Alan Higham, Retirement Director at Fidelity Worldwide Investment, Says that Annuity Purchasers Deserve Better from the FCA
No-one really knows what is going to happen after April when pension freedom comes into place. Consumers have more control, yet it is not entirely clear whether the industry knows what its customers want, or if it will allow them to have it.
Now is a chance to break with the past to help consumers make good decisions that meet their needs. Consumers need to play their part by thinking through their needs and preferences. Hopefully, the free guidance service will stimulate them however take-up of guidance soon after April is likely to be limited to a minority.
Having an effective “second line of defence” has troubled all consumerists. We do not have effective sales regulation in place at present, with the only requirement being to provide “sufficient information to allow an informed choice”. What does this mean though? Hundreds of thousands of people don’t usually choose to deprive themselves of up to £230 million a year of additional retirement income, so it is hard to accept that their choices are informed.
I think the FCA is struggling in this area, judging by the two reports it published before Christmas. The immediate reaction to these was disappointment. In time, though, I do expect that some pension providers will be required to take action on the sale of standard annuities to consumers who could have benefited from an enhanced one. Firms selling enhanced annuities on the open market are particularly vulnerable if they have a poor track record of selling them to their own customers.
OMO Washes Whiter
The trouble the FCA looks to be having in enforcing action suggests that we may have inadequate regulation. The FCA rightly focused on outcomes and listed specific ‘bad practices’ that contribute to poor outcomes. Can it make its enforcement against companies’ ‘bad practice’ stick, or do we need new rules?
The latest ABI statistics for retirement income sales in Q3 2014 suggest that outcomes are still going the wrong way. Annuity sales have plummeted, but sales of annuities to ones’ own customers – the internal annuity sale – have held up remarkably well from a providers’ point of view. In 2013, figures from the ABI show that 43% of annuity sales were pure external and by Q3 2014, this had fallen to 29%. Despite a fall in annuity sales of 14% from Q2 2014 to Q3 2014, internal annuity sales remained static at 28,500.
Consumers Are Confused
People need reliable expert help more than ever, but the proportion of people going it alone without advice has doubled since 2012. In round numbers, the balance of advice to no-advice was 61:39 in 2012, falling to 23:77 in the third quarter of 2014.
There is a significant group – perhaps 25% of the population – who are very led by provider defaults. Wouldn’t it be better if they were led by advice? Policymakers need to look closely at this group to see what action is needed.
The FCA proposes to require annuity firms to make it clear how their quote compares to others in the market. They also want to see “wake-up” packs changed to make information clearer. The policy is working on the belief that all you need is clearer information to overcome poor decisions.
This premise has been challenged by research; most notably, that of The Pension Policy Institute (November 2014), which showed that not only are retirement decisions the most difficult to make, but, quite simply, that people don’t understand the information they are given either! You only need to read the excellent DWP Research Report 515 in 20082 to see how little the thinking has moved on in policy circles.
Misinformation About Cost
If you accept that the PPI is correct, then surely a better foundation for good outcomes is to help people seek reliable expert help to make these decisions? Only advice gives people a professional recommendation on what is best for them to do. Yet people are routinely put off seeking advice by biased misinformation around its cost, relative to making a decision without advice. The DWP’s 2008 research stated that: “Individuals knew that they had the option to use an IFA for advice on annuitisation, but they often mistakenly believed that taking advice from an IFA would involve high, upfront out-of-pocket fees”
Many feel that the FSA made a big error to allow commission to continue be paid on sales without advice. It undoubtedly causes significant bias for consumer choice. Certainly, far fewer people seek advice. The belated “Additional Protection”3 announced recently by the FCA to require providers to encourage people to seek advice needs the commission bias to go or it won’t be very effective. The FCA should look critically at its predecessor’s decision, and correct this by requiring consumers to explicitly consent to all commission payments made on a product sale or justify why this bias should remain.