The Financial Services Authority (FSA) is set to launch an investigation today into the workings of the pensions annuity market.

With annuity rates still on a downward spiral, many pensioners are continuing to suffer a raw deal from the annuity system currently in place. The failure of consumers to shop around between pension providers for the best possible rates has also posed a serious problem within the market.

As a result, the FSA has outlined that it is set to announce a thematic review that will be conducted in two phases, and will continue to be in place throughout the year. The first phase will examine the exact level of detriment consumers suffer from not shopping around, and whether there are firms or particular groups of consumers where this detriment is more likely to occur. The FSA will outline a pricing survey of all annuity providers, comparing rates through the Open Market Option (OMO) and those offered to existing pension policyholders.

The second phase will follow on from this and will consider whether firms' processes for providing annuities “facilitate or inhibit shopping around”. The ABI is set to launch a Code of Conduct surrounding annuities on 1 March 2013.

The FSA’s investigation has been met by widespread approval among industry figures. Barnett Waddingham consultant Malcolm McLean said: “This is an important enquiry from the FSA which we all must hope will reach a speedy conclusion and some solutions to what is a developing problem area affecting large numbers of people now approaching retirement.”

AllianceBernstein head of DC sales and client relations Tim Banks also welcomed the inquiry but encouraged retirees to “delay timing of an annuity purchase”.

He added: “Our consumer research of retirees, found that those buying annuities act more by default than by considered choice, even though there is plenty of evidence to suggest that better retirement outcomes could be achieved, simply by taking a deep breath and reflecting a while.

“Most savers in defined contribution (DC) pension schemes feel pressured into buying an annuity when they retire, which is an irrevocable decision for life.”

Partnership director of corporate affairs Jim Boyd said: "While we have yet to see whether enhanced annuities will be included, we welcome any review that has the potential to raise awareness of finding the most appropriate product given a person's personal circumstances.

"Over 50 per cent of people at age 65 have a health or lifestyle condition that would qualify them for an enhanced annuity."

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