As currently drafted, the regulator's proposals on annuity comparisons could actually end up discouraging some people from shopping around - Stephen Lowe explains why
There is so much to like in the latest set of proposals designed to provide comparisons in order encourage retirees to shop around when buying guaranteed income for life. Yet, despite the good intentions, as they stand the plans could still leave consumers worse off and in some cases discourage switching.
Consultation paper CP16/37, Implementing information prompts in the annuity market, follows on from the Retirement Income Market Study published two years ago that found competition was not working well and proposed a number of remedies.
Among these was a proposal for an annuity comparator that would show customers of pension companies how the annuity rates offered by their own providers compared with those available on the open market, which are often much higher.
Behavioural research commissioned by the Financial Conduct Authority (FCA) has been used to develop the proposals it wants to see in place by the start of September this year. This showed that comparators do work to encourage shopping around - and work best when customers are shown a personalised communication detailing the extra annual income they could gain.
The flaw in the FCA's proposals is what it means by ‘personalised'. For many years, comparisons in the retirement income market were dominated by standard annuity rates reflecting little more than the age of the retiree.
Today's market is far more sophisticated, with underwriting able to take into account health and lifestyle factors at modest cost. About two-thirds of those seeking guaranteed income for life solutions will qualify for an enhanced income above the standard rate for their age. To us, you cannot have a personalised communication that does not include a personalised quotation.
In CP16/37, the FCA admits its research shows that, while 80% of consumers could obtain a better deal on the open market, it is those who would qualify for enhanced annuities who have the most to gain. It says: "Consumers who qualify for an enhanced annuity on the open market, but instead purchase a standard annuity from their existing provider, receive significantly lower retirement income as a result."
It then goes on to say, however, that this is not an issue these annuity comparison proposals are intended to solve. Instead, it intends to solve it through other communications, such as ‘wake-up' packs.
While the FCA is not ruling out any underwriting to take into account health and lifestyle and will insist all comparisons are on a like-for-life basis, the proposals require the firm to generate a comparison based on the business model of the firm rather than putting the customer first. If a firm only asks customers their age and pension pot size to generate a quotation, then the comparison generated from the open market will only use these inputs.
To be clear then - that means customers who have some form of medical condition or lifestyle factor, making them eligible to receive a much higher rate, will not see that rate in the comparisons.
Our judgement is that the proposals, as currently drafted, may have the unintended consequence of actually discouraging some people from shopping around when there appears from the comparisons to be little benefit from switching.
It may also expose providers to future complaints from consumers that the ‘best' rate offered was misleading, although it is likely that firms would counter-argue they were simply following the rules laid out by the FCA.
Many of us in the industry are also disappointed the proposals fail to build on the hard work done in recent years developing safeguards for consumers, such as the common quotation form to ensure quotations are tailored to an individual's own circumstances, and the progress made by many firms implementing broking solutions for customers that provide personalised services and access to the open market - even for those with modest pension pots.
To its credit, the FCA is delivering some excellent work in the pensions and retirement income market at a time when consumers are facing more choice and complexity than ever before. Annuity comparisons, improved communications, encouraging take-up of guidance or regulated advice, and the pensions dashboard are all positive steps designed to give consumers better information and support to make informed decisions.
Personalised annuity comparisons that are customer-centric - not business-centric - are a key imperative for this policy proposal and, if implemented, a clear indicator the FCA is working to put the consumer first.
Stephen Lowe is group communications director at Just
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