The annuities market is not working well for consumers, a review by the Financial Conduct Authority (FCA) has found. The FCA will now use its new remit to launch a competition market study to get to the heart of the issue and make recommendations that will have wider implications as to how the market operates.
– Of those who do not switch, eight out of ten people could get a more generous retirement income by shopping around and buying an annuity from a different provider;
– On average the benefit of switching is equivalent to having an extra £1500 saved into a pension just before retirement; and
– This situation is worse for people with small pension pots (less than £5000 saved at retirement) – they have less choice when shopping around as only a handful of providers offer them annuities.
All together this paints a picture of a disorderly market. Martin Wheatley, the FCA's chief executive officer, said:
"The need to get an income in retirement unites us all. 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 £1500 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. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.
"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."
The findings from the FCA's supervisory review are part of the first stage of the FCA's review into retirement products, which will now continue with a competition market study and further supervisory work. The first stage of the supervisory review gathered information from 25 firms representing 98% of the annuities market by sales volume and is the first in-depth and industry-wide study of the annuities market.
An annuity is a financial product that converts pension savings into a fixed income that is paid annually in retirement.
The FCA found that for a pension pot of £17,700 (the average size in this review), buying an annuity from your current pension provider would return an average annual income of £1030. However by shopping around for a better rate and switching provider, that annual income would increase by 6.8%, or £71 to £1101. In fact one in six people could increase their retirement income by more than 10% if they changed provider. For people with severe health conditions the figure is potentially much higher.
Currently, 60% of people buy an annuity from their current provider, with about 420,000 annuity sales every year.
The FCA also reviewed existing research about the challenges consumers face when buying an annuity and concluded that despite the various efforts to encourage consumers to shop around, there are still significant barriers preventing them from doing so. These include: consumers lacking the confidence to switch provider, not fully understanding the decision they need to make, and behavioural biases such as inertia. The FCA will be considering all of these as part of its market study.
The FCA also looked at 13 annuity price comparison websites. These sites compare different annuity rates and allow people to buy one direct from a provider, but there have been concerns about a lack of clarity in the information provided, including underplaying the significance of buying an annuity.
Poor practice was found on all websites and the FCA has already required the firms running these sites to make changes. This means it is already easier and clearer for people to shop around if they choose to buy direct, especially those with smaller pension pots that cannot afford, or do not want to pay for, financial advice.
Building upon the findings of the first stage of the review, the FCA will now undertake:
– A competition market study into retirement income to assess competition and gain an understanding of why consumers do not shop around.
– As part of the competition market study, further supervisory work looking at how pension provider sales teams conduct themselves when selling annuities to existing customers. This will include retention teams who try and keep existing customers.
The FCA has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers.
The FCA's work on annuities touches upon every one of these objectives, making this review of significant strategic importance.
While it has not proposed creating new rules at this stage, as the FCA continues to assess the retirement market it will consider very carefully whether changes to its investment rule book are needed to create a market that treats its customers better.