Consumers are being failed by pension funds, says a review by the Financial Conduct Authority (FCA), the UK’s financial regulatory body. Savers could have received much higher pensions had they shopped around. There is evidence that insurance firms’ actions prevented consumers from seeing alternative and potentially better policies, the FCA says.
When employees retire, we refer to their income as their pension.
Pension firms not informing customers
The review found that consumers who purchased “enhanced” annuities were not being informed of other policies which would provide better value.
Enhanced annuities provide people with major medical conditions with higher incomes.
The FCA claims pension firms have not been telling customers with shorter-than-average lifespans that different pension providers could give them a better deal.
The FCA wrote in a press release on Thursday:
“The market study confirms that competition is not working as well as it could for consumers, with many continuing to miss out on a higher income by not shopping around. However, FCA analysis suggests that for people with average-sized pension pots and low risk appetite, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies.”
Firms must improve in the way they communicate with customers, Mr. Woolard said. (Photo: FCA)
Many could have obtained better deals
After discovering that 80% of consumers who purchased an annuity from an existing provider could have obtained a superior deal in the open market, the FCA launched a probe in February 2014.
Pension providers, i.e. insurance companies, will have to adhere to stricter rules on how annuity pensions are sold to make sure consumers are obtaining the best deal possible for their retirement income, the FCA added.
The FCA recommends, among other things, that insurers show their customers how their own quotes compare with those from rival providers.
Reforms a game changer
Director of policy, risk and research at the FCA, Christopher Woolard, 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 is inviting feedback on its preliminary findings, and will at a later date decide on what rule changes are required.
The FCA also carried out a review of annuity sales practices and found that firms are contributing to consumers not shopping around. In other words, they are deliberately making sure consumers buy their own plans without looking at potentially better deals elsewhere.