FCA thematic review: consumers are not getting the best value.

The FCA has issued its thematic review into the annuity market, and the overall finding is a high percentage of consumers are not getting the best value when they turn their pension savings into a retirement income.

The main findings of the report are – 

• 80% of customers who buy an annuity from the provider they have saved with (and don’t use the open market) could get a better deal. The average benefit of switching is 6.8%, while one in six people could benefit by more than 10%. For people suffering from some health condition the potential benefit is much higher.
• People with small pension pots are not well served in the current market
• A competition market study is required to assess why more customers don’t shop around. This will include scrutiny of provider retention teams and how they sell business to existing customers. 

A separate consultation will be undertaken around comparison websites where the FCA found, in general, examples of poor practice including unclear disclosure of costs, and misleading information.

While it’s good to see regulatory scrutiny, the main finding that those who stay with their holding provider are likely to get a poor deal isn’t a surprise. It echoes the clear messages we and other commentators have been giving over the past few years. It’s clear the ‘internal’ market is broken, and the simple solution is to get everyone using the external market.

One simple statistic highlights the problems with the internal market. Of the 50% of people who stay with their current pension provider, currently only 6% go on to buy an enhanced annuity. More than 50% of those who use an adviser to shop around get an enhanced annuity, which suggests around 44% of internal customers receive a poor deal. We calculate this equates to £435m ‘lost’ income during the course of an average retirement for people reaching retirement in the three quarters of 2013. And that is, if anything, an underestimate as our calculation uses average annuity rates available in the open market, when in fact many who buy from their holding provider will get rates far below this level.

So what does the FCA propose to do? In essence a large market study which aims to report back within 12 months of launch. All well and good, and hopefully this will lead to some long-term benefits to retirees.

But my view is this doesn’t go far enough, quickly enough. Delaying making any changes for a year and more (the issue of the report is likely to coincide with the next general election which may delay any recommendations being implemented) will leave hundreds of thousands of people who take benefits over the next year no better off.

Although the review puts the spotlight firmly on the issues that need to be addressed, another year or two of customers sleepwalking into retirement is simply not good enough. There are some simple and practical steps we can take now to help those people looking to take benefits from their pensions. This could be done in tandem with the competition market study which will take some time.

At MGM we recently published our ideas for change in this market. Full details can be found here: Retirement Rescue Plan.  Many of these changes could be implemented quickly and simply, helping people retiring now – while the FCA market study is taking place.

For example, HMRC could quickly increase the standalone trivial commutation limit (alongside simplifying the rules) so that anyone with a pension pot of less than £10,000 can simply take their benefits as a lump sum. This would benefit those with small pots – a group of customers the FCA believe are poorly served by the current market.

And to encourage more people to use the ‘external’ market and shop around for the best deal, the FCA (or ABI as an industry-led solution) could introduce a process where a customer buying an annuity from their holding provider would have to sign a disclaimer - clearing stating they understand this action may mean they lose money. But, alongside that, the provider would need to demonstrate this was a suitable purchase – in line with the principles of Treating Customers Fairly. An easy way to push more people to the open market, which FCA believes is generally working well.

The FCA report is another key step forward to making the retirement income market work better for ALL customers. But we need to make sure that help starts now, not in 12 or 15 months time.