The Financial Conduct Authority (FCA) is to introduce remedies designed to support choice in the retirement market in light of the forthcoming pension reforms.
Its final Retirement income market study proposes five remedies for employees with defined contribution (DC) pension pots to help make competition work for those looking at drawdown and annuity products.
As part of its findings, the FCA will require pension providers to replace wake-up packs and the Association of British Insurers’ code with an obligation to offer an annuity quote comparison.
In the longer-term, it will also force the creation of pension dashboards for employees to see all of their pension pots in one place.
In December 2014, as part of its study, the FCA found that a failure by many to shop around or switch providers to get the best annuity deal proves that competition in the retirement market is not working as well as it could be.
Its final report findings included:
- Consumers are missing out by not shopping around for an annuity and switching providers, and some do not purchase the best annuity for their circumstances.
- Consumers are deterred from engaging with their options by the length and complexity of wake-up packs, or because they do not believe the sums involved make shopping around worthwhile
- Consumers’ tendency to buy products from their existing provider weakens competitive discipline on incumbent firms and makes it harder for challenger firms to attract a critical mass of customers
- Consumers are highly sensitive about how options are presented to them. Savers reaching retirement will face a landscape that is more complex and will need support in making the right choices.
The remedies from its findings are designed to support choice in the market. These include:
- Requiring firms to provide an annuity quotation ranking so that consumers can easily identify if they could be getting a better deal by shopping around.
- Redesigning and behaviourally trialling the information that consumers receive from their providers, such as wake-up packs, in the run up to their retirement.
- In the longer term, creating a pensions dashboard which will allow consumers to see all their pension pots in one place.
In addition, the FCA wants to see firms framing the options available to help employees make good decisions, rather than to drive sales of certain products.
It will also be monitoring the market and tracking outcomes, as well as the take-up of the government’s Pension Wise service.
Its work on annuity comparisons and the replacement of wake-up packs will take place as part of the FCA’s wider review of its rules in the pension and retirement area in summer 2015.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “Shopping around is the key; the best way to ensure an investor gets a good retirement income is and always has been to give them easy access to a competitive marketplace, together with the supporting information necessary to enable them to make good decisions.
“The FCA’s proposed remedies will take important steps towards this goal, however there is still more work to be done.”
Malcolm McLean, senior consultant at Barnett Waddingham, added: “Most disappointing of all is the pace at which change in a market so clearly in need of change is drifting along.
“The FCA plans to consider all this further and to run another customer survey as part of a wider review of its rules in the pension and retirement area later in the summer.
“It will probably be another year at least before the remedies kick in, making it eight years since the regulatory probe of the market began.”