Last Thursday, the UK’s Financial Services Authority (FSA), launched an investigation into the £11 billion UK annuity market amid allegations that British pensioners are not getting a competitive deal from the insurance industry. The FSA’s investigation is credit negative for UK annuity writers because it will likely put negative pressure on their annuity margins.
The FSA’s probe is examining the level of harm that consumers may suffer from not shopping around when purchasing an annuity. Currently, most pensioners buy their annuity from their “host” pension provider, despite the years-long existence of a so-called “open market option” (OMO) that allows them to shop around for the best rate before buying an annuity. In addition, many customers who qualify for an enhanced annuity, which pays a higher income per annum to people with shorter life expectancy as a result of poor health, buy conventional annuities, thereby missing out on higher income during retirement.
This probe will put pressure on the margins of UK annuity writers, particularly for those insurers that are the least competitive in terms of pricing. Currently, there is a difference of up to 20% between the best and worst annuity rates. In addition, those insurers currently relying mostly on the roll-over of their existing customers’ pensions funds into annuities are more at risk since their customers will be more likely to buy annuities elsewhere in the future. However, enhanced annuity writers, which are currently around 50% of the open market sales, stand to benefit from any growth of the OMO and from pensioners switching from conventional annuities to enhanced ones.
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