Annuity comparison sites must make guarantees and providers on restricted panels clearer, says FCA

Out-Law News | 24 Jun 2014 | 10:22 am | 3 min. read

Websites which allow consumers to compare the different types of annuity that they could purchase with their pension savings must make guarantees clearer, and identify which providers are included when a restricted panel is used, the regulator has said.

Publishing the final version of its guidance for operators of annuity comparison websites, the Financial Conduct Authority (FCA) said that it was “clarifying” its views and expectations as a result of feedback to its initial draft. The new guidance follows a regulatory review of 13 annuity comparison sites earlier this year as part of a wider review of the annuities market, which found that some providers’ disclosure of information and risk warnings were not sufficiently clear.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the new guidance would go some way towards ensuring that consumers were better informed.

“Buying an annuity is a complex decision,” he said. “It is particularly important to get it right since consumers cannot usually unwind an annuity once they have bought one. The decision has been made even more complex by the new choices that will be opened up for pension savers over age 55 from April 2015.”

“Pension savers need to appreciate that they won’t be able to get all the information they need from a comparison website. The FCA’s new guidance goes some way towards ensuring that savers are warned of the difficulties in deciding what might be best for them. But the reality is that those savers that can afford it should be seeking independent financial advice,” he said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income. Previously, around 420,000 of the policies were sold every year, according to the FCA. However, the government intends that from next year, savers into defined contribution (DC) pension schemes would have more freedom to access their savings in whatever way that they wish once they reach the age of 55 without necessarily having to purchase an annuity or face heavy tax penalties.

The FCA published the results of its thematic review of the annuities market in February. At the time, it said that it was concerned that few savers shopped around for a better deal despite its research showing that 80% of those who bought an annuity from their existing pension provider could have obtained a more generous retirement income if they bought their annuity elsewhere. It also found evidence of poor practices in use across 13 annuity price comparison websites, such as not making it unavoidably clear that the decision to buy an annuity could not be reversed and a lack of information about associated costs.

According to the regulator, respondents to its consultation on draft financial promotions guidance for these suites were broadly supportive, and welcomed the FCA “making clearer our expectations of what constitutes a fair, clear and not misleading annuity comparison website”. However, it has taken on board feedback from respondents in its final version of the guidance.

Most notably, it has requested that sites highlight that single life annuities provide no further income for surviving partners after the policyholder’s death unless a guarantee is purchased. Comparison sites that operate a restricted panel for either regular and enhanced annuities, which are medically underwritten policies that take into account underlying health conditions or lifestyle factors that affect life expectancy, will be expected to identify the providers actually searched.

The FCA rejected a number of suggested changes to the guidance made by consultation respondents. These included widening the scope of the guidance to cover lead generators and post-sale and governance issues; specifying whether commission and charges should be expressed as a monetary figure or in percentage terms; replacing the term ‘commission’ with ‘non-advised fee’, so that consumers are made aware that the payment comes out of their pension fund; and including additional warnings about the effects of inflation and the need for independent advice.

“We believe that whether to provide this level of detail would be up to the individual firm,” the FCA said.

“Commission and charges should be presented in a way that is fair, clear and not misleading. Consequently, whether they appear as a percentage or monetary figure will depend upon the context and individual circumstances of the consumer in order to be accurate and relevant. So we would leave this decision for firms. Additionally, introducing a new term ‘non-advised fee’ has the potential to cause confusion, with ‘commission’ being the industry standard,” it said.