With the FCA's long-awaited annuity thematic review due to report this week, Carmen Reichman finds out what's on the industry's wishlist
The £12bn annuities market has been bothering both politicians and the regulator for some time.
Sold at a rate of 400,000 each year, annuities are one of the main building blocks of the British pension system. Sales are also expected to double in the coming years as the number of maturing pension plans continues to rise and auto-enrolment comes to fruition.
But there are concerns that the market is too complex and confusing for consumers which, in turn, prevents them from securing the best deal. More than half of retirees simply stick with their pension provider in retirement, rendering competition in the market ineffective, according to studies.
Sounds like the perfect time for some regulatory input. Well, luckily enough, a thematic review of the annuity market has been running the background for many months and is due to report shortly.
It was started by the Financial Services Authority and continued by its successor the Financial Conduct Authority (FCA). The investigation took place in two stages, firstly looking at pricing then considering whether the market actually inhibits shopping around.
Here providers and advisers tell us some simple changes would go a long way towards improving the annuity market.
Zurich principal of government and industry affairs Matt Connell said financial advice was still the best way to ensure retirees get the best outcome from their pensions.
However, he said the regulator should give providers greater freedom to guide customers without facing liability backlashes further down the line. He was adamant that leaving pension saving strategy up to the individual "doesn't work".
Connell said: "From the regulatory point of view this is having a mechanism to get some assurance from the regulator that if [companies] have a proper risk process in place they will not be held accountable when things don't go as planned in hindsight."
Insurers could instead be scrutinised by in-house governance committees, he suggested.
Nick Flynn, longevity divisional director at LEBC group, a Tenet appointed representative, said the FCA needed to bring annuities in line with the requirements of the Retail Distribution Review (RDR).
"It is no wonder so many people simply accept their existing insurer's annuity offer and so few shop around," he said, blaming complexity and hidden commission charges for blighting the market for consumers. "Consumers should be directed to whole of market advisers; limited annuity provider panels and commission payments should be banned and brought in line with the RDR," he added.
But Hargreaves Lansdown head of Pensions Research Tom McPhail said the issue is not about products, it's about the "communication architecture" between the accumulation and decummulation phases.
"The [FCA] needs to focus on the behavioural issues around the open market option," he said.
"Ultimately where they need to get to is to completely redesign their regulations surrounding the customer journey from accumulation into decummulation. The whole emphasis should be around engaging the consumer with the knowledge that they have accumulated a pot of money and they need to convert that into a retirement income."
McPhail added: "We need robust minimum standards for retirement income brokers. That is far more important than trying to redesign the products. The products are actually largely fit for purpose it's the systems around it and the standards of some of the retirement brokers that need addressing."
The FCA isn't the only one with concerns...
In December 2013 the FCA's Financial Services Consumer Panel called for "urgent regulatory and government-led structural reform in order to prevent millions of pensioners from losing out" after it published the findings of its 12-month study into consumer experience of the at-retirement market.
The panel was particularly concerned about the emergence of non-advice services that are "expanding at the expense of the professional advice market" and "appear to be driven by light-touch regulation and higher profit margins, not consumer demand".
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