The Financial Services Consumer Panel has published a report into the current state of the UK retail annuity market. It is not a glamorous document, it examines the way the market is working and concludes it it not working very well.
There is criticism of those insuers who still operate “rollover” annuities – the practice described by one commentator as the “seal clubbing of gullible consumers”.
But the report is at its best in exposign what can best be described as “back-street annuity brokers” . Those offering a “non-advised” service.
The report is very valuable, not least because of its annex which outlines a possible code of conduct for non-advised services which could be into incorporated into FCA rules.
The proposals suggest the (non-advised) firm:
Adheres to the ABI code of conduct
• Has the facility to offer full (fee-based, regulated) as well as non-advice (commission based)
• Sets out the service choice clearly on the web home page, including:
• A ban on the use of the term “free”
• The difference between a fee-based service, where commission is rebated to the fund, and a commission-based service, where commission is deducted from the fund and is accommodated in the rate.
• Clear comparisons between fees and commissions relative to the pot size
• The difference in adviser and consumer responsibility:
• Fee based: the adviser is responsible for the sale and the customer has recourse to the FOS if it proves to be the wrong recommendation
• Commission-based: the customer is responsible and cannot complain to the FOS.
The (non advised) service :
Whole of market
• All pot sizes accepted (with a caveat to allow commutation of very small pots)
• Deep underwriting for enhanced terms
• Skilled practitioners available to deal with queries
• Effective checks for:
• Pension contract terms – for example, a guaranteed annuity rate, an exit penalty, a forthcoming with-profits bonus.
• Choice of features to ensure customers are making an informed decision, about, for example, single versus joint life; level versus inflation-linked.
• No unsolicited emails, letters or telephone calls
• Clear information on non-annuity options
These measures will not solve the long-term problems with annuitisation; we need to have a new way to decumulate. Indeed, this report shows just how complicated the annuity market has become and how confused the consumer is about his or her options.
These measures do however give a short-term fix which will staunch the bleeding and do something immediately.
At the heart of the report, is a recognition that RDR has not solved the problem, it has simply created a two tier market. Those who want to take advice can do so , get greater protection from Regulation and will most likely get a good service. Those who choose to go the non-advised route may get anything from something that conforms to best practice (see above) to an offshore boiler-room.
Many will argue that all annuities should be purchased on an advised basis. But this is surely wrong. There must be a place where the consumer can expect to get a reasonable (if not perfect) service from a reputable source. The report suggests that there should be a Government service (akin to NEST) that is a default for the hundreds of thousands of annuitants for whom the full advisory process is not affordable.
I thoroughly support this recommendation, not least because it offers employers a sensible solution to what will increasingly become their problem. The abolition of the normal retirement age, the increasing proportion of retirement savings tied up in DC and the advent of auto-enrolment mean that almost everyone retiring from the private sector (and most people in the public sector) will have to take critical financial decision effecting the second halves of their lives.
Employers need to have the confidence to choose and this means having decent choices. The Red Tractor, the Corgi and the BSI kitemark give confidence to consumers but the FCA (FSA previously) is allowing annuities to be sold by a variety of introducers and brokers (on and offline) many of whom appear to offer little more than a search engine and a pay wall.
The report makes it clear that the consumer is not well placed to find value, even his or her employer may struggle to find value and it is a timely wake up call to the Regulator. The OFT did not have annuity purchase in its scope and we are going to have to wait till Mid 2014 for the publication of the FCA thematic review.
Meanwhile, around 40,000 people a month are having to consider purchasing an annuity.
Let’s hope that the FCA take action and adopt the excellent suggestions in this report without delay. Give the non-advisory brokers a kitemark if they fall under this code and we may at least have a short-term fix.
In the meantime, let’s continue to work on the DWP to provide a legislative framework that allows people the option to decumulate without having to go through this dire process!