Why the FCA's piecemeal action could push people back towards annuities

This will be to determine whether savers with certain lifestyles or medical conditions lost out through purchasing a standard annuity rather than an enhanced annuity, or through not shopping around. Providers are being asked to check their own homework on questions we know the answers to (yes and yes).

This widespread investigation of what is going wrong with the annuity market could, conversely, give the market a boost at a time when it is under the most scrutiny. One of the watchdog's main conclusions, from the FCA's market study:

The problem with annuities, in two graphs

The vast, vast majority could do better shopping around.

Or, viewed through the FCA's calculation of the "money's worth" of annuities (for the technically minded among you, this measure is explained in an accompanying paper), we can see how this is hardly a new phenomenon:

There are a number of things stopping people from shopping around... 

The FCA laid out a series of factors for people sticking with their current provider.

• Lack of understanding or knowledge of how to do so

• Reluctance to commit the time or effort

• Jargon putting people off

• An unwillingness to provide personal information

• People trusting employers and their providers to do the right thing by them

• Major life events creating an urgent need to convert retirement pot into income

...but bad sales practice is making things worse

The watchdog's review of sales practices found both good and bad practice. The bad practice included providing shopping-around leaflets to one set of customers but not others, or telling people that delaying the decision could cost them – but mostly it was not encouraging people to shop around, particularly on customer service calls:

"The majority of calls in our sample did not actively encourage customers to shop around, or repeat the shopping-around message," the FCA reported. But some went further:

But the FCA's plans to deal with these situations – the pre-announced review of rules in pensions and retirement, and replacing the Association of British Insurers' code of practice, with the possibility "to extend our regulations" to drive shopping around – will hardly leave providers quaking in their boots. Again, we will have to wait and see.

Five suggested remedies

The FCA suggested in its market study five remedies:

1. Requiring firms to make clear how their quote compares

2. Recommending the pensions guidance service take into account 'framing effects' and other customer biases

3. Working with the government to develop an alternative to the wake-up pack given to savers at retirement

4. Recommending the development of a 'pensions dashboard' to allow savers to view all their pension pots in one place

5. Continuing to monitor the market

These will be no doubt be seen as sensible steps. The dashboard in particular would help address the big challenge for the government's retirement guidance: people knowing what entitlements they have, and where.

But given what we know about people's propensity, or a lack of, to shop around – especially that point of trusting what an employer has put in place – stronger action is needed against the less-healthy sales practices.

The government's champion for older workers, Ros Altmann, put out the following statement: "It is truly shocking that the FCA's review uncovers what seems clear evidence of frequent mis-selling, yet is not proposing immediate action to stop it happening any more."

After a tough year for annuities, the FCA's long-awaited report could be taken as a fillip: a few creases to iron out, but annuities are still a good choice for consumers, given the right options. The debate may swing back a little more towards products that provide income security in retirement.

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