The regulator’s retirement income market study concludes that competition “is not working as well as it could for consumers” and says many people miss out on a higher retirement income because they do not shop around when buying an annuity.
A review of the entire retirement income market was launched by the FCA in February 2014 to discover if it was operating in the best interest of retirees. The scope of the study was changed following the 2014 Budget, which scrapped the requirement of people to buy an annuity at retirement, to consider how the market could develop.
From April 2015 people will be able to use their pension pot however they like when they reach 55 including taking the whole amount as cash, subject to their marginal rate of income tax in that year. As part of these wide-ranging reforms, people will be able to obtain free and impartial guidance on how to make the most of the new pensions choices.
Christopher Woolard, director of policy, risk and research at the FCA said: “The Budget reforms are a game changer for the retirement income market. People will be given more choice and many will want some support to ensure they make the right decisions for them.”
“The Government’s new guidance guarantee, with the standards we have already proposed, is a vital part of this - now firms need to play their part. We want to see firms improving the way they communicate with their customers.”
“In order for the pension reforms to work and for people to have trust and confidence in the products they are buying firms need to act now.”
The FCA’s principal recommendations for the industry include a requirement for insurers to make clear how their annuity quote compares with those of their rivals on the open market. It also calls for an alternative to the “wake-up” packs that are sent to savers as they approach retirement, which have been criticised as being too confusing for some consumers.
Meanwhile, the regulator plans to consult on scrapping the ABI’s shopping around code of conduct after finding that many providers are ignoring its principles. The FCA wants to replace this code, which lays out how pension providers should encourage savers to shop around for the best annuities, with its own rules after a consultation.
It also wants a ‘Pensions Dashboard’ to be created, which would allow consumers to see all their defined contribution savings in a single place. A similar tool is used by the Dutch pensions industry.
Commentators have broadly welcomed the findings from the study but agree that more work is needed by the FCA and the industry in order to make the market more aligned with the interests of its customers.
Jason Whyte, director in financial services at EY, says the regulator’s findings shouldn’t surprise anyone in the retirement savings industry and describes its suggested reforms as “a step in the right direction”.
“The FCA’s claim that an annuity at the best market rates can offer good value compared to alternative options is a timely reminder that they may still have a role to play in securing people’s retirement. However, the regulator also recognised the enormous challenge in helping people to make good decisions based on the new choices that are available,” he said.
“The difficulty of judging how long they might live or the impact of stock market conditions should not be underestimated, as well as the sheer complexity of understanding and comparing different options. There are also some sound, but hard to quantify, reasons why a customer might opt not to annuitise. For many customers with small pots, a minor increase in monthly income might mean less to them than having a fund on hand for emergencies.”
Whyte adds that the pensions overhaul next year offers a “once-in-a-generation chance” for the financial services industry to change how it communicates with its customers and suggests the FCA should be more willing to change any constraining regulations that were designed for a different environment.
Stephen Lowe, group external affairs and customer insight director at Just Retirement, says the FCA’s study reinforces the view of a ‘two-tier’ retirement income market, where people who engaged with the decision-making process chose good value solutions but the majority who simply trusted their pension provider to see them right were put in poor value products.
“The report won’t be a surprise to anyone in the industry. Many of us have campaigned to encourage engagement and shopping around but there simply hasn’t been the industry will or regulatory pressure needed to ensure providers treat consumers fairly.
“We support the FCA’s moves to improve communications and regulatory oversight. With the April reforms set to deliver more options to retirees, it is crucial that they are encouraged to make active, informed decisions and appropriate measures to ensure those that fail to engage are protected rather than abandoned,” he said.
“Some providers have got away with selling poor value and inappropriate annuities to a captive market for far too long. Unfortunately their selfish actions have tainted the whole annuity market, undermining confidence in both good and bad.”
“Yet guaranteed lifetime income should be the firm foundation on which all retirement planning is based because it is the only way to be sure the income will continue flowing for as long as it is needed. In the new pensions era, we need to keep working to make sure that basic fact doesn’t get forgotten.”
Richard Lloyd, executive director at consumer group Which?, also welcomes the reforms laid out by the FCA but urges the watchdog to move quickly on its reforms.
"Consumers have been repeatedly let down by the pensions industry, with years wiped off people's hard-earned savings, so it's welcome to see the FCA working with the industry to clean up mistakes from the past,” he said.
"The regulator's proposals to ensure consumers have better information when they make big decisions about their income at retirement are sensible. But action is long overdue and the regulator and industry must now quickly put in place changes to ensure retirement products offer true value for money."
