How the annuities mis-selling racket ripped off an entire generation: As experts warn it is the new PPI, we call for a major inquiry
- We urge the FCA to extend its investigation into the annuity market
- The annuity mess left behind by Pension Freedoms has not been dealt with
- Standard Life and Prudential have already received multi-million pound fines
More than four years ago, David Cameron’s Government introduced changes to pensions that were billed as the ‘biggest and most exciting’ for a century – Chancellor George Osborne’s words.
In a nutshell, they gave people the right to choose for the first time how they turned their pension fund into retirement income. Freedom, pension freedom. Hallelujah.
At the heart of the new rules was a seismic transfer of power from pension companies to individuals.
No longer would tens of thousands of people every year be forced by their pension provider to exchange their carefully nurtured pension fund for a lifetime annuity – a stream of monthly pension income, guaranteed until death do us part.
The Mail on Sunday urges the FCA to extend its investigation into the annuity market
A route that all retirees – self-employed or employed – were frogmarched down if their pension fund was set up on a defined contribution or money purchase basis (those with de luxe defined benefit pension schemes are spared such a fate).
But this was a process routinely abused over the years by numerous pension companies (insurance companies, many household names), as they sought to line their corporate pockets with wads of profits.
A process often resulting in woefully poor financial outcomes for pensioners that they could not then unravel – once bought, an annuity, however inappropriate, stays with the buyer for life.
Trapped. Hung out to dry. Despicable. Mis-selling at its most grotesque – far worse than a lot of financial mis-selling we have witnessed over the years because of its focus on the elderly, many with health issues and living on tight financial budgets.
Osborne knew the unfairness of it all – hence the reforms. We had written about it vigorously for many a year and, of course, the insurance industry damned well knew what they had been up to (feathering their own nests). Guilty m’lud without a scintilla of an apology. Money, money, money. Greed, greed, greed.
Our manifesto for justice
- All annuity sales made by insurers to existing customers should now be reviewed.
- Compensation should be paid to all those who have lost out financially – as a result of not being told to shop around; not being informed about enhanced annuities; or missing out on important spouse benefits.
- All insurers – large and small – should review annuity sales made to customers, even if they were not responsible for the sale in the first place.
- Government must resurrect plans to allow people to sell their annuities for hard cash.
Although the new era of pension freedom that Osborne waved in has not been without its own problems – a lack of quality, affordable advice available for retirees, an inflexible tax regime that often punishes those who want to access their pension, and outrageous charges applied to some new style pensions – the annuity mess it left behind has not been properly dealt with.
It remains a blot on the pensions landscape. A boil that needs to be lanced soonest.
It is why The Mail on Sunday today urges the City’s regulator to extend its investigation into the annuity market, following the multi-million pound fines it has imposed on Standard Life (£30.8million) and last week Prudential (£23.9million).
Fines issued as a result of the widespread mis-selling of annuities by sales teams at the two insurers.
We now believe that:
- Every insurer should be required by the regulator to review ALL past annuity sales to check customers ended up with the most appropriate plan.
- Such a review should not only embrace those customers who were shunted into an inferior annuity because their ongoing health conditions were ignored by the provider (better annuities are available to those in poor health or have a history of smoking). Or those who were not told about their right to shop around for a better annuity (rather than take the first one offered by the company that had managed their pension fund).
- It should also extend to those who ended up with annuities that offered no financial protection to loved ones – by failing to include a reduced spouse’s benefit. The exclusion of such a key annuity element exposes widows or widowers to a sharp drop in their household income.
- Where evidence of mis-selling is found, consumers should be offered immediate compensation (with interest) and be put in a position where future annuity payments reflect the rate they should have got if they had been given the best deal available at the time they annuitised.
- The review should embrace ALL insurers that sold annuities to their customers – and it should be conducted independently or under strict supervision. Where insurers have been taken over by rivals, it should be the new owner that is responsible for paying any compensation.
- Finally, the Government should resurrect a plan to allow people with annuities to cash them in. Such a scheme was promised under Osborne’s 2015 pension freedom rules, but was then quietly abandoned amid claims it was unworkable. Where there’s a will, there’s a way.
Baroness Altmann believes a sweeping review of past annuity sales is long overdue
Baroness Altmann, one of the country’s leading pension experts and Pensions Minister under Cameron’s second term as Prime Minister, believes such a sweeping review of past annuity sales is long overdue.
On Friday, she told The Mail on Sunday: ‘I believe nearly all annuity providers have failed to treat customers fairly.
‘They were never obliged to ask anything about a customer’s health or marital status.
‘As a result, the customer was invariably at a serious disadvantage when making an irreversible purchase. An industry-wide review of past annuity sales? Yes, definitely.’
Altmann also believes the fines meted out to the Prudential and Standard Life are not ‘nearly stiff enough’ and unlikely to ‘deter future problems of a similar nature’.
‘We need tougher penalties and more urgent action from the regulator,’ she adds.
Certainly, the Financial Conduct Authority’s fining of Prudential is a mere fleabite as far as the insurer is concerned – it is busy demerging its UK fund management business M&G ahead of its separate stock market listing later this month.
Annuity scandal: Pru routinely failed to alert customers to the right to shop around
The £23.9million annuity fine and the final compensation bill – that could rise to £250million – are less than the £310million final dividend and £100million one-off payment that M&G shareholders will get later this year. Disgusting.
Hardly a deterrent to bosses happy to inflict financial detriment on customers in order to keep profits high and share prices moving upwards so that personal bonuses keep growing.
At more than 70 pages long, the FCA’s final report into Pru’s failure to treat customers fairly is exhaustive and repetitive.
But in places, it makes for almost gripping reading as it reveals some of the sharp practices Pru staff employed between July 2008 and September 2017 to ensure customers bought Pru annuities – uncompetitive ones at that – and did not exercise their right to go elsewhere.
Staff, says the regulator, exploited the Pru’s trusted brand to push inferior annuities down the throats of customers.
They routinely failed to alert them to the right to shop around – and while informing customers that they would not qualify for an enhanced annuity from the Pru, they conveniently forgot to mention that one may be available from a more flexible rival provider. The whole emphasis was on ensuring customers ended up buying a Pru annuity.
Staff were rewarded with sales bonuses – equivalent on occasion to 37 per cent of their basic salary – plus the opportunity to win prizes such as spa breaks and weekend holidays abroad if they achieved high sales.
Steve Groves is the former boss of Partnership, an insurer specifically set up in the early 2000s to lure customers away from the likes of Pru with attractive enhanced annuities.
He says it was always in the business interests of insurers like Pru to do all they could to stop customers shopping around.
The more customers they leaked, he says, the more their profits were hit, the more their share prices – and the directors’ bonuses – came under pressure.
He adds: ‘I remember an article appearing in the personal finance pages of a national newspaper in the late-2000s advising people to shop around for an annuity, especially if they had health issues.
‘Partnership was suddenly inundated with people who had suffered strokes, cancer and heart attacks. They all wanted to move their annuity to us to take advantage of an enhanced annuity.’
He adds: ‘Sadly, we couldn’t do anything for them because annuities can’t be switched, but it was quite clear they had never been told about the availability of an enhanced annuity when they purchased their plan – or even asked about their health.
‘I knew then the annuity market was heading for a mis-selling scandal. I’m just amazed it took so long to bubble to the surface.’
A number of insurance companies, including Aviva, continue to sell annuities on the same ‘non-advised’ basis that both Standard Life and Prudential sold them to existing customers
The financial detriment caused by annuity mis-selling should not be underestimated.
Numbers crunched by Billy Burrows, of pensions adviser Better Retirement, show that a 65-year-old taking out a £100,000 annuity with Prudential 11 years ago would have obtained an annual income before tax of £7,384 (single life, no spouse’s benefit).
But if they had been directed towards the best annuity available at the time, they would have secured a retirement income of £7,690. Assuming they go on to live until age 85, the financial ‘loss’ works out at £6,120.
The numbers look even more dramatic if the 65-year-old had experienced a heart attack during his working life. Back in 2008, as a result of shopping around, he could have secured an enhanced annuity of £10,150.
The ‘loss’ of sticking with the Pru would then be a massive £55,320 over 20 years. Burrows says he would not be surprised if ‘ambulance chasers’ started looking at the annuities market to see if they could extract compensation on behalf of people who were sold a poor value, or unsuitable annuity.
Martyn James, of complaints handler Resolver, says annuities could be the new PPI mis-selling scandal.
‘It’s hard to get people to complain about pensions because they give up when faced with all the complexity. But I’d encourage people to exercise their right to complain, especially if the annuity they got was inferior to others available at the time and was not properly explained.’
Andrew Megson is founding director of retirement specialist My Pension Expert.
He says the insurance industry’s propensity to push customers towards poor value annuities is ‘reprehensible’.
On Friday, he told The Mail on Sunday: ‘What I find difficult to stomach is that often people who needed maximum annuity income the most – those with short life spans because of health issues – were denied it.
‘That extra bit of income provided by an enhanced annuity could have made a huge difference to their lives when they needed it the most. Many of these people are no longer with us and are not going to be able to get the compensation they deserve.’
A number of insurance companies, including Aviva, continue to sell annuities on the same ‘non-advised’ basis that both Standard Life and Prudential sold them to existing customers.
On Friday, Aviva would only say that annuities ‘can offer a valuable guaranteed income for life’ and that ‘it was important for the insurance industry and the regulator to work closely together to build greater trust in the financial services industry’.
The regulator told The Mail on Sunday it had been reviewing the annuity market for more than five years. Any customer who felt they had been given insufficient information about the annuity they bought, it said, should raise the issue directly with their provider.
Rest assured The Mail on Sunday will not let go until all victims of this awful mis-selling scandal are properly compensated. Justice for annuity victims.