11 December 2014
- FCA still fails to ensure customers are properly protected despite finding frequent mis-selling
- Regulator proposes more consultation and investigation instead of immediate action to protect customers
- Annuities irreversible, people still effectively forced to buy, but the most vulnerable being let down
- As annuities are insurance against running out of money if you live a very long time in retirement, those in poor health must be protected from wasting their pension funds
The FCA has just published findings and recommendations from its long-awaited study of the Retirement Income Market and Annuities. The findings confirm that customers are still too often being short-changed, yet the recommendations fail to ensure proper protection is put in place straight away.
Having found, in February 2014, that 60% of annuity customers were just buying the product offered by their existing pension company even though 80% of them could get a better rate by switching to another provider, the FCA launched a full-scale study into how retirement income products are sold. We have waited months for its findings, but the reports out today are deeply disappointing.
Evidence of mis-selling is uncovered but action is not stopping it happening: It is truly shocking that the FCA’s review uncovers what seems clear evidence of frequent mis-selling, yet is not proposing immediate action to stop it happening any more. For example, even if people were being sent information that disclosed to them that they could shop around for better rates, or explained how annuities worked (and not all of the companies were even clearly doing this) the customers were not being told this information over the phone. In some cases, call centres were being incentivised to sell their internal annuities with staff earnings linked to the number of annuity customers who did not move away, even though they could be the wrong products at poor rates. Call centres were not explaining properly about how to benefit from better rates if you had health issues or how much annuity rates can vary if you shop around. This is surely mis-selling, yet there seem to be no proposals for compensation.
Those in poorest health losing out most and still won’t be properly protected: The FCA highlights once again, that those with health issues are most at risk of losing out from poor annuity sales practices. This is a finding it reported back in 2008 (http://www.fsa.gov.uk/pages/Library/Other_publications/Pensions/2008/omo.shtml when it said that pension firms were not telling customers about the advantages of ‘exercising the Open Market Option and in particular not telling people about shopping around if they had health problems’ when they could achieve much higher income from an impaired life or enhanced rate annuity. Here we are, more than six years later, and similar failings have been uncovered yet again. But still the FCA is not ensuring that customers in poor health will be properly protected from now on. Despite the fact that the FCA believes more than half of customers could qualify for better annuity rates as a result of their health (and advisers report that around 60% of their customers are eligible for enhanced rates), the rules regarding selling standard annuities are not being immediately changed.
What has it decided to do now? Instead of forcing firms to change their sales processes immediately, it has asked them to look back at a sample of their sales since 2008 to check if people with health issues might have been sold the wrong type of annuity. The FCA says it ‘will be asking some firms to do further work to determine if the findings of this thematic review in relation to the sale of enhanced annuities are indicative of a more widespread problem.’ Based on the figures of low shopping around and low proportion of enhanced annuity purchases, it is blindingly obvious that there is a widespread problem. Action is required immediately to stop these inappropriate sales happening in future, not just looking at the past. Indeed, we do not know how long this inquiry by insurers will take, nor how the firms will assess their customers’ health.
Widows still at risk of being left penniless: Another particular problem that leaves pensioners vulnerable to unsuitable annuity purchases revolve around those who have a partner and those with smallest funds. Annuity companies are not clearly telling people about the risks of buying a single life annuity. This means many widows are left penniless when their husband passes away. The company will send information about ‘joint life’ and ‘single life’ annuities but most people do not understand what these terms mean. However, the FCA is relying on ‘disclosure’ and paperwork to inform people rather than directly explaining in clear English what the implications of single life annuities are.
What should be done? – Stop this happening to anyone else straight away, second line of defence: The FCA should impose a duty of care on all companies selling annuities to ensure that customers have a fair chance of doing what is right for their own circumstances. That means proper risk warnings about the products they may buy and asking basic questions that would reduce the risk of those with shortened life expectancy buying an annuity that assumes they are in excellent health. For example, before selling an annuity that assumes someone is in excellent health, they should be told this and also asked whether their health is actually good. For example, the company should explicitly state ‘ this annuity assumes you are in excellent health’. If you have had any particular health problems it may not be suitable for you.’ The firm should then also ask ‘are you in good health, or have you had cancer, heart problems, high blood pressure, diabetes, been a heavy smoker or had other serious health issues that might impact you in future?’ To protect partners, firms should be forced to say to someone buying a single life product, for example, ‘this annuity assumes you do not want to ensure your partner will carry on receiving income from your pension fund if you die before they do’ and ask the customer to confirm ‘I confirm that I do not want my pension fund to keep on paying a pension to my partner if I die first’. This would be a proper protection measure. Why is the FCA being so slow in ensuring proper protection and a second line of defence to protect customers?
Why is it so vital that annuity sales processes are changed immediately? Annuities are a unique financial product, because once bought they can never be changed. A standard annuity is for life, if you buy the wrong type of annuity at a poor rate you can’t do anything about it unless you can prove it was mis-sold. Therefore, it is absolutely crucial that people are protected against unsuitable purchases. Annuities are also complex – there are many different types and if someone buys the wrong kind, they usually cannot change it.
Didn’t the Budget pension changes mean that people no longer have to buy annuities?: In theory, yes, the new pension freedoms mean people don’t have to buy an annuity any more, but in practice the pension companies are not allowing their customers to use the new freedoms. In the past, anyone wanting to take money from their pension fund had to ‘secure an income’ which meant buying an annuity or income drawdown product with the rest of their fund within six months. Those rules have been relaxed, so people will no longer have to do this, but pension firms have refused to embrace the new freedoms. Therefore, most people reaching pension age are still being forced to buy an annuity or income drawdown product if they want to take any money out of their fund. Thus, ensuring annuity sales work properly for customers remains imperative, but the FCA is not showing the required sense of urgency. It is deeply disappointing that customers can still be left to their own devices, in a market where their pension company effectively forces them to buy a product that may be unsuitable for them and which most people do not understand.
Just ensuring ‘disclosure’ of ‘information’ is not enough to protect customers who don’t understand annuities: The FCA is still relying on the insurance or pension companies to ‘clearly inform’ their customers about retirement, about their options for taking income from their fund and about getting quotes from other providers. This does not work. What is ‘clear information’ to a pension provider or a regulator is simply not understood by most customers who have never heard of annuities and never had to buy one before and may only ever have one chance to buy. The FCA’s conclusion that it is really important consumers are ‘given sufficient information with which to make an informed decision’ is simply not enough to protect customers. The terms and jargon used in annuities are baffling to most normal people. The Regulator and the industry understand these terms, but customers usually don’t. Therefore, just leaving it to firms to ‘inform’ customers and ‘disclose’ relevant information is not sufficient – a second line of defence is required.
Annuities are an insurance not an investment: Annuities are basically an insurance product that protects you against running out of money if you live a very long time in retirement. They are not an investment product. With interest rates at such low levels, they are much poorer value than ever before and if you are not going to live a very long time, then buying this insurance may not be the best way to spend your pension fund. In addition, standard annuities offer no inflation protection and, unless you buy the right type of annuity, they will not provide a pension for your partner if you die before they do. It does not seem as if the FCA has really recognised the urgent need to stop the failings of annuity sales. Just suggesting that annuities may be ‘good value’ relative to income drawdown ignores the impact of low interest rates, inflation and unsuitable product sales to give a false sense of reassurance to customers who may end up poorly served by a market that has failed its customers for far too long.