The FCA is launching a competition study into the annuities market after its thematic review found eight out of 10 people could get a bigger income by shopping around.
A final market study report will be published within 12 months outlining proposed remedies that could include rule changes designed to stimulate competition in the market or to constrain the behaviour of firms.
Critics have attacked the pace of the review, arguing the current findings reflect findings of other research that has been carried out in the area in previous years. They argue another year’s wait before action will mean the majority of the 420,000 people who retire by then will get the wrong annuity.
The FCA’s review of the annuity market found an average pot of £18,000, but they could have got income equivalent to an extra £1,500 in their pot by shopping around. Four fifths of consumers who bought their annuity from their existing provider would have been better off if they had shopped around and switched provider.
The research, which did not look at enhanced rates but instead focused on rates that were not medically underwritten, found that only 20 per cent of customers purchasing their annuity from their existing provider got the best deal, with 32 per cent losing out by 5 per cent, 32 per cent losing up to 10 per cent, 11 per cent using up to 15 per cent and 5 per cent losing out by up to 20 per cent. A further 1 per cent could have got a non-enhanced annuity more than 20 per cent higher than the one they got off their home provider.
But the review found that there was no differential pricing by providers between the rates they offered their existing pension clients and those available on the open market.
The FCA also found there was no real market for small funds of under £5,000, with only three providers operating in this space.
The report found annuity business transacted to existing pension clients is considerably more profitable than business sold through the open market option. This raised concerns at the regulator that providers might prevent switching to increase their profitability. While it had no evidence to date of rules being broken, it will investigate further in this area.
The FCA review was also critical of annuity comparison sites, which it says are used by 6 per cent of annuity purchasers. It found problems in all 13 of the sites it reviewed, with one found to have failed to meet its requirement to be ‘fair, clear and not misleading’.
The regulator will now issue financial promotions guidance for consultation setting out the improvements it wants to see from websites.
It will publish an interim report from the market study in the summer and a final report with recommendations within 12 months.
CA chief executive Martin Wheatley says: “For most people getting the right annuity could mean the equivalent of an extra £1500 in savings – so we need to understand why they aren’t shopping around and switching.
“But this isn’t true for everybody; our research showed that there is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.
“There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers. This is a very significant piece of work for the FCA.”
Pensions campaigner Ros Altmann says: “The FCA’s Thematic Review of Annuities is certainly welcome. Its findings that the market is not working well are hardly a surprise, given the extent of media coverage in recent months and years but it is encouraging that many of the problems are finally receiving regulatory attention.
“Just launching another review leaves more customers at risk. The FCA has powers to protect consumers properly, but it is launching another review rather than acting immediately. The reason why immediate action is so important is that this market affects so many people and the transactions they are making are irreversible. More than 1000 people every week are buying annuities and the market is worth £14billion each year.
“The Report seems to suggest that the lack of engagement with the open market option is a failing of customers, rather than a failure of the sales process and the market itself. The Report suggests that customers ‘lack confidence’ to switch to a new provider, that they do not ‘fully understand’ the decisions they need to make and that they suffer from inertia. In reality, however, insurance companies often make it impenetrably difficult to move to another company.”