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Annuity advice and purchasing channels: the consumer experience

Annuity advice and purchasing channels: the consumer experience. Dr Debbie Harrison M ember, Financial Services Consumer Panel Visiting Professor, The Pensions Institute, Cass Business School. FSCP research December 2013.

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Annuity advice and purchasing channels: the consumer experience

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  1. Annuity advice and purchasing channels:the consumer experience Dr Debbie Harrison Member, Financial Services Consumer Panel Visiting Professor, The Pensions Institute, Cass Business School

  2. FSCP research December 2013 Lifetime annuities are used by 90%+DC savers to convert their funds into a retirement income Approximately 420,000 annuities sold each year New business worth c. £14bn per annum Both figures set to rise rapidly: Maturing pots from early personal pensions & GPPs (sold since 1987) Auto-enrolment to bring up to 9m additional DC savers into the market Small pots will continue to be a major problem: no effective OMO.

  3. Focus • OMO: definition in law is weak – describes a purchase from a provider that is different from the pension provider. This includes: • Single tied arrangements • Provider-to-provider arrangements. If accepted, this annuity is classed as OMO but there has been no shopping around • Good outcome requires: • Right timing; • Right product; • Right features; • Competitive rate; & • Competitive cost of service

  4. Research methodology FSCP 4-stage evaluation of barriers to good outcomes • Market overview and literature review • Evaluation of websites that advertise and sell annuities • Interviews to evaluate consumers’ annuity purchasing experience • Interviews with expert practitioners to evaluate market developments

  5. Summary of findings • Buying via open market is too complicated • Status of distribution channels, cost & consumer protection unclear • Advice, non-advice, single-tie, multi-tie, introducer? Fee? Commission? The websites look the same • Difference in protection: non-advice - no recourse to FOS: there has been no ‘sale’. • Shift to non-advice driven by advisers, not consumers • Introducers ‘masquerading’ as advisers • Concerns about product pricing, profits & competition

  6. Using OMO too complicated; status of distribution channels unclear • Lifetime annuity purchase is a major financial decision: • Complex product • One-off purchase, so no learning curve • Irreversible • Open market bewildering & feels risky • Consumers ‘shop and stop’; more info isn’t the answer • Buy-side competition weak (as per OFT findings re schemes) • Low consumer financial capability • Fear of product complexity • Fear of making an irreversible, high-cost mistake • General distrust of professional advisers • Inability to find appropriate advice at acceptable cost

  7. Introducers ‘masquerading’ as advisers • Much lighter regulation than non-advice • Websites look just like non-advice and advice sites, but: • Consumer doesn’t know who they are dealing with • Doesn’t even know where the firm is based • Introducer objective: • Not to sell annuities, • But to sell personal customer details to other firms that do • Result? • Customers get phone calls, emails, texts from firms they have never heard of and did not contact, so they shop and stop • Introducers gets c. £250-300 for each successful sale

  8. Trend to non-advice driven by advisers not consumers • Major shift to non-advice due to: • Light touch regulation; not responsible for sale • Lower costs (eg qualifications), higher profits via commission • Potential for ‘inducements’ via special commission deals? • FCA found poor practice endemic • Huge differences in non-advised services • Whole of market; deep underwriting, checks for contract terms (eg GARs); checks to ensure selection of right product • Limited panels; limited support (annuity sales-driven); shallow underwriting; no checks for GARs etc (can be a disclaimer on site) • Impossible for most consumers to navigate advice maze

  9. Pricing and competition issues • Evidence indicates excessive profits on annuity books • 20 x profits on annuity books compared with all other lines, including pensions • Rollover pricing embeds cost of adviser commission even if customer does not use OMO; cost not visible to customer • ‘Rollover’ annuities most pressing concern, especially where provider is not in open market

  10. Recommendation 1Better Regulation by FCA of Distribution Channels • The FCA should introduce a compulsory code of conduct for the non-advice market and for introducers. • It’s not enough to have a quiet word with individual site owners. All the sites the FCA examined were in breach of the rules • The FCA should examine & address the causes of regulatory arbitrage whereby non-advice services are expanding at the expense of the professional advice market.

  11. Recommendation 2: Strengthen the OMO • The FCA should strengthen the operation of the OMO: • Clear comparisons on commission vs fees, including £ & protection • Set minimum standard of service e.g. whole of market, use of ‘deep’ underwriting, checks for contract terms • Require non-advice firms to ensure product suitability and to explain the fee and commission practices across the market • Exclude tied annuity sales from the definition of OMO (provider to provider, provider to adviser) • Work with MAS to establish single national directory of specialist annuity advisers that adhere to code

  12. Recommendation 3: Annuity provider competition investigation • The FCA should undertake a rigorous market study: • Insurance company profits vs. pricing • What is a ‘prudent’ mortality assumption? • What is an excessive buffer to generate profit? • Comparison between annuity book profits and profits on other lines of business • Impact insurance company ties with/ownership of distribution channels

  13. Recommendation 4:High quality DC scheme decumulation services • The Government should require employers and trustees to establish a high-quality, low-cost decumulation service for members of workplace schemes • TPR to provide guidance on selection criteria & service agreements (whole of market essential) • Set clear guide for service standards, including the code of conduct, commission cap etc • Regular reviews of service, including member outcomes

  14. FSCP Conclusion ‘In the Consumer Panel’s judgement, the chance of millions of pensioners losing out are too high to trust to current market-driven solutions alone: hence our recommendations for further regulatory and government-led structural reform.’

  15. PS: Are we asking the right questions? • Is a more efficient market (pricing, distribution) the only objective? • An effective market needs the right products • Longevity insurance: too expensive and inappropriate for c. 50% age 55-75? • Yet annuity purchase hard-wired into the DC system • Retail product/market: anachronistic for auto-enrolment

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