Fiona Murphy looks at the implications of an FSA review on shopping around for the annuity market
The Financial Services Authority (FSA) recently confirmed it will investigate how annuities are sold and the detriment consumers are facing.
The thematic review will be in two stages over the course of 2013, and led by the newly-created Financial Conduct Authority from April.
The FSA revealed it will examine how consumers lose out on income by not shopping around and which firms are responsible for disengagement.
Research has found many consumers lose out on thousands of pounds of annuity income by sticking with their pension provider's offer and not searching for the most suitable deal or shape of annuity for their circumstances.
Partnership director of corporate affairs Jim Boyd says: "By not shopping around for the best annuity at retirement Partnership has estimated over the last decade people lost nearly £7bn in retirement income for life."
In its first steps to combat the issue, the regulator will survey annuity rates through a range of distribution channels. This will include rates available through the open market option and those reserved for existing pension policyholders.
The second phase will consider whether firms' sales processes support or discourage shopping around.
The FSA also said it has been in talks with the pensions industry for the past month with annuity experts welcoming the move.
Aviva head of at-retirement marketing Roger Marsden says: "It will encourage customers approaching retirement to shop around with the open market option and provide them with the necessary support and advice at the right cost, so they can get an annuity that provides fair value.
"Choosing an annuity is a once in a lifetime financial decision and customers need to have confidence that they are getting a fair deal for their individual circumstances. "
Who will it affect?
Legal & General head of strategy Timothy Gosden expects the focus will be on companies offering internal rates to existing pension customers.
He says: "I think where the FSA is coming from and we don't know the detail obviously, is there are some insurers who are able to offer their internal pension customers decent rates, access to enhanced annuities and access to advice if they need it. There are other companies who do not do that. They are not competitive in the external annuity market or [maybe] do not operate there at all.
"Their rates are not good and they do not offer enhanced annuities to their customers. They are in a worse position. I think what the FSA is going to do is take a long, hard look at the market because at the end of the day there are a set of people who are disengaged from the process and so no matter what you send them in the post, they do not know what to do.
"The code is going to help in some ways because we can communicate with them, but if they are with a provider that does not offer good rates or enhanced annuities, it is highly likely they will still buy rates from that provider."
While any inducements to shop around are positive, there have been concerns about the overlap between the review and the ABI's code of conduct. This code will change how providers sell annuities from 1 March 2013.
LV= head of annuities and equity release Vanessa Owen says: "Obviously they would have known about the code of conduct. So whether this announcement is a nice little shot across the industry's bow; if you were thinking of not taking this code of conduct seriously".
Just Retirement group director Stephen Lowe warns: "Let's not judge [FSA] results until the code has started to bite and have impact. If they do the review now, they'll tell us what we already know."
L&G's Gosden agrees and says: "We have got to give the code time to bed in."
Owen adds: "Timing wise it is interesting but they do indicate it is going to be quite a long process taking them well into the second half of the year so they will be using some form of measurement to see whether the code of conduct will be having an immediate effect.
"Perhaps by publishing the potential detriment by not shopping around, from a consumer perspective that might be positive in terms of raising the profile of what they are receiving when they approach their provider at the point of retirement."
Arguably the regulator's weight might provide a further layer to ensure the ABI's code is a success.
Annuity Direct chairman Alan Higham says: "I do not know whether to read anything into the timing other than it shows policymakers are not taking anything for granted that the ABI code of conduct will solve the problem. I do not want to denigrate the efforts of the ABI but I do not think it will make a massive difference.
"Communication to policyholders is long winded and complex. The ABI has said you cannot send out application forms. If you ring up the provider for an application form, they are not going to give you access to independent advice, all they are going to do is give you help on purchasing an internal annuity. Consumer research shows the existing insurer is where most people turn to for help anyway."
Higham believes without succinct communications and minimum standards on annuity advice, the situation will stay the same.
Another concern is the FSA's blinkered focus on rates and prices. As Billy Burrows, director at the Better Retirement Group, says, in the annuity market getting the best rate is just the "tip of the iceberg".
Burrows adds: "Annuity rates are at their lowest levels ever. I do not have a problem with those people with small pots being told a very simple message but that message is a bit too simplistic for people who have above average-sized pensions.
"When we look at customer detriment, getting the best annuity is the tip of the iceberg. If they'd shopped around, they would have had more flexibility."
"There is potential for customer detriment, part of the problem is in many cases, the cost of shopping around outweighs the exercise."
Securing the right shape of annuity is equally as important as getting a good rate. While at face value people may feel they are getting good value for money, if they fail to provide for a spouse, omit health related enhancements or options such as escalation, they will lose out down the line.
Will it go far enough?
With all these issues in mind, it is feared that the FSA's investigation will not go far enough in its focus.
Andrew Tully, pensions technical director at MGM Advantage, says: "It is disappointing that this review does not include members of trust-based pension schemes. It is crucial everyone approaching retirement is encouraged to shop around for the best deal, and take advice, not just those customers in personal arrangements."
No matter what the regulator's intentions, additional scrutiny on the annuity market to help consumers reach the best outcomes in retirement will undoubtedly be a good thing.
However, let's hope the FSA sharpens its focus to understand the market, look at the shape of annuities and gives providers time to adapt to the code before they pronounce their judgements.
The Aviva Investors Multi-asset Funds (MAF) target equity risk rather than absolute volatility. Thomas Wells, Multi-asset Fund Manager, explains that while absolute volatility varies significantly over time, the inherent risk of investing in equities remains relatively constant.
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