FCA Annuities Review is bound to find serious failings
by Dr. Ros Altmann
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Annuities scandal must be ended to ensure better value pensions
Annuities are sold as a ‘no-risk’ product, suitable for all but are actually high risk for those who buy unsuitable, irreversible pension income
The FCA must act urgently as Treating Customers Fairly is about more than just ‘shopping around’
Providers must make suitability checks, give risk warnings and fair charges – currently they are not bothering to check and just making good profits
The FCA will be publishing its thematic review of the annuities market on Friday. It is almost impossible to imagine that the review will not find serious failings in annuities and significant damage being caused to customers who buy the wrong annuity, at the wrong time and at a poor rate. I have been highlighting this market’s shortcomings since 1999 and still, 15 years on, the market is failing its customers. Each time the Treasury or FCA looked at annuities, they found failings but left it to the insurance industry to regulate itself and reform its processes.
The Association of British Insurers has continually promised to look after customers better, to ensure that companies selling annuities would make sure everyone understood that they could find a better annuity rate elsewhere and received information that would be in plain English and user-friendly. The latest initiative was the introduction of the ‘ABI Code of Conduct’ but none of the reforms so far has actually achieved the objective of treating all customers fairly. TCF is about far more than just ‘shopping around’ for a higher rate for a standard annuity. Even though the FCA’s TCF rules require that financial providers must not sell products to people which may be unsuitable for those who buy them, insurers do not even ask the most basic questions of their customers before selling an annuity, so how can they possibly know whether the annuity is suitable or not?
There are no suitability checks. The pension company who has looked after your pension fund does not have to ask if you are in good health or poor health, nor whether you have a partner, or are still working – all of which would be vital pieces of information to assess whether a standard single life annuity (the one most commonly offered and bought) is even a suitable product for you. They do not have to check whether you might be able to take all your fund as cash (under helpfully-names ‘trivial commutation’ rules), instead of buying an annuity at all. And the insurer may also be offering a very poor rate for this unsuitable annuity, but there are no controls on the value for money that must be offered and once you have bought it, you can never change it. The extent of market failure is enormous.
Currently, annuities are sold with no controls on charges or value for money. There is no real customer protection at all – even though the product is completely irreversible in most cases. The standard annuity offered is a single life, level annuity, which has no inflation protection and covers only the person buying, not his or her partner. Many companies do not offer annuities that reflect poorer health, yet this could give people much higher pensions that they never find out about. This scandal has lasted long enough. It’s time for the Regulator to act. Every week of delay will see more than 1000 people at risk of locking into the wrong product for life and possibly wasting their pension savings.
10 things the FCA annuities review needs to address:
- Stop providers automatically offering annuities to all those reaching pension age – Reform Conduct of Business Rules
- Introduce standard forms and paperwork that enable customers to understand all their options – including taking all as cash, or doing nothing for now. Make sure the forms are tested on customers to ensure they meet a ‘plain English’ test
- Ensure annuities are no longer sold as a no-risk product that is suitable for all – the Regulator should recognise that buying an annuity is a ‘risky’ decision and customers need warnings to understand all the risks before making this irreversible purchase
- Require providers to treat customers fairly – which means mandatory suitability and know your customer checks which help check annuity suitability – checking for health issues, trivial commutation and whether to cover a partner
- Require providers to highlight the value of independent advice before purchasing an annuity so that customers have someone to help them understand the complexities of this decision
- Cap charges for non-advised annuity selling and require disclosure of costs up front in order to remove current bias against individual financial advice
- Ban commission on the sale of annuities by any party, not just IFAs and do not permit non-advice services to hide their costs until the point or purchase while advertising ‘free’ services
- Ensure annuity companies are obliged to Treat Customers Fairly in terms of value for money relative to other providers – FCA to conduct regular checks on the pricing of annuities
- Encourage alternative approaches to taking income from pension funds to allow more flexibility, rather than committing all funds to a product that may turn out to be wrong
- Introduce controls urgently as delays will mean thousands more making the wrong decisions
Dr. Ros Altmann