Annuity comparator: our research

In the context of our wider work on pension freedoms[1] and consumer access to information, we have researched a specific issue in the annuity market. The Retirement Income Market Study[2] (RIMS) identified consumers’ tendency to purchase from their existing provider as an important barrier to competition. This has two principal effects:

• incumbent providers are put under less pressure to offer competitive rates to their existing customers.
• challenger firms find it more difficult to attract the critical mass of business they need to compete.

Shopping around and switching are therefore important, both for competition and consumer outcomes.

RIMS proposed the creation of an ‘annuity comparator’ to improve competition - this would provide targeted information, just before the point of purchase, to help consumers who have decided to purchase an annuity understand the benefits of shopping around. It was important that this remedy was carefully researched. 

We worked with Oxera and the Centre for Experimental Social Sciences (CESS) at Nuffield College, Oxford to test what difference this remedy could make. We have now published the findings from that research in full[3] alongside the Terms of Reference for the Retirement Outcomes Review[4].

Findings

Findings from this experiment suggest some broad lessons for regulation, as well as specific implications for the annuity market. One broad lesson from the research is the importance of what behavioural economists call ‘social comparison’: the idea that consumers assess their options and circumstances relative to their peers. 

For example, one group of participants was told that ‘8 out of 10’ people who buy an annuity from their existing provider miss out on increased income. This general message had a significant impact on shopping around. The results also confirm that ‘information overload’ can quickly undermine the benefits of other features in communications. For example, consumers were no more likely to shop around when the lifetime gains of doing so were added to a personalised comparison of their options.

The research evidences 2 key conclusions for annuity sales:

• The proposed comparator should have a significant impact on shopping around. This conclusion was robust across different (including socio-economic) groups. We have therefore decided to consult on the remedy as proposed in RIMS.
• The testing also showed that a particular, personalised form of the remedy was most effective. Participants were over 3 times more likely to shop around for an annuity when they were shown the difference that it could make to them. We intend to consult on the rule changes necessary for implementation later this year, and welcome feedback in response to this research as a start to that process.

Please contact James Shafe ([email protected]).

Wider work on the consumer journey

It is important to note that the comparator is just one part of a wider programme. Since the introduction of pension freedoms, we have been working with firms to ensure that consumers have access to the information they need to make decisions about their retirement savings. Some steps in the consumer journey are shown below:

Often, consumers begin to consider decumulation options when they receive a ‘wake-up pack’ from their provider. Following a recommendation of the Retirement Income Market Study, we are testing ways to improve the wake-up packs by simplifying and clarifying the information they contain. We will also consider lessons that could be learned for the reminders that customers are sent.

The Financial Advice Market Review[5] (FAMR) was launched in August 2015 to examine how financial advice could work better for consumers. It made a number of recommendations designed to ensure that consumers have access to appropriate financial advice, including on how to use their retirement savings. For example, FAMR recommended the establishment of an Advice Unit within the FCA. This opened on 1 June 2016, and will provide regulatory feedback to firms developing automated models that seek to deliver lower cost advice to consumers.

Guidance and product information

Many consumers will also take guidance. Our supervisory monitoring with Pension Wise Designated Guidance Providers (now MoneyHelper's Pension Wise) is intended to ensure that consumers receive appropriate guidance on their options when they use the service. Our recent supervisory work also considers whether providers are signposting the service to their customers in an appropriate way.

In our Policy Statement PS16/2[6], we suggested amendments to the product information that firms are required to provide customers as a result of pension freedoms. We also encouraged firms to consider our research on smarter communications[7].  At a later stage in the consumer journey, our rules require firms to give appropriate retirement risk warnings to consumers accessing their pension savings. 

The policy intention of the rules is to engage consumers and to help them understand the implications of the decision they are making. Firms must ask the consumer relevant questions, based on how the consumer wants to access their pension savings, to determine whether risk factors are present. If they are, risk warnings must be given.

Shopping around

Finally, shopping around is important to consumer outcomes. We made it clear in PS14/17[8] that the ability to shop around now applies to all retirement options available to a customer, including those introduced by the pension freedoms. Firms should encourage shopping around in its widest sense. The Retirement Outcomes Review will consider how consumers can be encouraged to shop around for products like drawdown, and the information they need to do so.