The Financial Conduct Authority (FCA) is set to probe pension providers after its review into the annuity market found that 80% of consumers could secure a more generous retirement income by shopping around.
The regulator has found that up to 150,000 consumers every year could benefit from shopping around by as much as an extra £1,500, which if extrapolated could result in up to an extra £230 million boost to pension savings.
It found that 60% of consumers bought an annuity from their pension scheme provider and said that all annuities sold to existing customers were expected to be more profitable than those sold on the open market option.
The regulator launched a thematic review into the annuity markets in January 2013 with the aim of discovering the extent to which consumers miss out by not shopping around.
The FCA will now use its new competition powers to launch a market review to look into the conduct of pension providers, consumer behaviour and the structure of the retirement income market.
It will also look specifically at the role of providers’ role in shaping consumers’ decision making.
FCA chief executive Martin Wheatley said the regulator wanted to understand why people were not shopping around for an annuity.
‘The need to get an income in retirement unites us all. But once you’ve bought an annuity you can’t change your mind. For most people getting the right annuity could mean the equivalent of an extra £1,500 in savings – so we need to understand why they aren’t shopping around and switching,’ he said.
The regulator analysed data from 25 providers, out of a possible 31 that offer annuities. It said that for a pension pot of £17,700, consumers buying an annuity from their scheme provider would get an average income of £1,030 per year. However, a consumer using the open market option could increase their annual income by 6.8% or £71 a year.
It found that consumers eligible for enhanced annuities were also losing out.
The FCA estimates that on average consumers purchasing enhanced annuities from their existing pension provider could increase their annual income by £134 by buying one on the open market. In some cases enhanced annuity customers of some firms could increase their income by as much as £278 a year.
Other customers eligible for enhanced annuities are also not being given the chance to buy one if they buy directly from their pension provider, added the FCA.
The regulators findings also showed that the situation was worse for those with pension pots of less than £5,000 as only a handful of providers offer them annuities.
Wheatley (pictured) said: ‘Our research showed that there is virtually no market whatsoever for people with smaller pension pots. This means that for those people who need to make every penny of their pension count, the market has closed the door on them.
‘There should be competition across the entire market, not just for those with the most money. That is why we will be using our new remit to conduct a competition market study and a review of sales practices in pension providers. This is a very significant piece of work for the FCA.’
Data from the Association of British Insurers, published in 2012, showed that 60% of people bought an annuity from their scheme provider. There are around 420,000 annuity sales per year.
The FCA has found that around five providers have relatively high retention rates of around 60%.
It said its market study will look into whether these firms have active retention strategies that may increase customer loyalty and reduce the propensity to shop around.
The regulator’s review also examined non-advised annuity websites following a report by the Financial Services Consumer Panel which found that people using these services to shop around were being misled.
It found that information on 12 of the 13 websites it reviewed did not satisfy the key requirement to be 'fair, clear and not misleading', for example describing a service as free when commission would be received by the firm.
It has already required firms running each site to make changes.