Last updated: January 31, 2013 12:02 am

Insurers pressed over annuity deals

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The Financial Services Authority’s latest intervention in the annuity market comes after years of probing and prodding of insurers to give millions of their retiring customers a better deal.

Since 2002, insurers, as pension providers, have been obliged to highlight to their customers that they can shop around for their pension incomes and do not simply have to settle for the annuity rates they are offered.

Insurers should do this in the information they send to customers at least six months and six weeks before their expected retirement dates.

The consequences of not shopping around can be significant. With a difference of 10-20 per cent between the best and worst rates, not getting a good deal can mean tens of thousands of pounds less income over the course of retirement.

Yet a 2010 probe of the market by the financial services regulator found that just one in four consumers had used the “open market option” (OMO), or shopped around.

At the time, the regulator pulled up the industry for practices such as burying information about the OMO in the small print and not fully explaining that shopping around could result in a higher pension.

“The decision on whether to buy an annuity from a ‘host’ insurer or to purchase one on the open market is important, as it influences an individual’s lifetime income,” the FSA said.

Pressure on the industry to raise its standards has continued, more so as annuity rates have fallen to record lows, meaning retirees have a greater need to find the best deal.

Following representations from lobby organisations, in 2010 a government stakeholder group was given the job of looking for ways to help make shopping around the default option.

After these discussions the industry announced plans to introduce a code of conduct that was designed to support shopping around.

In March, the Association of British Insurers (ABI) will launch the code, which will require its members to stop putting annuity application forms in retirement packs and to make the open market shopping around option more prominent.

Members will also be obliged to ask their customers certain medical questions before selling them an annuity, to determine if they might qualify for a higher income from an “impaired life” annuity.

Currently, two-thirds of annuities sold are “standard”, yet it is estimated that more than half of consumers could qualify for an impaired life annuity. These can pay up to 50 per cent more to those with certain common medical conditions, or even to smokers.

“This is the area where more needs to be done,” said Dr Ros Altmann, economist and government adviser on pensions.

However, the latest FSA probe is designed to put pressure on the industry. The two-phase probe will see the regulator examining the rates insurers are offering to existing customers and then comparing these with the open market.

They are expected to take a close interest in firms which have high volumes of business, but languish at the bottom of the annuity best buy tables.

The second phase will depend on the outcome of the pricing probe, and may see the regulator further probing the way the way insurers communicate the OMO.

The timing of this work will take account of the launch of a new industry code of conduct which is aimed to boost the numbers shopping around for an annuity.

The Code will see insurers, which are members of the ABI, bound to do more to highlight the OMO and to also ask medical questions of their customers, before selling them an annuity.

“We should not be surprised about the timing of this review, given the current position of the pensions market,” said Stephen Gay, of the Association of British Insurers (ABI).

“So it is a timely review by the FSA rather than a something that should be considered alarming.

However, industry observers said that while the code of conduct was a step forward, it was flawed and could result in insurers performing a very limited shopping around process on behalf of their customers.

“This could result in investors getting a slightly better deal than they would have done in the past, but still not as good as if they shopped around the whole market,” said Tom McPhail, head of pensions research at asset manager Hargreaves Lansdown and chairman of the Pension Income Choice Association, an industry lobby group.

“Hopefully the FSA review will determine whether the ABI code of conduct is acting effectively to improve consumer outcomes.”

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