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.
Further information on the review
The FCA is now conducting a Competition Market Study. As part of this it will do further supervisory work looking at how firms behave and treat their customers when selling an annuity.
Interim findings will be published in the summer of 2014. This will cover the FCA’s provisional assessment of competition and include ‘theories of harm’, as well as results from the FCA’s review of sales practices.
Within 12 months the FCA will publish the final competition market study report, outlining proposed remedies. Depending on the findings of the Competition Market Study, the remedies could include rule changes designed to stimulate competition in the market or to constrain the behaviour of certain firms.
Longer term, the Competition Market Study will give the FCA a better understanding of possible future developments in decumulation and retirement income more generally. The FCA wants to ensure that retirement income market can evolve to meet the changing demands of consumers.
More detail on the review of shopping around and profitability
The FCA’s review was set up to assess the difference in income provided by sticking with a current provider when buying an annuity, or switching and buying one from somebody else. It covered 25 firms that represent 98 per cent of the annuity market by volume of sales in 2012.
The findings are conclusive: shopping around and switching gets a better deal far more often than not, particularly for people purchasing an enhanced annuity. In fact, on average, 80 per cent of consumers who buy their annuity from their existing pension provider will be able to get a better deal. This breaks down as follows:
NB – These are indicative estimates calculated using a simplified model and representative hypothetical consumer profiles.
For standard annuitants
(i.e. those with no medical conditions)
For enhanced annuitants
(i.e. those with a medical condition)
|Average fund size - £17,000||Average fund size - £26,800|
|Average annual income achieved by sticking with existing provider - £1000||Average annual income achieved by sticking with existing provider - £1630|
|79% could be better off by an average of £67 a year by switching - a 6.7% increase||91% could be better off by an average of £135 a year by switching - a 8.3% increase|
|That’s the equivalent of £1429 extra in their pension pot just before they retire||That’s the equivalent of £2428 extra in their pension pot just before they retire|
|A very small number (less than 1 in 100 people) could increase their annual pension income by as much as £200||A very small number (less than 3 in 100 people) could even increase their annual pension income by as much as £290 (some with very severe health conditions may be able to increase their income even more)|
The low levels of switching - despite the clear benefit in doing so - and lack of options for people with smaller pots are both key factors in the FCA commissioning a market study.
The FCA also looked at the expected profits annuity providers can make between annuities sold on the open market and those sold to existing customers. The results show that all annuities sold to existing customers are expected to be more profitable than those sold on the open market.
The FCA believes there is a risk that providers may unfairly try to retain existing customers to maximise profits, so it will explore this in greater details in the next market study.
More detail on the review of annuity comparison sites
During the course of 2013 the FCA reviewed 13 annuity price comparison websites. These are websites that allow people to buy an annuity direct, which can save money by foregoing professional financial advice, but puts the responsibility of buying the right product squarely onto the shoulders of the consumer.
Industry estimates suggest that 6% percent of people buying an annuity visit one of these sites.
Given the significance of buying an annuity, the FCA expected these websites to make it unavoidably clear that the decision to buy an annuity cannot be reversed. The FCA also wanted to see that information about the services offered by firms was clear, and any associated costs were prominently disclosed, and that these websites were not inadvertently giving financial advice by giving recommendations. All of the sites raised concerns and all but one were giving information that FCA believes was not fair or clear, and was misleading.
Since concluding its review the FCA has been helping firms improve their offering so many consumers using these websites will already be receiving a better service. The FCA expects all other firms that offer an annuity comparison service to consider the findings and make changes where necessary.
To help, the FCA has published some proposed guidance on financial promotions which makes clear the improvements it wants to see across the board. The guidance consultation is open until 14 March 2014
 Association of British Insurers, 2012
 ‘Theories of harm’ are theories about what might be impairing the efficient operation of a market.
Notes for editors
- Approximately 420,000 annuities are sold a year (ABI 2012), the FCA’s review breaks this down as follows:
- 168,000 sold internally to existing customer
- 24,000 sold through a tied arrangement with a provider
- 134,000 sold through the open market
- Out of scope of our review:
- 54,000 guaranteed rate annuities
- 19,000 escalating annuities
- 19,000 investment linked annuities
- 31 firms sell pension annuities (25 of which were included in our review)
- NB - the FCA’s review shows an average pension pot used to buy an annuity from an existing pension provider was £18,000. This compares to the overall average across the market of £27,000 (ABI 2012).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it 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.
- Find out more information about the FCA.