Out-Law News 2 min. read

Annuity providers will be required to provide customers with competitors' deals


Annuity providers would be required to deliver personalised 'information prompts' to their customers, highlighting whether they would be better off if they shopped around, under plans put forward by the Financial Conduct Authority (FCA).

The new requirement, which would come into force next September, would apply at the point that the customer is ready to convert their pension pot into a regular income stream by purchasing an annuity. It is intended to address a lack of competition in the market uncovered by the FCA's retirement income market study, which found that 60% of customers were not switching providers when they bought an annuity and up to 80% of these customers could get a better deal on the open market.

Although annuity sales have declined since the pension freedoms were introduced last year the products "still play a significant role in retirement provision", making it important for consumers to shop around to get the best deal, according to the FCA's executive director of strategy and competition, Christopher Woolard.

"We believe that the proposals we have outlined will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market," he said.

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that for the FCA to decide on such a "draconian" measure it "must consider competition is non-existent" in the annuities market.

"Not many, if any, other markets have regulatory intervention on this level," he said.

"Draconian – but too many people are sleepwalking into the wrong annuity purchase. The question is whether the 'information prompt' will really wake them up. Time will tell. Annuities are complex, involve big sums of money and are once-and-for-all decisions – let's get them right," he said.

The FCA is proposing that firms provide their customers with a personalised prompt showing the difference between their own quote, and the highest quote available to the consumer from all other providers on the open market. It should also specify whether the annuity is a single or joint life product, whether the rate of income paid by the annuity is guaranteed and the value of the pot that would be used to purchase the annuity. The prompt should also contain a link to help the consumer access the best quote.

Firms would be required to provide this information in a standard format developed by the FCA. Behavioural testing carried out by the FCA found a 27 percentage point increase in the number of participants that went on to compare products from different providers when presented with the annual increase in income that they could gain from doing so.

The FCA is also intending to introduce new formal reporting requirements for providers of retirement income products, building on its 'ad hoc' data collection since the introduction of the pension freedoms. This data will cover the types and volumes of the products sold by providers and the extent to which consumers took financial advice or used Pension Wise before doing so. The data will be used by the FCA to enable it to identify "emerging risks" and to "use our supervisory resources most effectively".

It intends to introduce the new reporting requirements from 30 September 2018, covering the period beginning 1 April 2018.

Both consultations close on 24 February 2017.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.