Out-Law News 3 min. read

FCA steps up financial market competition scrutiny as annuities review reveals eight out of ten non-switchers could get better deal


The Financial Conduct Authority (FCA) is to use its new powers to carry out a competition market study of annuities providers, after its thematic review of the market revealed that few pension savers shopped around for the best deal.

According to the regulator's research, 60% of pension savers buy an annuity from their current pension provider, despite the fact that 80% of those who do not switch could receive a more generous regular retirement income if they bought an annuity from a different provider. It was particularly concerned by the lack of options for those with less than £5,000 saved at retirement, due to the small number of providers offering an annuity.

As part of its market study, the FCA said that it would also conduct further supervisory work on pension provider sales team practices when selling annuities, including the practices of those teams tasked with trying to retain existing customers. It will publish its interim findings in the summer, and follow up with proposed remedies next year.

"The need to get an income in retirement unites us all," said FCA chief executive Martin Wheatley. "But once you've bought an annuity you can't change your mind. For most people getting the right annuity could mean the equivalent of an extra £1,500 in savings - so we need to understand why they aren't shopping around and switching."

"But this isn't true for everybody; our research showed that there is virtually no market whatsoever for people with smaller pension pots. There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers. This is a very significant piece of work for the FCA," 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. Around 420,000 of the policies are sold every year, according to the FCA.

The FCA's research was carried out as part of the first stage of an in depth review into retirement products. Based on information from 25 firms representing 98% of the annuities market by sales volume, it concluded that the average saver with a pension pot of £17,700 would receive an average annual income of £1,030 if they purchased an annuity from their current pension provider. However, that annual income would increase by an average of 6.8%, to £1,101, if the saver shopped around for a better deal. This figure was potentially much higher for one in six savers, and those with severe health conditions, it found.

Analysis of existing research about the challenges consumers face when buying an annuity by the regulator found that despite various efforts to encourage consumers to shop around, there were still significant barriers preventing them from doing so. These included consumers lacking the confidence to switch provider, not fully understanding the decision and simple inertia. The FCA intends to consider the impact of these barriers as part of its competition study, it said.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA's decision to carry out an annuities competition market study was no surprise, given recent media attention and the FCA's own recent drive to step up its competition scrutiny of a range of financial markets.

"The market study will try to understand why individuals don't shop around for an annuity," he said. "The problem is that buying an annuity is a complex process. Individuals only get one crack at the whip: once an annuity is bought, they are stuck with it for life. It is not just a matter of finding the cheapest provider - individuals need to decide the type of annuity, and to assess whether they may qualify for an enhanced rate because of ill-health. Clear communication can go a long way to assist individuals through the maze, but more information does not necessarily solve the problem and can lead to more inertia."

"The FCA has a difficult balancing act: additional regulation could simply increase the cost of annuities; but if individuals continue to make apparently poor choices, the reputation of the pensions industry risks being tarnished. Everyone in the pensions industry wants to see pensions savings increase, so the FCA has to get this right," he said.

The regulator's thematic review 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. All of these sites have already been required to make changes, and the regulator is now consulting on further guidance on financial promotions which outlines what it expects to see from price comparison sites.

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