In February 2014 the FCA found that the annuities market was not working well for most consumers and launched a market study to look at the entire retirement income market. As a result of the new pension freedoms announced in the 2014 budget, the scope of the market study was changed to look at how the market might develop, as well as gathering evidence on how it works today. A separate piece of work was undertaken to look at annuity sales practices.
The market study confirms that competition is not working as well as it could for consumers, with many continuing to miss out on a higher income by not shopping around. However, FCA analysis suggests that for people with average-sized pension pots and low risk appetite, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies.
The Government’s reforms increase the at-retirement choices facing consumers, so it is vital that consumers are properly supported in making their decisions. The Guidance Guarantee will perform an important role, but firms’ own communications with their customers will remain of central importance, and the FCA has made a series of recommendations to improve the way firms communicate with customers about their options.
Christopher Woolard, director of policy, risk and research at the FCA said:
“The Budget reforms are a game changer for the retirement income market. People will be given more choice and many will want some support to ensure they make the right decisions for them.
“The Government’s new Guidance Guarantee, with the standards we have already proposed is a vital part of this, now firms need to play their part.”
“We want to see firms improving the way they communicate with their customers. In order for the pension reforms to work and for people to have trust and confidence in the products they are buying firms need to act now.”
The FCA has identified future risks and has set out what they will be looking for as the market develops. The FCA’s principal recommendations are:
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Requiring firms to make it clear to consumers how their quote compares relative to other providers on the open market.
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The introduction of a behaviourally trialled alternative to the current system of wake-up packs. This would build on work already underway and feed into our work considering how we will replace the ABI Code with FCA regulation.
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Recommending that the pension guidance service and firms take account of the findings of the market study on consumer behaviour when designing tools to support decision-making.
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In the longer term, recommending the development of a ‘Pensions Dashboard’ which would allow consumers to view all their lifetime pension savings in one place.
The FCA is seeking views on its initial findings and will consult at a later date if any potential rule changes are needed.
At the same time as carrying out the market study the FCA also conducted a review of annuity sales practices. The review found evidence indicating that firms‘ sales practices are contributing to consumers not shopping around and switching, and significant improvements are required now.
The FCA identified particular areas of concern in relation to enhanced annuities, where customers are often not informed of shopping around or encouraged to do so to get a higher income and where some firms are failing to tell customers other providers may offer enhanced annuities for medical conditions that they do not underwrite.
The FCA is asking the majority of firms involved in the review to do further work under FCA supervision. This work is to determine if the findings in relation to enhanced annuities are indicative of a more widespread problem. This will cover the period since the Financial Services Authority’s previous thematic work on Open Market Options in 2008. At this stage, this will be a sample of relevant sales since May 2008 rather than a full review and will involve individual firms gathering more evidence to determine whether customers with certain medical conditions or lifestyle factors missed out on a higher retirement income. Following this work the FCA will take a decision on whether further action is needed.
The FCA also found examples where the ABI Code is not being applied in practice. The ABI Code is compulsory for ABI members, and sets the industry’s own benchmark for members about communicating key information to consumers clearly and consistently.
Following discussions with the ABI, the FCA has decided to consult on its rules to replace the ABI code, which would cover all firms, not just ABI members. During any transitional period, the ABI code will remain in force for its members.
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