The cost of compliance in the pension annuity market
Operators in the pensions and annuity market should be aware of the importance of call training to maintain compliance.
Failure to do so and to adhere to open-market regulation for non-advised annuities can lead to large fines from the regulator, as one pension provider found recently. Annuities – the part of the pension that is bought on retirement and pays out a yearly sum – are regulated so that providers must advise shopping around at the point of purchase.
Over the course of nine years between 2008 and 2017, Prudential allowed its telephone handlers to sell annuities to Prudential pension-holders without publicising the need to shop around to compare prices with other providers. Telephone guidance by the pension provider was not standardised and the business failed to ensure that the call scripts advised consumers to shop around, and it did not monitor calls with customers to check that they were compliant.
The result was a £23.8m fine and an additional £110m in redress to Prudential’s customers, in what Mark Steward, executive director of enforcement and market oversight at the FCA called “very serious breaches” of regulation.
'Prudential failed to treat some of its customers, who could have secured a better deal on the open market, fairly.
‘These are very serious breaches that caused harm to those customers. Prudential is now rightly focussed on redress and today’s financial penalty reinforces the cardinal obligation of fairness that firms owe to customers.'
Catherine McKinnell MP, interim chair of the Treasury Committee, was quoted in newspapers at the time as saying: “This is yet another example of incentives in the financial services sector leading to a poor outcome for consumers. This toxic culture must be wiped out.
“Competition benefits consumers; Prudential’s actions have undermined this.”
The FCA’s annuities thematic review, published in 2014, found that shopping around while buying an annuity could save consumers an average of £71 per year, and that only 20% of the market had been shopping around before buying, necessitating regulatory intervention.
However the annuity market faced competition following regulation brought in by the outgoing Coalition pensions minister Steve Webb in a 2014 Budget.
In April 2015, pensions ‘freedoms’ were introduced that allowed retirees to drawdown a lump sum upon retirement rather than being directed into an annuity purchase. Critics of the previous system had suggested that annuities offered by the large providers were not good value, with the average pension pot of £25,000 affording a very small annuity.
Webb said that savers should be allowed to spend their savings as they wanted, commenting that they could buy a “Lamborghini” if they liked, which drew accusations of bad advice. But the consequence of the freedoms on the annuity market was huge: providers lost their monopoly of choice and competition increased on annuity sales.
About the author
Brian Cantwell, Commissioning Editor, ICAEW Financial Services Faculty