A probe by Britain’s Financial Services Authority (FSA) into whether pensioners are getting a fair deal when they purchase annuities could be a credit negative for some U.K. annuity writers, says a Moody’s analyst.
Last week, the FSA announced the review, which will run through the second half of this year. The purpose, according to a statement from the FSA, is to explore “the risk of detriment that consumers may face as a result of not shopping around when purchasing an annuity.”
In the U.K., most pensioners obtain their annuity from their “host” pension provider, even though there is what is called an “open market option” (OMO) that permits them to shop around for the best rate when buying an annuity, writes Moody's senior vice president Antonello Aquino.
Aquino says there is up to a 20 percent difference between the best and worst annuity rates. Therefore, the probe “will be pressure on the margins of U.K. annuity writers, particularly those insurers that are the least competitive in terms of pricing,” Aquino states. If the FSA review makes consumers more aware of better rates, insurers with lower rates may see volume fall as consumers shift to other annuity options. Or, Aquino predicts, some insurers may see profit margins fall as they are forced to raise rates to stay competitive. “In addition, those insurers currently relying mostly on the rollover of existing customers’ pension funds into annuities are more at risk since their customers will be more likely to buy annuities elsewhere in the future,” the Moody’s analyst says.
Among the U.K.’s largest life business underwriters (which include annuities) are Prudential (No. 2) and Aviva PLC (No. 4).
The Moody’s note points out the Association of British Insurers is set to implement its compulsory annuity code of conduct in March. The code will require more transparency on the part of insurers when they communicate with customers regarding both the OMO and the benefits of enhanced annuities. Enhanced annuities are designed for those consumers that have a shorter life expectancy due to poor health. However, the Moody’s note states that many who would qualify for an enhanced annuity purchase conventional annuities instead, thereby missing out on higher annual payouts. Enhanced annuity underwriters, which account for about 50 percent of open market sales, stand to gain if more consumers switch from conventional annuities to enhanced ones, Aquino says.
“An annuity purchase is an important one-off decision that has long-term consequences for individuals if they get it wrong,” said Nick Poyntz-Wright, head of life insurance for the FSA in a statement. “We want to understand the level of the potential detriment for consumers if they do not shop around to see if there are ways to make this market work better for consumers.”
The FSA investigation will be done in two phases. The first will explore any harm consumers may suffer from not shopping around as well as a comparison of rates available in the open market and those offered only to existing pension policyholders. Depending on the outcome of that review, the FSA will investigate whether insurers’ systems “facilitate or inhibit” the annuity buying process.