11th December 2014
Many pension providers of not offering good value for money and significant changes need to be made to the way the financial services industry deals with consumers the City watchdog has claimed in a new report.
In its Retirement Income Market Study the Financial Conduct Authority (FCA) said the majority of consumers were losing out better deals by not shopping around for an annuity when they come to retire.
Traditionally the majority of retirees, trade in their nest-egg for an annuity, which provides them with an income for the rest of their life. As such it is ultimately one of the most important decisions a consumer will make in their lifetime as once that decision is made, the consumer is locked into that annuity type and rate for the rest of their lives.
But the FCA’s thematic review found that 60% of consumers were not switching providers when they bought an annuity, despite the fact that around 80% could get a higher income on the open market, many significantly so. For enhanced annuities, usually sold to those with poorer health, the proportion of consumers who could get a better deal rises to 91% found the research.
It said: “We concluded that many consumers were failing to get a good deal at retirement and that further work was needed to identify the root causes of these issues.”
As a result, regulator is recommending that pension providers should be forced to explain to savers how their quote compares with others on the market.
Speaking to the BBC Christopher Woolard, the FCA’s director of policy, risk and research said: “We want the industry to play its part; we want to clean up how people are presented with their options.”
In the longer term, the FCA is recommending the development of a ‘Pensions Dashboard’ which would enable consumers to view all their lifetime pension savings, including their state pension, in one place.
Commenting on the report, Otto Thoresen, director general of the Association of British Insurers, the trade body for pension firms said: “We have always stressed the value of shopping around and the need for consumers to have the right information about their retirement options, which is why the industry introduced the ABI Retirement Choices Code. Providers recognise that in the new pensions world of greater choice more needs to be done to ensure good outcomes for customers. The ABI had urged the FCA to replace our Code and we are therefore pleased the FCA plans to develop the Code into rules that will apply across the entire pensions market.”
Mark Stopard, head of product development at retirement group Partnership believes the establishment of the so-called dashboard would be a very positive move. He said: “Allowing people to view all their pension information together will not only ensure that they can make informed decisions but will also encourage them to take a considered look at all their options at retirement.
“Perhaps – most importantly – it will also facilitate shopping around to ensure that they make the most of their retirement savings. Too often people simply take what is offered by their existing provider as they perceive it to be easier and not overly detrimental to their finances. Today’s announcement will encourage people to engage and achieve the retirement income they deserve by making their pension savings more tangible and visible.”
Tom McPhail, head of pensions research at Hargreaves Lansdown noted that the FCA did not find any evidence of widespread mis-selling of annuities. “There is no smoking gun. In fact they have gone further than that by explicitly endorsing annuities as good value for money, but only if customers shop around on the open market.
“They have however established that competition does not work well in the retirement income market. Significant changes need to be made to the way the pensions industry helps its customers to get the best value from their retirement savings.
From April 2015, in what is the biggest reform of the retirement system in a generation, consumers will be given much greater freedom over how to generate a retirement income from their pension savings. The system will no longer be so heavily biased towards encouraging consumers to swap their pension pot for an annuity.
The FCA said: “The reforms open up a range of choices, especially for those savers with smaller pension pots and those with other sources of retirement income. The Government’s reforms mean that the landscape is on the brink of major change. To support consumers facing increased choice, the Government also announced a guidance guarantee, which entitles everyone with a defined contribution pension to access free, impartial pensions guidance when they retire.”