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FSA unveils two-stage annuity probe plans

by Brian Cantwell on Jan 31, 2013 at 10:36

FSA unveils two-stage annuity probe plans

The Financial Services Authority (FSA) has unveiled the details of its annuity investigation.

The FSA will conduct the work in two stages.

The first phase of this work will consider the level of detriment consumers suffer from not shopping around.

The second will depend on the outcome of the first phase, and will consider whether firms' processes for providing annuities facilitate or inhibit shopping around.

As part of the review the FSA will conduct a pricing survey of all annuity providers, and will compare the rates available to consumers through a range of distribution channels, including through the open market option and those only available to existing pension policyholders.

The FSA said the timing of the work will take account of the implementation of the Association of British Insurers (ABI) code of conduct, set to come into force on 1 March.

Nick Poyntz-Wright, FSA head of life insurance, said: '[Incoming regulator] the Financial Conduct Authority has set out its vision to make sure markets work well so consumers get a fair deal.'

‘An annuity purchase is an important one off decision that has long term consequences for individuals if they get it wrong.'

‘We want to understand the level of the potential detriment for consumers if they do not shop around to see if there are ways to make this market work better for consumers.'

Research by enhanced annuity provider MGM showed that 42% of the over 55s have not heard of the open market option (OMO), which was up from 2011 when 31% said they hadn’t heard of the OMO.

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25 comments so far. Why not have your say?

Richard Hardy

Jan 31, 2013 at 10:44

On the outcome of the second phase will they then implement a third phase leading to a fourth phase and fifth phase to determine the outcome of the third phase and fourth phase?

Otherwise "I have nothing on my desk today how can I keep myself in a job for another two years?"

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Green Eyed Monster

Jan 31, 2013 at 10:52

Compulsory advice is the answer.

People need advice when choosing an annuity. The FSA make IFAs go to great lengths to be competent in all manner of products, to be transparent in charges, to commit to obtaining the most suitable product on the best terms for their clients. They then go and ignore them when it is patently obvious that the general puiblic need IFAs when it comes to annuities. The solution is staring them in the face! Does anyone do joined-up thinking at Canary Wharf?

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Paul Barnard

Jan 31, 2013 at 10:56

I reported a company to the FSA a couple of weeks ago who were offering full advice, no fee and stated that they were paid by commission. The FSA replied, saying they would investigate, but couldn't possibly let me know the outcome.

They are still running the same advert/website today.

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Kate Brookes

Jan 31, 2013 at 11:10

@ Paul Barnard, I saw an annuity site that one of my clients mentioned, it stated that it offerred a free service, and that it was registered with the FSA. I rang them up to see how they got paid, and it was by commission. There was no mention of this anywhere on the site. How do they get away with this?

I called the FSA about a company offerring cash back on pensions that was clearly an unauthorised withdrawal, they're still going strong too. I just don't bother to waste my phone bill on them now.

I'm sorry, but I have to conclude that it is one rule for us and another for everyone else.

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John Burchett

Jan 31, 2013 at 11:13

Advice is the only way forward and always has been.

I had a case recently with an insurance company that sold an annuity to a client who was terminally ill. The client was not in full possession of their faculties due to their illness and the insurance company should have walked away from this but instead stated they had covered evrything in their standard letters to the client. The insurance company received £7,000 in commission without, they said, giving any advice!


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James Dean

Jan 31, 2013 at 11:21

In general the open market is fairly competitive, with some 'pack leaders' and some 'bottom dwellers' with many who work with annuities can already predict. However, I do hope that the FSA review spends a lot of time focusing on the many who do not shop around and stay with their pension provider. The rates here can be completely disconnected from anything approaching a competitive market rate. The review should hopefully uncover that it is not their actuaries inability to source quality underlying assets to power the annuity, but that rates are poor due to hefty profit margins on 'in-house' annuities at the expense of their own clients.

With the existing small ABI changes and this new review, any move to encourage more people to explore the open market option should be welcomed from all in the at retirement market.

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Ian O

Jan 31, 2013 at 11:24

The problem in this area of the market at the moment is the difficulty for these people to get advice. It is ok to advocate shopping around, but unless someone is prepared to undertake a full review in to all areas of their finances it is very difficult for them to get advice on only their retirement options. As such, the majority will fall in to the hands of non advised companies and may well end up purchasing the wrong type or shape of retirement vehicle.

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Jan 31, 2013 at 11:27

The industry already knows that over 80% of cases the consumer could gained more by moving to another provider. This does not take into account what they might have gained had they looked at an Ill Health Annuity.

So why do we need a review?

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complacency rules

Jan 31, 2013 at 11:44

There are so many different ways of taking retirement benefits and an annuity is just one of them. It can even be appropriate not to take retirement benefits as per John Burchett above. The problem is that the letters sent out by the providers with their retirement packs do not even begin to address all the issues and many of the annuity websites only provide basic information and quotes.

There have been instances where I have been able to obtain an uplift of 50% in income for clients over what was being quoted by thier pension provider. Admittedly that was exceptional, but uplifts of 30% are not uncommon.

Anyone who deals with Retirement benefits knows about these issues, it does not need a review it needs action now. It is not clear from the statement whether IFAs are being included in the review perhaps this can be clarified. The FSA only need to dicuss this with a few IFAs to establish this is an area where advice should be compulsory (ot at least as compulsory as it can be) otherwise it will become the next mis-selling scandal.

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Paul Barnard

Jan 31, 2013 at 12:42

We used to do quite a bit of annuity work - properly I might add. People would ring us, or email us (this wasn't for existing clients) and we would explain what we did etc. Fewer and fewer could be "bothered" to complete a factfind, let alone a health questionnaire and preferred to tap their details in to a bucket shop/tied internet outlet and buy, without any investor protection, from there.

You could say that 80% of the public are getting exactly what they deserve if they can't even take this irrevocable act seriously; bet they know the plot line in Eastenders though.

Harsh? Perhaps, but there are more lucrative fish to fry.

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Jan 31, 2013 at 13:22

So, when, having completed part one, they find out the annuity offerred directly from the company is as often as not, inappropriate to the client's needs, the FSA (or FCA) will have to act.

It will either force retirees to go through either:

1 an approved system, online or face to face, to obtain a reasonable result to obtain a sensible outcome in line with the clients needs. or

2 Force insurance and other providers to increase the approved wording following a quote, incorporating many more risk warnings and legal jargon, increasing the wording by 150%. This of course is unlikley to be read by the majority of recipients, but absolves the regulator and provider of any liability.

But who will pay for option 1 post RDR?

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Jan 31, 2013 at 13:32

Paul I agree, we ask the clients to get a copy of their medical reports for our records and to send to the potential annuity providers when getting illustrations. You would think we had asked them to walk around the world twice in some cases. We start doing this after a provider refused to honour an annuity rate having received the clients medical information.

Yet, the second they think they have been disadvantaged having received some phone call from a claims company saying they lost money, you can guarantee they would walk around the world three times.

Human nature it’s a funny old thing!!!

By the why if you go on the MAS site, according to them consumers should not use any adviser for annuity advice unless they have 25 dedicated staff.

Take a look.


Can anyone explain to me why?

How many advisers and staff does it take to complete research and an application, it might take 25 staff in the public sector, but in the private sector it can be done by one or two!

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Kate Brookes

Jan 31, 2013 at 13:37

@ Hickky......no, option 1 will be replaced by another one of those hideous incomprehensible 'what does ma say' adverts on the telly. Ma says shop around for your annuity......job done, box ticked.

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David McCabe 1

Jan 31, 2013 at 13:46

The horses left the stable quite some time ago. Again. It's easy - make OMO the default option & force insurers to include details of this AND fund/transfer values in their projections instead of just paying lip service as they do at the minute. In my experience individuals get a shedload of paper but nothing that actually tells them the value of the fund.

On the MAS, I wasn't aware of the guidance stating a firm should have at least 25 adviser - what an absolute joke. I'm livid - why did they pick such a figure & what make the idiots in the ivory tower think this will give a better result?

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Jan 31, 2013 at 14:19

@ Martin

I think the 25 dedicated staff thing refers to a specialist annuity broker, not an IFA. This advice seems to be saying to tread carefully when trying to obtain information only from a specialist broker as there are cowboys out there, and a dedicated team may reduce the risk.

Just my thoughts though, who knows what the thoughts of the MAS team members are, apart from:

I hate working here as we are always being critisized.

Why wasn't I picked to be made redundant, those lucky so and so's got a great deal?

Will the new FCA pay me as much as I earn now if I leave?

Blimey, this room looks empty nowadays.

I wonder what sandwiches Waitrose have got for lunch?

Pip Pip

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Jan 31, 2013 at 15:11

Sorry but the answer is not always advice. A retiree who knows he wants a lump sum and a level single life annuity with 5 year guarantee does not require advice, he requires information. The information is that your ceding provider's rates are rubbish - you can buy from someone else and here's where you find someone offering a better deal. A client does not need advice to conclude that £1000pa from the OMO provider is better than £800pa with the existing provider. In the majority of small-pot cases, that information will suffice. Yes, the larger the fund, the more likely the client will need and benefit from advice.

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Eastenders Fan

Jan 31, 2013 at 15:52

@ Paul Barnard

Whats wrong with knowing the Eastenders plot line.

I believe someone could know that and appreciate that they need advice on annuities.

We are finding we are getting increasing initial contact from folks who have fairly moderate fund values.

Slow progress but I think more are now seeking advice than five years ago.

n.b. Found a client who had heard of MAS this morning!!

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lee rawding

Jan 31, 2013 at 16:04

Whilst I understand the full advice is best argument it's simply not realistic. There are approximately 700,000 people reaching 65 this year and 600,000 or so each year for the next 5 years or so, courtesy of the Baby Boom.

Many of the above managed to get to that ripe old age without ever seeking or receiving a full financial advice service. In addition half of them have pension pots that are below the average size and many of them have tiny pots in some cases in many small penny packets.

Add to the above the phenomenon of silver surfers and overall consumer moves towards internet purchase in almost every area of life, facilitated by many organisations, big and small and it's easy to conclude that 'turning back the clock' is really quite a pipe dream.

OMO should be the default of course and the shape and quality of service provided to clients should always be uppermost in service provider's minds.

It's good to see the regulator starting at the provider end of the stick as there's still much to do to ensure people do get proper information in plain English on page 1 of a short summary not page 23 of a voluminous pack.

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Green Eyed Monster

Jan 31, 2013 at 16:12


Agreed , a retiree does not need advice if:

a) he understands annuities and the various types available

b) has daily access to the rates of the whole market

c) knows whether his state of health is relevant

d) knows whether his spouse's health/ income level is relevant

e) knows how to use the time limits to secure an annuity quotation in a falling market,

f) understands inflation

and so on.

So how many retirees do you think can tick all the boxes?

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complacency rules

Jan 31, 2013 at 16:14

I disagree with Marco. In my experience most people are not aware of the various types of annuities that are available such as increasing, impaired life, survivors annuities, temporary annuities, asset backed annuities, drawdown options and indeed what the position is if they do not take their benefits (such as for the very seriously ill).

There may be some people who are aware of all and know all the pros and cons of the various options but I would suggest that they are very few and far between, in fact despite the retirement packs from providers many are not even aware of the Open Market Option. I still say advice is required in virtually all cases. Although I accept that in some isolated instances that advice may confirm what the client already knows.

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Christoher Hill

Jan 31, 2013 at 17:12

I also disagree with Marko. Very few clients sit down and actually figure out what income they need now, what effect inflation will have on their income, how much income his or her spouse will have and require.

50% of solving a client's problem is knowing how to actually define the problem in the first place so that it can be solved correctly. This is the value that advice can offer and the reason why it should be made compulsory at retirement when the default option is an irrevocable decision.

The issue should be less focused on whether clients should be more aware of the OMO and more on making sure that they are set up with a method of receiving income that is right for their circumstances. Access to OMO is a part of that issue, but not the whole issue.

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Super Moses via mobile

Jan 31, 2013 at 21:23

Well I must be missing something. Most 'your approaching retirement' packs I have seen quite clearly give a fund, an amount they will pay (often various options) and clear notes saying you should shop around and explaining what OMO is. Creating a problem where there isn't one. You lot all encouraging the FSA to act are forgetting one thing...it will eventually bite us on the behind one way or another

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Julian Stevens

Feb 01, 2013 at 10:09

The FSA could have addressed this a decade ago by stipulating that all providers must include with their pre-retirement packs issued to policyholders a separate, brightly coloured, possibly laminated, sheet highlighting in simple and straightforward terms the importance of seeking independent advice on the best terms on which to apply their fund.

"XYZ Life offers a range of options for vesting your pension fund/s but these should be assessed in the context of all the other options available to you in the open market, some of which may be more suitable for or advantageous to you".

If customers can't be bothered to act on a statement such as that above, well, that's their decision and potentially their loss (you can lead a horse to water and all that) but the FSA surely has a statutory obligation to ensure the message is presented in such a way that nobody after the event can claim that they weren't made aware of it.

The IFA community has known this for years and so surely must the regulator. Why, as has been asked so many times on so many other issues, has the FSA failed to act? How many more millions of pounds of OPM will be spent on this latest "probe" because, yet again, the FSA has failed to do its job properly?

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Richard Hardy

Feb 01, 2013 at 17:08

The FSA, fails to do its job because, like many regulators and the Houses of Parliament, is full of people who are bloody useless, don't have a clue about what their job entails and get paid whether they do a good job or a bad job.

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Arthur Schopenhauer

Feb 03, 2013 at 19:06


We have seen this before

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