The Financial Services Authority has launched an investigation into the pension annuity market that may prompt action against insurers who are found to be offering uncompetitive annuity rates. The FSA said it was embarking on a “thematic review” of the annuity market to look at whether people were losing out by not shopping around for their retirement income.
The review is expected to be conducted in two phases.
The first phase will analyse the level of detriment consumers suffer from not shopping around, and whether there are firms or particular groups of consumers where this detriment is more likely to occur. This will involve a pricing survey of all annuity providers, and will compare the rates available to consumers through a range of distribution channels, including rates available through the open market option and those only available to existing pension policyholders.
The second phase will consider whether firms’ processes for providing annuities facilitate or inhibit shopping around. FSA head of life insurance Nick Poyntz-Wright says: “The FCA has set out its vision to make sure markets work well so consumers get a fair deal. An annuity purchase is an important one off decision that has long term consequences for individuals if they get it wrong.
Last year, the National Association of Pension Funds (NAPF) complained that the way annuities are sold by insurance companies might be costing 500,000 retirees each year as much as £1bn in future pension income.
It also pointed out that retirees not utilising the Open Market Option – or being unaware they were able to do so – might reduce their annual pension income by a third.
The insurance industry agreed to reform its practices, and in March this year insurers will have to conform to new guidelines set down by the Association of British Insurers (ABI). These will require insurers to:
- Provide clear and consistent information, including details on how to shop around for an annuity
- Highlight the details of enhanced annuities – the higher pension income available to those with shorter life expectancy
- Signpost customers to external advice and support that is available
- Give a clear picture of how their products fit into the wider annuity market.
However, the FSA is clearly not satisfied that this will go far enough and wants, initially, to estimate how much people are losing in potential income.