FCA publish thematic review of annuities
This morning the Financial Conduct Authority (FCA) released its thematic review of annuities. Michelle Cracknell, The Pensions Advisory Service (TPAS) Chief Executive warmly welcomed the FCA review on "Wake up to Money" on Radio 5 live this morning. Michelle commented:
"Anyone who has a question about the annuity process and is unsure where to start should contact us to talk to one of our pensions experts for free, impartial information, and guidance. The concept of buying an annuity is a big unknown to many people. Many of the people that call our helpline do not understand this part of the process and are confused when they find they need to do something with their pension savings. The current wake up pack is unable to address this gap in understanding. A significant number of people that talk to TPAS about retirement planning and making decisions at retirement had not understood issues such as enhanced and impaired annuities and despite having the relevant conditions, would not have identified themselves under these headings. Failing to understand these choices can leave people 20% worse off. "
The FCA started a thematic review of annuities in January 2013 aiming to:
- assess whether and by how much consumers would be better off buying an annuity from the open market rather than their existing pension provider.
- consider the drivers of provider behaviour, including assessing, at a high level, the profitability expected from their annuity business.
- commission a report reviewing existing research about consumer behaviour and engagement to better understand how this affects shopping around and the choice of annuity.
The review established that shopping around is worthwhile - 8 out of 10 annuitants could have got better annuities (retirement income) if they had shopped around rather than taking what their current provider offered.
As a result of FCA review, the FCA are to carry out a market study of the retirement income market to see if the current competition in this market place is working well for consumers and what can be done to promote competition in this area. They expect to publish a statement of interim findings in summer 2014 with the final report within 12 months from launch. They will engage with market participants, consumer organisations and other interested parties through interviews, surveys, and information requests over the coming months.
The market study will cover all forms of retirement income i.e. annuity, income drawdown, and any other alternative products to see whether there are obstacles to competition working more effectively for consumers in this market. It will look at:
- the behaviour of consumers
- the conduct of firms
- the structural features of the market
The review found good practice on annuity comparison websites (13 reviewed) in the presentation of alternative options to buying an annuity, such as deferring or pension drawdown, and the use of jargon-free language. However, all of the websites reviewed raised concerns with key information and risk warnings often missing or insufficiently prominent. The FCA has now produced guidance for such websites which they believe will make clear their expectations of firms' and improve the level of compliance across the sector, level the playing field for firms and ultimately lead to better consumer outcomes. The proposed guidance sets out what the FCA would expect to see on annuity comparison websites to ensure that they are fair, clear, and not misleading.