in annuity market
A leading consumer group is demanding urgent regulatory and government-led reform of the annuity market to "prevent millions of pensioners from losing out".
Following a year-long study into the consumer experience of purchasing an annuity, the Financial Services Consumer Panel (FSCP) said the market does not work well for "the majority of consumers".
It also said the regulator has been "extremely weak" in its work policing some areas of the annuity market, particularly the so-called rollover market, where defined contribution providers also sell an annuity to customers.
The FSCP uncovered evidence of a complex market which it said is failing to deliver good outcomes. In particular, it is worried that people buying annuities without advice are unaware that by doing so they forfeit the right to valuable consumer protection services, such as recourse to the Financial Ombudsman Service should things go wrong.
It is now urging the Financial Conduct Authority (FCA) to:
- Introduce a regulated code of conduct for companies that sell annuities direct to consumers (also known as the non-advice market). This Code should emphasise the need for high professional standards, the transparent disclosure of charges, and a clear explanation of the implications of non-advice for consumer protection.
- Address the causes of why the market for people buying annuities without advice is growing faster than the professional advice market.
- Undertake a "rigorous market study" to examine whether providers of defined contribution pensions are exploiting their customers by offering poor-paying annuities in order to bank "excessive" profits.
- Strengthen the definition of the Open Market Option. Defined contribution pension savers do not have to accept the annuity offered by their pension provider, they are allowed to check rates across the whole annuity market and choose an alternative – this is the open market option.
Urgent reform needed
Sue Lewis, chair of the FSCP, said: "400,000 annuities are sold each year; this will increase significantly as those who have been auto-enrolled into pension savings reach retirement age. The Open Market Option has been around for a long time, but still isn't working for many people, who are getting less income in retirement than they could.
"We are seeing a shift towards purchasing annuities via 'non-advice' routes, which means reduced consumer protection if things go wrong. The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand.
"We urgently need to reform this market, particularly for those with smaller pension pots, who usually can't get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward".
The FSCP said it would like the Money Advice Service to develop an annuity adviser website and require member firms to adhere to the code of conduct. It also said the government should require employees and trustees to establish a non-advice service for members of workplace schemes, and ensure this adheres to the code of conduct.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "It is absolutely vital that shopping around at retirement, both for the right kind of retirement income and then for the best rate, should be the default for
"As the report identifies, much of the market innovation is led by intermediaries offering non-advised solutions and so it is vital they deliver good results for their customers. By giving them access to good quality shopping around services, the industry can show that it is putting customers’ interests first."
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.