The Financial Conduct Authority has launched a consultation on proposals to require annuity providers to inform customers on how much they could gain from shopping around and purchasing an annuity from a different provider.

The proposals follow the FCA’s Retirement Income Market Study which recommended that an “annuity comparator” be established in order to encourage shopping around. The FCA is proposing that this comparator takes the form of an information prompt before an annuity is purchased.

It has previously found that 60 per cent of customers were not switching providers when they bought an annuity and up to 80 per cent of these customers could get a better deal on the open market.

Under the FCA’s proposals, firms will be required to deliver information in a personalised form in a format set out by the FCA. This prompt will have to show the difference between the provider’s own quote and the highest quote available to the consumer from all other providers on the open market. There will also be a prompt to help the customer access the best quote – this will be a link contained in the information prompt. The FCA has proposed that the new rules will come into force in September 2017.

Commenting on the proposals, FCA executive director of strategy and competition said: “Although sales have declined since the pension freedoms were introduced, annuities still play a significant role in retirement provision. It’s important that consumers shop around to get the best deal for them - yet our previous work found that very few people actually did so.
“We believe that the proposals we have outlined today will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market.”

Firms will be also be required to give consumers details of whether the annuity is a single or joint life product, whether the rate of income paid by the annuity is guaranteed and the total pot that will be used to buy the annuity.

The FCA tested different information and formats to understand which worked best to encourage consumers to shop around. The behavioural testing found that when shown the annual increase in income that a consumer could gain from purchasing an annuity on the open market, the testing showed a 27 percentage point increase in the number of participants that went on to compare products from different providers.

It has also announced plans to introduce requirements on the providers of retirement income products to provide data to the FCA about the types and volumes of products they are selling.

Since the pension freedoms were introduced in 2015, the FCA has been collecting retirement data from a representative sample of firms on ad hoc basis. The consultation proposes to formalise the data that is gathered with firms being required to report this to the FCA.

Commenting on the proposals, AJ Bell senior analyst Tom Selby said: “Arming people with information about annuity deals available elsewhere should help redress the competitive balance in the annuity market and hold insurers’ feet to the fire when it comes to pricing. The effectiveness of this measure will depend on the extent to which consumers actually read and react to the information provided, so policymakers must closely monitor how shopping around figures change following its implementation.”

Just Retirement group communications director Stephen Lowe added: “The failure of some providers to explain the benefits to consumers of shopping around when purchasing a guaranteed income for life product has been a longstanding problem. The FCA is taking positive steps to address this problem but we think there is a strong case to go further and make it a requirement for all purchases to be made via the open, external market to ensure consumers get the best deal.”

The consultation runs until 24 February 2017 and can be found here.

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