Annuities Inquiry for FSA Consumer Panel

by Dr. Ros Altmann

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Introduction:

Having worked on annuities policy for the past ten years, and mindful of the rapidly increasing importance of annuitisation in the UK pension system, I am delighted to offer my expertise in connection with a study focussing on improving consumer outcomes from the annuitisation process.

Annuities are a unique financial product. The Government forces people to annuitise their defined contribution pension savings; the purchase is irreversible with consumers locked in for life; most consumers only ever buy an annuity once in their lifetime; and providers are permitted to deduct ‘commission’ as if a regulated sale is taking place, without having to fulfil the obligations usually associated with financial product sales. There is no other financial transaction which has all these characteristics.

It is well-documented that consumer understanding of annuities is generally very poor, that many purchasers may not be aware of either the different types of annuity available to them or how to find the best value product for themselves. It is also well-known that most annuity purchasers do not receive independent financial advice.

Over the past few years, there have been several reviews and various industry initiatives, designed to improve the functioning of the annuity markets from a consumer perspective. It is therefore of interest to assess what progress has been made and to what extent further improvements may be required. The Financial Services Consumer Panel has already identified later life and financial services as one of its most significant areas of interest. It is, therefore, important identify whether the Consumer Panel may need to make any policy recommendations to the FSA itself in connection with the annuitisation process.

Role of the FSA Consumer Panel

The FSA Consumer Panel’s main purpose is to provide advice and comment on the effectiveness of the FSA. The Consumer Panel’s involvement relates directly to annuities as follows:

• Is it a consumer issues? Yes, most definitely. Nearly half a million annuities are bought each year
• Is there actual or potential serious or widespread consumer detriment? Yes, this has been well-documented and is evident from the nature of the market
• Does the Panel have the capacity to get involved? Yes, if it so chooses
• Will Panel intervention make a difference? If it is determined to do so, yes. The Financial Services Consumer Panel objectives state that the Consumer Panel is willing to develop its own position, via informed evidence and make its views known publicly

The Consumer Panel has already commissioned some initial research on later life issues and this, together with further discussions, has indicated that annuitisation is an important area for further work. The key findings of its work on decumulation so far, point to the potential consumer detriment from low consumer understanding and the scope for mis-selling and mis-buying. The work also indicates to the FSA Consumer Panel that the ‘consequences for the consumer can be severe, extremely stressful and in some cases difficult to remedy’. In fact, with annuitisation, any detriment will often be impossible to remedy.

Aims of this Proposal

This proposal aims to provide the FSA Consumer Panel with a unique and powerful insight into the workings of the annuities market from the perspective of major stakeholders – and most particularly for consumers. It offers to carry out a detailed study of how the annuities market is working, from the point of view of a comprehensive range of stakeholders. I believe it is particularly important to include actual and potential purchasers of annuities. The aim of the research will be to identify actual or potential consumer detriment, areas where consumer outcomes can be improved and devise policy recommendations that could facilitate such an improvement. The main thrust of the report will be focussed on producing specific recommendations that would improve the workings of the annuities market for consumers. These would be designed to help the Consumer Panel fulfil its remit of advising and making recommendations to the FSA which can help mitigate consumer detriment or improve regulation and protection for consumers of annuities.

External expertise to supplement my own input – subcontracting

I have asked Opinion Leader Research to assist me in this project.

Having discussed the project in-depth with Opinion Leader, we have put together what we believe will be a thorough programme of work, aiming to achieve the following:

• assess what consumer detriment does or might exist
• explore any evident market failures, process shortcomings or failures of regulatory protection
• identify possible routes for improving consumer outcomes
• then put forward potential solutions that the FSA Consumer Panel can consider for action, with suggested routes to best achieve the desired improvements

Description of proposed project

We believe that the FSA Consumer Panel may not have, so far, paid sufficient attention to consumer needs directly. It is essential to engage with individual consumers. Speaking to financial advisers and consumer representative bodies will obviously be a important, however the value of interviewing individuals themselves and having direct input from past or potential consumers will, we believe, add significantly to the usefulness of this project. It should help demonstrate, more directly, how the annuitisation process is working in practice and also to test out possible proposed solutions on the public directly, for people who do not access an adviser. More than half of those purchasing annuities do not have a financial adviser.

We have therefore added a section of work to interview consumers and then hold focus group discussions to give direct input to the policy picture. The desk based research will provide input to the questions to be focussed on in the stakeholder interviews and this research, combined with stakeholder interview findings, will also drive the questions for consumer interviews. For example, if interviews with financial advisers or consumer groups identify potential problems in connection with choice and distribution of annuities, we can follow these up with consumers themselves. If FSA or ABI interviews highlight issues where improvements in consumer protection or market workings have occurred, we can test these out. Consideration will be given to simplified or streamlined advice and money guidance.

Schematic representation of project:

Desk research
– identify consumer detriment and legal/regulatory issues

Stakeholder interviews
– discuss consumer detriment and role of regulator

Consumer individual interviews

Consumer focus groups
– discuss policy changes

Revisit some stakeholders
– discuss policy changes

Proposed policy recommendations

My skills, expertise and relevant experience

I am experienced in research, having worked in the pensions arena as an academic, practitioner and policy adviser for over thirty years. My Ph.D. thesis was on pensions and incomes of the elderly. I work as an independent adviser on pensions policy, including annuities policy. Much of my work has involved desk research and subsequent presentation to Senior Management, Government officials, Parliamentary Committees, Corporate Boards, Trustee Boards or industry bodies, as well as national media.

I have worked on annuities policy for some ten years. I was an adviser to the Treasury on the Myners Review of Institutional Investment and one of the pieces of work they asked me to provide was on Annuities. I subsequently worked with the Number 10 Policy Unit, advising on Annuities. In connection with the ‘Modernising Annuities’ consultation in 2002, I worked extensively on putting together proposals, interviewing industry stakeholders, analysing the workings of the market and making policy recommendations for improvement. I worked with insurance companies, specialist annuity advisers and also met with the FSA Consumer Panel to outline areas for potential improvement to annuitisation. I identified a number of areas of consumer detriment with proposed solutions to overcome them. In 2002, I commissioned a significant piece of nationwide research from YouGov which included an analysis of knowledge and understanding of annuities. This online Survey identified serious shortcomings in consumers’ knowledge and understanding of annuitisation. This led me to propose policy improvements to attempt to overcome some of the failures and many of my proposals received support from individual insurers and consumer bodies. I have spoken at industry conferences on annuities, published articles and last year I wrote a large report on Planning for Retirement, which explored some of the alternatives to lifetime annuitisation.

My website has a section specifically devoted to Annuities. www.rosaltmann.com/annuities.htm This contains a summary of some of the work I have published on annuities reform. The papers I wrote for the Treasury and Number 10 are not included.

I am experienced in advanced level desk-based research, as well as interviewing at a senior level. For the Myners Review, I interviewed senior executives of fund management firms, investment consultancies, actuarial practices, insurers and industry bodies. When working with Number 10, I worked with a wide range of pension and annuity companies, as well as with the DWP, OPRA and the NAPF.