The annuity market does not work well for the majority of retirees according to the findings of research into the consumer experience of purchasing an annuity, published by the Financial Services Consumer Panel.
In its report, the panel recommends urgent regulatory and government-led structural reform in order to prevent millions of pensioners from losing out.
The panel’s main recommendations are for the government, the Financial Conduct Authority (FCA) and the Money Advice Service (MAS).
It recommends the government should:
- Require employees and trustees to establish a non-advice service for members of workplace pension schemes, and ensure this adheres to the Association of British Insurers’ (ABI) code of conduct.
It recommends that the FCA should:
- Embody in regulatory rules and mandatory standards the equivalent of a code of conduct for the non-advice market, which emphasises the need for high professional standards, the transparent disclosure of charges and a clear explanation of the implications of non-advice for consumer protection.
- Address the causes, including light-touch regulation and non-transparency of commission, of the current regulatory arbitrage in which non-advice services are expanding at the expense of the professional advice market.
- Undertake a rigorous market study to examine, among other things, the possible exploitative pricing of annuities sold by insurance providers to their defined contribution customers who have saved with them for a pension.
- Strengthen the definition of the open market option.
It recommends that the MAS should:
- Develop an annuity adviser website and require member firms to adhere to the code of conduct.
Sue Lewis, chair of the Financal Services Consumer Panel, said: “Four hundred thousand annuities are sold each year. This will increase significantly as those who have been auto-enrolled into pension savings reach retirement age.
“The open market option has been around for a long time, but still isn’t working for many people, who are getting less income in retirement than they could.
“We are seeing a shift towards purchasing annuities via non-advice routes, which means reduced consumer protection if things go wrong. The increase in non-advice sales appears to be driven by light-touch regulation and higher profit margins, not consumer demand.
“We urgently need to reform this market, particularly for those with smaller pension pots, who usually can’t get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward.”