Financial News

  • 11 December 2013, 12:18

Pension Annuity Industry Slammed By Watchdog

A major overhaul of Britain's private pension industry has been urged by an independent panel that advises the City watchdog.

The Financial Services Consumer Panel (FSCP) said the annuity market is dysfunctional and reform is needed to prevent millions of pensioners losing out.

Its report said retirees choosing where to invest their pension pots may face poor deals if sticking with insurance companies with whom they have saved their funds but face a bewildering variety of options if shopping around on the web.

They may be attracted by deals offered by so-called "non-advice" options without realising they forfeit the right to consumer protection services - or that they may carry hidden charges, the FSCP discovered in its year-long study.

Some online and offshore providers have an "unclear" regulatory status, with evidence of poor conduct including unsolicited emails and telephone calls, according to the report.

It said a lack of transparency in commissions further hampered annuities for consumers.

The confusion can result in customers deciding to "shop but stop" and going back to the "rollover" product offered by their original insurance company - an area of the market where regulation is "extremely weak".

Annuities provide the main means by which ordinary people turn their defined contribution pension savings into retirement incomes.

New annuity business - which currently sees 400,000 sold each year - is expected to double over the next few years due to the impact of maturing pension plans and the introduction of auto-enrolment for private sector workers.

The panel found that while product complexity had increased, professional advice was harder to find, and retirees were increasingly buying annuities on the open market through "non-advice" websites and "losing valuable consumer protection".

"Irreversible mistakes affect retirees for the rest of their lives," the panel warned.

It concluded: "The chances of mass consumer detriment are, in our judgment, too high to trust to current market-driven solutions alone: hence our recommendations for further regulatory and Government-led structural reform."

Sue Lewis, chair of the FSCP, said: "The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand.

"We urgently need to reform this market, particularly for those with smaller pension pots, who usually can't get independent advice.

"Our recommendations are intended to make choosing the right annuity more straightforward."

The panel recommends that the Government should set up a service guiding retirees through the process of buying "non-advice" products for those with small pots.

Other measures include a call for the Financial Conduct Authority to set up a code of conduct for the non-advice market and a study into the "possible exploitative pricing" of annuities sold by insurance companies to customers who have saved with them.

Meanwhile, the financial burden of running final salary pension schemes is hampering companies' ability to invest in expansion and development, according to new research.

A survey of 226 chief executives and board members in companies carried out by UK business organisation the CBI and insurer Standard Life found more than 66% reported the cost of so-called defined benefit pensions is stifling

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