Urgent regulatory and government-led structural reform on annuity purchasing is needed to prevent millions of pensioners from losing out, the Financial Services Consumer Panel warned today.
Publishing findings from its 12-month research programme on annuity purchasing, the panel said the market did not work well for the majority of consumers. It called on the Financial Conduct Authority to examine the 'exploitative' pricing of annuities sold by insurance companies to their defined contribution customers who have saved with them for a pension. The FCA should also strengthen the definition of the open market option, which allows savers to shop around for the best annuity.
Panel chair Sue Lewis, said: 'The open market option has been around for a long time, but still isn't working for many people who are getting less income in retirement than they could. We are seeing a shift towards purchasing annuities via "non-advice" routes, which means reduced consumer protection if things go wrong. The increase in non-advice sales appears to be driven by light-touch regulation and higher profit margins, not consumer demand.
'We urgently need to reform this market, particularly for those with smaller pension pots, who usually can't get independent advice. Our recommendations are intended to make choosing the right annuity more straightforward.'
Among other recommendations, the Panel called on the government to get employers and trustees to establish a non-advice service for members of workplace schemes and ensure this adheres to the code of conduct.
Commenting on the findings, investment firm Hargreaves Lansdown highlighted that the challenge was to make that process as effective as possible.
Tom McPhail, head of pensions research for the firm, agreed with the panel that a lot of innovation in the annuities market was led by intermediaries offering non-advised solutions making it vital that insurance companies deliver good results for their customers, said
He said: 'By [companies giving their customers] access to good quality shopping-around services [on annuities], the industry can show that it is putting customers' interests first.'
Andrew Tully, pensions technical director, at MGM Advantage, agreed that the annuities market was not working as well as it could.
He said: 'Our research continues to evidence a complete lack of awareness and understanding of the options people have when approaching retirement. Forty three per cent of the 55-64 age group are unaware of the different products and options to generate a retirement income, while 61% are unaware of the open market option.'
Last month, pensions minister Steve Webb acknowledged that the government needed to take a broader look at the annuities market. He said that a 'bog-standard' annuity might not be the best option for growing numbers of people.