FSA launches annuity market review

Financial Services Authority to look at whether older people are at a disadvantage for not seeking out competitive products

The Financial Services Authority has launched an investigation into the £11bn-a-year pension annuity market that may prompt action against insurers who are found to be offering uncompetitive rates.

The FSA said it was embarking on a “thematic review” of the annuity market to look at whether older people were losing out by not shopping around for their retirement income, and whether there were providers or groups of consumers where this “detriment” was more likely to occur.

An annuity provides a regular income from the pot of money that a pension plan holder has accumulated over their lifetime. At retirement most people simply take what is offered by their pension provider, with only about 40% going for the “open market option” (OMO). Yet by shopping around for the best annuity, people can typically get 10% to 20% more for their pension pot – rising to 40% or more if the individual has a health problem or “lifestyle issues” that mean they are statistically likely to die sooner than a healthy person.

About 400,000 new pension annuity contracts were sold by insurers and specialist firms in 2011, with the average pot thought to be only £28,000.

In recent years annuity rates have plummeted to all-time lows as a result of improving longevity and falling interest rates. The average annual annuity income for a 65-year-old man has fallen by 56% in less than 20 years, according to figures from financial data provider Moneyfacts.

The FSA said the first phase of the review would look at “the level of detriment consumers suffer from not shopping around, and whether there are firms or particular groups of consumers where this detriment is more likely to occur”.

This will involve a pricing survey of all annuity providers, and will compare the rates available to people through the various channels, including those offered via the open market option and those only available to a company’s existing policyholders.

The second phase will explore whether the way firms offer annuities help or inhibit shopping around.

Tom McPhail, head of pensions research at investment firm Hargreaves Lansdown, said the regulator would be looking not just at the pricing differences between annuity providers, but also the volumes of business they were receiving. This would identify if a provider that was ranked low in the annuity pricing tables was profiting from high volumes of business.

McPhail, who is also chairman of the Pension Income Choice Association lobby group, said the FSA could not force annuity companies – mainly insurers – to increase their rates, as it was not a price regulator. “However, if they find that too many investors are buying annuities with insurers who are not competitive, they will act to address this as a market failure,” he added.

Nick Poyntz-Wright, head of life insurance at the FSA, said: “An annuity purchase is an important one-off decision that has long-term consequences for individuals if they get it wrong. We want to understand the level of the potential detriment for consumers if they do not shop around, to see if there are ways to make this market work better for consumers.”

Earlier this month Moneyfacts said its research had shown that incomes from annuities have fallen in 15 of the past 18 calendar years. The average annual income from a standard annuity for a 65-year-old man fell by 11.5% in 2012, representing the biggest annual fall since 1998, it added.

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