* 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 An important 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 and said
those with the smallest pension pots were worst hurt by having
only a handful of annuity providers to choose from.
The findings come at a time when the government wants more
people to save for their retirement as they live longer and
national coffers cannot afford the generous state pensions
needed to maintain a decent standard of living into old age.
About 420,000 annuities worth 14 billion pounds ($23
billion) are sold each year with each purchase irreversible,
depriving people of the right to shop around that would leave
four out of five people better off by 71 pounds a year on an
average pension pot of 18,000 pounds.
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 said there was a risk that insurers would try
to unfairly migrate their savings customers to their own annuity
products to maximise profits.
Many annuity providers do not offer better terms to people
who are ill or smoke and are likely to live for fewer years than
their healthier peers. Annuity providers make the most money
from people who die young, since the annuity payments cease on
death. The review also found poor practices on all annuities
"All together this paints a picture of a disorderly market,"
Otto Thoresen, director general of the Association of
British Insurers, said the insurance industry had addressed many
of the issues raised but acknowledged more progress was needed.
"The market isn't working as well as it could... We
recognise that our industry can do more to make the market work
effectively for customers," he 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 10 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 private 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 to better protect consumers
and end a stream of mis-selling scandals spanning three decades,
notably of payment protection insurance.
The FCA said it could not say if there had been mis-selling
in annuities, a sector dominated by big insurers like Standard
Life, Aviva, Prudential and Legal & General.
David Barral, chief executive of Aviva UK and Ireland Life,
welcomed the review: "We want the FCA to identify all those
areas where consumers get less than they should on their
He said the FCA should investigate insurers taking advantage
of savers' inertia and brokers charging excessive commissions or
keeping customers in the dark about what was available on the
The watchdog said it would study sales practices and report
in the summer, open its first competition probe into the wider
retirement market and require changes to comparison websites.
Watchdog officials said it had not ordered immediate changes
to the market because 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.
Poor sales practices can trigger fines. A record 28 million
pounds fine was levied on Lloyds 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
"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
"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