Financial Services Consumer Panel says reforms needed to ensure pensioners aren't losing out through "exploitative" pricing
Millions of older people may be losing out because of potentially exploitative pricing of pension annuities by insurers, according to an official report that found the £12bn-a-year market does not work well for most consumers.
The Financial Services Consumer Panel, a statutory body, has recommended "urgent" regulatory and government-led reforms in order to prevent millions of retirees losing out, including the launch of a national annuity service.
An annuity provides a regular income from the pot of money that a pension plan holder has accumulated during their working life.
At retirement, the majority of people take the deal that is offered by their pension provider, although figures have suggested that the proportion going for the "open market option" (OMO) is now almost 50%.
By shopping around for the best annuity in this way, people can get more for their pension pot - perhaps as much as 40% more if the individual has a health problem or "lifestyle issues" that mean they are likely to die sooner than a healthy person.
About 400,000 new pension annuity contracts are sold by insurers and specialist firms each year, and this number will increase dramatically as millions of workers who have been "auto-enrolled" into pension savings reach retirement age.
But the consumer panel, which advises the Financial Conduct Authority, found that the open market option "still isn't working for many people, who are getting less income in retirement than they could".
Part of the problem is that buying in this way is "too complex" for most consumers - too often, they are "put off by complexity, information overload and the perceived cost of a full-scale search".
The researchers also found that increasingly, people are buying annuities without taking advice. Instead, they are using one of the multitude of "non-advice" or "execution-only" websites, where the company receives a commission from the provider, which is deducted from the customer's pot.
Sue Lewis, chair of the consumer panel, said: "The increase in non-advice sales appears to be driven by light-touch regulation and higher profit margins, not consumer demand."
Lewis's organisation found "many examples" of poor practice in the non-advice market, including persistent unsolicited emails and phone calls, which meant that the outcome for consumers "can be akin to a lottery".
Annuities sold by pension providers to their existing customers count as non-advice sales, and the panel said the FCA needed to undertake a rigorous market study to examine, among other things, "the possible exploitative pricing of annuities sold by insurance companies to their DC [defined contribution] customers who have saved with them for a pension".
It added there was growing concern that insurers' profits on these annuities "might be excessive".
Other recommendations include tightening up the rules on the non-advice market, and asking the Money Advice Service to launch a "targeted educational campaign".