The Annuity Market: the good, the bad and the ugly

Last month, the FCA published their thematic review of the annuity market. Catheryne Michael looks at the good, the bad, and the ugly parts of the outcome of this report.

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Identifying the annuity crisis

Last month, the FCA published their thematic review of the annuity market. The results were worrying, confirming suspicions that 80% of people are worse off in retirement because they are not shopping around on the open market and switching providers.

The annuity decision is a once-in-a-life-time one; therefore it is critical the regulator steps in to improve it before automatic enrolment kicks in, significantly increasing the number of people saving into a pension.

Nick Poyntz-Wright, Director of long-term savings and pensions at the FCA, noted the importance of taking a closer look at the activities of the providers to ensure they are in keeping with the customers best interest at all times.

“It is important we get this right and we will be working with the industry over the next year, with the aim of ensuring the market works well for those buying an annuity.”

The review proved beyond doubt the scale of the market failure which has led far too many people to receive less that they deserve in retirement.

What the FCA failed to address

The results may seem underwhelming, the FCA have merely scratched the surface and have not yet touched on structural issues that will need to change before the market is fixed. They’ve simply taken a year to tell us what we already knew.

There are some things the report tells us that helps move the argument along; we know 80% of people could do better by shopping around. We also know that 91% of people are aware they can move, but not all know they could get a better deal if they did.

Despite what they do know, 37% of people choose not to shop around.

If everyone knows to shop around but choose not to, should the FCA bother to make sure they do? If the pensions industry wants to rid itself of the rip-off annuity headlines, the answer has to be yes.

The good, the bad and the ugly

In conclusion;

  • The good happens to those who take care to shop around before buying an annuity.
  • The bad describes those who buy direct from their pension provider without checking out alternatives.
  • And the ugly is the FCA’s lack of urgency with fully addressing the crisis.

One would read the report with interest but with very little surprise – retirees that are savvy enough to shop around enjoy the best outcomes. The review instead, highlights the plight of those who buy direct, and in-so-doing miss out on regular income for the rest of their lives.

What does this mean for Grovelands?

The report noted the big incentive for insurers to prevent shopping around, as business sold to existing customers is more profitable.

An investigation into the insurers’ sales and retention practices will form part of a continued year-long review of competition in the annuities market.

Rescuing retirees from poor annuities ought to be the business opportunity of the century, but too many are happy to keep barriers that allow them to serve themselves ahead of their customers.

The regulator is now likely to drag them kicking and screaming into the 21st century; we should prepare for major changes.

The FCA has said it will take immediate action if it uncovers poor sales practices. This needs to include the detriment caused by selling standard annuities to those who qualify for enhanced rates; surely a breach of TCF outcome two, which insists products meet the needs of consumers and are targeted accordingly.

It may be many months before we see any solid proposals. As an industry that relies on reputation and trust, are the FCA happy kicking this can that far down the road? The clock is most certainly ticking.

– Catheryne Michael

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