* Watchdog sees risk of unfair profit maximisation
* FCA opens competition probe into wider retirement market
* FCA says not clear yet if any enforcement action needed
* Pensions campaigner says watchdog must act straight away
By Huw Jones
LONDON, Feb 14 A part of Britain's pensions market is disorderly with insurers maximising profits and failing to give the best deal, according to a watchdog review that drew criticism for ruling out immediate reforms.
The Financial Conduct Authority's review of annuities, where a pot of money saved over a working life is swapped for an annual income until death, found too little competition.
The findings come at a time when the government wants more people to save for their retirement as they live longer and national coffers can't afford generous state pensions.
About 420,000 annuities worth 14 billion pounds ($23 billion)are sold each year with each purchase irreversible.
Four out of five people would be better off shopping around to boost annual income by 71 pounds from an average pension pot of 18,000 pounds, the review found.
About 168,000 of the annuities are bought from the insurance company a customer has saved with, and the company makes far more money out of them than from annuities sold to savers from elsewhere.
"The FCA believes there is a risk that providers may unfairly try to retain existing customers to maximise profits, so it will explore this in greater details in the next market study," the watchdog said in a statement.
Many annuity providers don't offer better terms to people who are ill or smoke and not expected to live as long, and it also found poor practices on all annuities comparison websites.
"All together this paints a picture of a disorderly market," FCA said.
Pensions Minister Steve Webb said in January that annuities "need a rethink" as they were designed for a world in which people lived for ten years after retiring, not 30 years.
The minister is to propose draft legislation, as part of his "defined ambition" pension reform programme, that would allow creation of collective pensions in which savings would be pooled into funds that would provide a retirement income, negating the need to buy an annuity.
NO BIG CHANGES YET
The FCA was launched last year specifically to protect consumers better and end the country's stream of mis-selling scandals spanning three decades.
It has powers to intervene much earlier than in the past, such as by banning products or forcing changes in practices.
So far banks have been in the firing line for mis-selling products like payment protection insurance (PPI) for which they have set aside over 20 billion pounds for compensation.
The FCA said they still cannot say if there has been mis-selling in annuities, a sector dominated by big insurers like Standard Life, Aviva, Prudential and Legal & General.
The watchdog said it will now study sales practices, open its first competition probe in the wider retirment market, and require comparison websites to make changes.
Despite the review's damning findings, the watchdog has decided not to order immediate structural changes to the market, take enforcement action or require new sales practices.
Watchdog officials said pensions were a complex topic and more data was needed before deciding if any rules have been broken or whether major market changes are needed.
"We are not yet in a position to say if firms are operating inappropriately, and we will look into all of these aspects over the next six months," said Nick Poyntz-Wright, FCA director of long-term savings and pensions.
Fines for poor sales practices can be hefty with the FCA fining Lloyds bank a record 28 million pounds in December for encouraging staff to sell 2 billion pounds of products customers did not need.
The FCA said any big reform would not come until at least after its review into annuities sales practices is published in the summer, when it will also have preliminary findings from its competition probe.
"I am certainly disappointed that the FCA is not acting immediately - every day that goes by risks more people buying the wrong product for life and never being able to change it," said Ros Altmann, a pensions campaigner and former Downing Street adviser.
"This market is failing customers and so is the regulator."
The competition probe will be completed by early 2015. Structural changes appear inevitable as FCA officials said requiring more disclosures would simply drown customers in more off-putting jargon.