In light of recent press interest and the current concern of an increasing aging population, annuities, which are a financial product that convert pension savings into a fixed income that is paid annually in retirement, have been given much more attention.
As a result, the FCA has published Thematic Review 14/2: Thematic Review of Annuities (TR14/2) which sets out the findings of its thematic review into annuities. The data the FCA analysed in the review covered approximately 330,000 annuity sales in 2012. This represents around 78% of all annuity sales.
In TR14/2, the FCA states that it is concerned that too many customers purchase an annuity from their existing pension provider without considering what would be available to them on the open market. In 2012, around 60% of annuities were purchased from customers’ existing pension providers or through a third party arrangement. The FCA also found that 80% of consumers who purchase their annuity from their existing provider could get a better deal on the open market.
The FCA has also published Guidance Consultation 14/1: Annuity Comparison Websites – Financial promotions review and guidance for firms (GC14/1). GC14/1 follows an FCA review of 13 annuity comparison websites in which it assessed whether they were fair, clear and not misleading in accordance with its rules.
The FCA found good practice in the presentation of alternative options to buying an annuity, such as deferring or pension drawdown, and the use of jargon-free language. However, it also found a number of issues that were of concern. In particular, the FCA found that:
- key information and risk warnings were missing or were not prominent; and
- most information on the websites did not satisfy the requirement to be fair, clear and not misleading.
In chapter 2 of GC14/1, the FCA makes the point that firms with annuity comparison websites must ensure that the information on their websites is fair, clear and not misleading under the rules of COBS 4 and its Principles for Businesses. The FCA also states that this includes sufficient information and warnings (where relevant) on their websites in relation to a number of issues that it lists out including:
- that the decision to purchase an annuity is usually final and cannot be changed;
- that the annuity options indicated on the website may not include all the annuity options available on the market; and
- whether the service provided by the firm is advised or non-advised and the relevant implications.
Market study to examine retirement income
Following on from this, the FCA notes that it would be prudent to carry out a market study into retirement income. This market study will examine:
- products purchased by UK individual consumers using funds from their accumulated pension pot that provide a retirement income during retirement;
- customer behaviour and the types of difficulties consumers face when attempting to draw from an accumulated pension pot;
- the conduct of the annuity provider in terms of how they treat their customers;
- the structure of the market overall, especially the distribution of the relevant products; and
- the impact of advised/non-advised sales on different types of consumer.
The FCA invites comments on the issues being considered in the market study by 14 March 2014. It expects to publish a statement of its preliminary findings in summer 2014 and to publish its final report within a year.
View Thematic Review 14/2: Thematic review of annuities, 14 February 2014
View Pension annuities: a review of consumer behaviour – a report prepared for the Financial Conduct Authority, 14 February 2014
View GC14/1 annuity comparison websites – thematic review and guidance for firms, 14 February 2014
View FCA finds annuity market not working for consumers – competition market study launched, 14 February 2014
View FCA press release: Retirement income market study, 14 February 2014