♦ FSA must safeguard annuity pricing and take action if improvements in pricing are not passed on to customers
Mercer has welcomed the review by the Financial Services Authority (FSA) investigating whether annuities are being fairly priced and appropriately marketed. According to the consultancy, it is critical that the 12 month investigation safeguards competitive annuity pricing and that retirement options are communicated to pension scheme members.
Martyn James, Investment Principal at Mercer commented: “Mercer is fully supportive of the FSA's investigation into annuity sales. Annuity pricing can greatly influence whether the retirement income generated by a pension will be sufficient for a scheme member. It is simply not acceptable that pension scheme members are losing significant value because of poor marketing practices, which mean that members are not getting access to the best annuity or to fair prices.
“The amount that a scheme member and their employer pay into a pensions pot during that employee's working life, combined with investment outcomes achieved on those contributions, is crucial. However, as members approach retirement they also need to ensure that they carefully consider the payment channels and timing for receiving income in retirement.
“The industry needs to encourage pension scheme members to take independent advice at an early stage and to ensure that professional advice is available at affordable prices. Mercer encourages employers to engage with their employees by highlighting the retirement options on offer, rather than allowing employees to sleep walk into expensive annuities. This situation often includes income drawdown, which is likely to become increasingly popular as pension pots get larger and if annuities continue to be expensive.”
Mr James added, “Pension scheme engagement needs to improve to ensure that employees are prepared for retirement. In particular, strategies designed to de-risk investments and optimise pension pot pay-outs close to retirement should not necessarily be static. Where the pension fund is constructed to protect against changing annuity prices, investment strategies should be tailored to reflect how annuities are priced.
“It is critical that the FSA safeguards annuity pricing to reflect market conditions and that precautions are taken against insurers who fail to pass on annuity price improvements to their customers."
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