Enhanced annuities also under scrutiny after FCA review.
The government has backtracked on plans for a secondary annuity market, citing a lack of measures in place to protect against possible consumer detriment.
A statement released by the Treasury on 18 October said: “Creating the conditions to allow a competitive market to emerge could not be balanced with sufficient consumer protections.”
First mooted by the government in 2015 as part of its overhaul of the UK pension industry, the secondary annuity market was intended to be introduced in spring 2017 and allow the sale and purchase of guaranteed retirement income.
“It was a brave decision but the right one,” Steven Cameron, pensions director at Aegon, said of the U-turn. “The secondary annuity market had all of the risks associated with pension freedoms and a few more on top.”
Mr Cameron highlighted the danger of selling a guaranteed income that might later be required, as well as risking a poor selling price by dealing with third-party purchasers that are unable to properly ascertain value.
Martin Tilley, director of technical services at Dentons, described the original idea of the secondary annuity market as “a think-bubble that should’ve been popped before it got into someone’s mouth.” But he conceded that many consumers holding unwanted annuities would have had their “hopes dashed” as a result of the decision.
Annuities hit the headlines for other reasons earlier last month after the FCA issued its final thematic review on enhanced annuities. The findings are likely to result in compensation for many consumers.
The report, titled TR16/7, investigated, in addition to findings conducted in February 2014, whether firms are providing “timely, relevant and adequate information” to consumers regarding their eligibility for enhanced annuities.
Although it found no systematic failings, the regulator highlighted “poor handling of telephone conversations” as an area of concern, where firms reacted to customers’ questions rather than making them aware of key information.
It stated that these calls provided “little or no information about enhanced annuities on which to base … decision-making”.
Two types of non-compliance were identified: process failures combined with rule breaches, and those which were likely to have changed consumers’ behaviour in a way that may have caused the customer an actual loss.
The small number of firms that returned a high ‘Type 2’ fail rate will be required to conduct a formal review of past sales. The loss of annuity income in each case was estimated as being between £120 to £240 pa.
Steve Lowe, group communications director at Just Retirement, welcomed the findings, but said finding the right annuity still needs to become easier.
Mr Lowe also said he was concerned that the same issues could arise with income drawdown, especially now many consumers are transacting on a non-advised basis post-pension freedoms.
He said: “There is no mechanism to shop around for drawdown – it is very complicated, it is a different style of solution. Whereas with annuities it is just simply ‘how much do I get paid a month?’ It makes shopping around for drawdown look like an amateur sport.”
