The ghost of annuities past

Posted: 16th September 2015

Potential mis-selling concerns about annuities seem to be the elephant in the room across the industry at the moment.

You’ll have been living on a cloud for the last 14 months if you missed the 2014 budget and its decimation of the annuity market. As providers lose themselves in a flurry of activity to prepare and innovate for the unforeseen pension freedoms, how much thought is still being given to the many thousands who purchased annuities that may not have been right for them?

A LOOK AT PENSIONS PAST

Long before the pensions freedoms were announced in 2014, the FCA (then FSA) had initiated its own transformation in the annuities market, with its 2008 initial Thematic Review looking into the sale of annuities and open market options (OMO). The findings? The clear direction was that that firms needed to improve how customers were informed about their OMO, and the financial benefits that they could achieve by shopping around.

Fast forward six years to more thematic reviews and market studies from the FSA’s successor the FCA including:

TR14/2 – eight out of ten consumers who purchased their annuity from their existing provider could get a better deal on the open market
TR14/20 – firms’ sales and customer retention practices were contributing to customers not shopping around and switching. Customers were still potentially missing out on higher income

REACTION ACTION

For firms, the reviews have led to different views on ‘what is causing this?’ and ‘what to do next?’ Some providers have moved to carry out comprehensive reviews; others plan to review a discreet sample to provide a view on their exposure; many are yet to do much whilst keeping a keen interest and seeking direction from the industry. With this in mind, what action should you be thinking about in preparation for any possible fallout?

COMPETITION LETHARGY – CLARITY IS KING

It was found that many customers in the retirement income market tend to buy from their existing pension provider. The concerns were that incumbent providers feel less pressured to offer competitive vesting rates, and challengers find it difficult to attract a critical mass of customers. A good explanation as to why there’s been limited new entry in recent years. Competition has, as such, been failing to drive good value for customers. In fact, of the 40% of the customers surveyed in the FCA’s December Market Study, one in five were unaware that they even had the option to switch.

So ask yourself, how clear have you been with your customers about how your quote compares to other providers’ on the open market? Or that there even are other options they could switch to?

Research also showed that customers found ‘wake-up packs’, sent to those approaching retirement, were too long, difficult to navigate, and full of jargon. Customers were put off from engaging with their options at all. A regulator remedy is to require pension providers to replace these with an annuity quote comparison, and a high level pension ‘dashboard’. But as this pushes through, reflect on the intelligibility of how your own ‘wake-up packs’ were written and structured.

FRAMING FALLOUT

How options are presented, or ‘framed’ has a strong impact on outcomes. The use of effective framing could help consumers to make reasoned choices.

To what extent have the options you’ve presented, in person and through all other forms of communication, been represented in a way that supports good decision-making rather than driving sales of particular products?

Have you sufficiently urged customers to make an active decision rather than offering a ‘default’ or standard offering?

SAVVY SALES

For many, a quick call can clear up what emails and letters back and forth take an eon to. Whilst the regulator found annuity customers placed more weight on written communications, it also found that they preferred to speak to people to discuss their options and clarify their understanding. But, information given to customers in documentation format was of much better quality than that during telephone calls.

Look at the quality of conversations with your customers over the telephone. If you see any issues, show that this is an area your firm is fielding, and that you’re looking to aid your customers’ understanding and ability to make informed decisions.

Some sample investigative work is the least we believe firms should have achieved by now to give themselves some conviction on what the future could hold in terms of liabilities within.