There is ‘no evidence’ that pension providers systematically mis-sold annuities between May 2008 and April 2015, according to an investigation by the Financial Conduct Authority (FCA).
However, the regulator said it was concerned about “particularly poor behaviour” at a handful of providers. These firms are now required to review all annuity sales and offer compensation where appropriate. They have also been referred to the regulator’s enforcement division and could face hefty fines.
Annuities are bought with a pension fund and pay a fixed income for life. As part of this ‘thematic review’ the FCA reviewed more than 1,200 annuity sales to see whether firms provided customers with adequate information about their options at retirement. This covered around two-thirds of the annuity market.
The FCA specifically looked at whether customers were given clear information about ‘enhanced’ annuities – (also known as ‘impaired life’ annuities) – which pay higher incomes to smokers or those with health problems.
The FCA found many of the firms provided clear and comprehensive information to customers with written communication tending to meet the standards required.
Annuity Sales Over the Phone Misled Some Consumers
However, the regulator said it had concerns about the ‘small number of firms’ where communication with customers was primarily via telephone.
The FCA said: “[This] was likely to have caused some customers to purchase a standard annuity when they may have been eligible for an enhanced product.”
These firms will now have to review all annuity sales from July 2008 and offer redress where appropriate.
Megan Butler, director of supervision at the FCA said: “Annuities play an important role in providing an income for retirement. It is important that consumers get the right information at the right time in order to make the right decision for their retirement.
“While we have found particularly poor behaviour at a small number of firms, there is no evidence that firms have systemically failed to provide customers with the information required by our rules. Firms, particularly those outside our sample, should look at the report we have published today and consider whether they can make improvements.”
The FCA also highlighted a number of areas of concern in the sale of these annuities. These included when call handlers relied too heavily of provided scripts, which meant they were often unable to respond to clients’ needs or clarify misunderstandings.
Other problems included failing to tell customers about enhanced annuities, when the pension provider in question did not offer this option. In addition, customers were not always made aware they could obtain a higher income by shopping around for an annuity, rather than accepting the deal from their current pension provider.
The FCA added: “Clear messages about enhanced annuities were sometimes undermined by subsequent comments which included call handlers under-playing the level of increase which a consumer may obtain by shopping around.”
FCA Review Opens Door For Compensation Claims
Tom McPhail, the head of retirement policy at Hargreaves Lansdown, said: “The FCA’s review has given the non-advised annuity sector a reasonably clean bill of health however they also found some failings which for a minority of customers may eventually lead to their getting some compensation.
“They also found that even where insurance companies follow the letter of the regulations, they still don’t always communicate effectively with their customers.
“If you are buying an annuity - and tens of thousands of pension investors still do every year - you absolutely must shop around. In a small number of cases your existing pension provider may actually be able to offer you the best deal on the market but the chances are that they won’t. Shopping around means getting a better deal every year for the rest of your life; you only have to do it once so it is worth taking the time to do it well.”
Stephen Lowe, group communications director at Just Retirement said: “The FCA’s interim findings are a stark reminder that further improvements need to be made by some firms to ensure customers have access to good information and support to shop around.”
Annuity sales have dropped significantly since the introduction of the Pension Freedom rules in 2015. But prior to this most people used their pension fund to buy an annuity to ensure a regular income stream for life.
