On 10 December, the Financial Services Consumer Panel published its report into annuities, based on a twelve-month study which included qualitative consumer research, mystery shopping of annuity quotation and purchase websites, and gathering expert views.
The Panel’s consumer research highlights some familiar themes from existing research. Buying an annuity is a one-off, irreversible decision with no learning curve, and people approach this decision with a degree of apprehension. “Shopping around” means different things to different people, and there are barriers to act on the advice to shop around, including the difficulty of understanding how to get quotes, unfamiliar terminology, and lack of understanding of the impact of selecting different types of annuity.
In contrast, the Panel’s mystery shopping research into the world of online annuity quotation services is genuinely new and includes some of the most interesting insights – particularly, that misleading websites claim to offer free advice but only pass on users’ details – this can be confusing for customers and must act as a barrier to shopping around. It also reveals a considerable disparity in how websites disclosed fees and commission, how they explained how many companies are included in their search, and poor conduct, with persistent unsolicited emails and calls.
The Panel made a number of recommendations - so what's our verdict?
- The Panel recommends that the FCA undertakes a rigorous market study to examine “possible exploitative pricing of ‘rollover’ annuities” (where customers stay with their existing provider), and the “distorting impact of embedded and opaque charges and regulatory arbitrage that may well seriously impede informed consumer choice between rollover and OMO providers and between non-advice and professional distribution channels.”
The Panel’s report provides no evidence to back up these assertions. However, the FCA is conducting its thematic review of annuities which is assessing the impact of ‘rollover’ annuities on customers. It should announce its findings soon – we need to see evidence before jumping to conclusions about pricing practices.
Similarly, the Panel recommends that the FCA outlaw exit penalties. But there is no evidence that pension providers impose exit penalties where customers seek to switch to a different annuity provider.
- The Panel recommends that the FCA enshrines a Code of Conduct for the non-advice market in its rulebook.
These rules for non-advice services should include high professional standards, transparent disclosure of charges, and a clear explanation of the implications of non-advice for consumer protection. The Panel’s headline terms for such a Code include adherence to the ABI Code of Conduct which we very much welcome. But we doubt that enshrining a Code for the non-advice market in FCA rules would be the best way forward considering how much the annuity market is changing – we think industry standards would be a better solution as they can be amended more quickly to adapt to market developments. In fact, there are already moves in the adviser community to develop a Code, and we understand PICA’s directory of intermediaries will include commitments for those listed on its website. We would urge the Panel and the FCA to work with the industry on such standards.
We also support the Panel’s call for the FCA to investigate the role of “introducers”, and the need for standards in this area. It is however surprising not to see a specific recommendation for the FCA to investigate websites that claim to offer advice but only sell users’ contact details.
- The Panel recommends that the Money Advice Service (MAS) should fully develop its proposed annuity adviser directory and guidance, and launch a targeted education campaign.
We work closely with both the MAS and the Pensions Advisory Service – we would very much welcome both services playing a bigger role in helping consumers.
- The Panel recommends that Government should consider the rules that stop those with several small pension pots, together worth more than £18,000, from taking their pension as a lump sum.
We agree that the trivial commutation rules should be reconsidered, and an evidence-based policy recommendation will be part of our New Retirement work .
- The Panel recommends a “national default annuities service” meeting best practice standards, with a public obligation service similar to NEST.
It is not entirely clear what the Panel has in mind here, and indeed how it would be paid for. Rather than setting up a new structure, efforts should be focused on ensuring that the existing market for services that help people shop around meets high standards.
- The Panel recommends that employers and trustees establish a non-advice service meeting the Code suggested by the Panel.
We agree that the workplace is a crucial route to supporting people in better understanding their retirement choices. But it is unclear how this recommendation fits with the existing arrangements employers have with advisers or indeed providers running their pension scheme, and with the Pension Regulator’s guidance that employers and trustees should meet the ABI’s Code of Conduct, and appoint an adviser or broker.
Conclusions
As so often in the debate on annuities, there is more heat than light. The media coverage of the Panel’s report focused on the charge that consumers are “exploited” by insurers. It is unfortunate that the conclusion lacking an evidence base attracted the most attention, rather than the more thoughtful recommendations about a greater role for the Money Advice Service, and the role of intermediaries.
We urge the Panel and indeed the FCA to base any policy proposals for the annuity market on evidence and to work with the entire industry. There is widespread agreement that more can be done to improve the retirement decision-making process.
The ABI’s members are committed to ensuring people are able to get the most appropriate product and a competitive rate, as our Code and transparency tables demonstrate. But the pensions industry is only one part of the solution. We therefore welcome that the important role of advisers and non-advice services is now also being considered.