26th March 2015
The Financial Conduct Authority’s final report on the Retirement Income Market demonstrates how far the regulator’s thinking has progressed since the announcement of freedom and choice in pensions one year ago writes Royal London group chief executive Phil Loney…
However we believe its thinking has not gone far enough and more radical market-based solutions are required, to ensure that customers get the deal best suited to their retirement income needs.
The FCA’s first ‘Remedy’ requires providers to tell their customers how the annuity rate they offer compares with quotes in the open market rate. This is a step in the right direction but we suggest that the current market failure will only be addressed if providers are required go further. Instead of an anonymous annuity quote, providers should be required by the regulator to identify the top three competitors’ quotes by name.
The risk with the Remedy as currently proposed is that customers will still not shop around. The annuity quote comparison may simply convince already inert customers to do nothing. Low financial literacy amongst customers is compounded by a poor understanding of longevity, and many people do not yet understand that better annuity rates are available for those with poor health. Customers may fail to understand that apparently modest differences in annual income available from their current provider and that of the anonymous ‘highest quote’ could add up to substantial sums over their lifetime. It is also not obvious how this remedy will help customers to realise that enhanced annuities can offer superior value to the standard annuity products that are most likely to feature in the proposed comparison. We are concerned that this measure is too weak to improve upon the ABI’s well intentioned but unsuccessful efforts.
We propose a national comparison service for annuity products, with all quotations based on customer information including their state of health. Wherever feasible, customers should be encouraged to appoint an impartial Financial Advisor to assist with their retirement income planning. For non advised customers, providers should be mandated to provide the customer with direct access to the comparison web site, or to provide the top three quotations from the service regardless of whether their own products feature. We believe this approach should be equally applicable to non advised drawdown customers in due course. We need a truly competitive market which works in the best interests of consumers.”
We welcome FCA’s decision to progress the ‘Pensions Dashboard’ with the co-operation of Government. Royal London has long-advocated a mechanism that allows customers to view all their retirement provision, including State Pension, in a single place. This move would help customers and their advisers make better provision and – vitally – take the right decisions at retirement