ANNUITIES. A change in the landscape

Transcription

1 1 ANNUITIES A change in the landscape

2 2 BACKGROUND WE BELIEVE THAT FROM THAT TIME [2008] FIRMS SHOULD HAVE BEEN IN NO DOUBT ABOUT THEIR RESPONSIBILITIES TO THEIR CUSTOMERS FCA The Pensions Act of 2014 created a great deal of uncertainty surrounding the changing nature of retirement income options. Annuities in particular have been on the regulator s radar for some time highlighting the clear need for annuity providers to take notice and take action. Such firms should take steps to assess their past sales, checking whether they secured a fair outcome for their customers. The first thematic review on open market options (OMO) dates as far back as 2008, when the then FSA emphasised the need for firms to make improvements to the way customers were informed about the availability of other providers products; products with potentially better rates including the availability of enhanced / impaired annuities. The FCA followed this work up in February 2014 publishing a second thematic review into annuity sales (TR14/2): it found that little had changed. The review reported that many customers are missing out on higher incomes as a result of buying an annuity from their current provider. Based on the results of TR14/2 the FCA began a market study to look at how the market might develop, as well as gathering evidence on how it works today. The results essentially found that competition in the retirement income market is not working well for consumers. In March 2014 the Government announced the biggest reform of the retirement system for a generation, giving consumers much greater freedom over how to use their pension savings from April Based on these new freedoms the FCA announced that a further thematic review into non-advised annuity sales was to be completed (TR14/20). This review sampled files from firms that represent 70% of the annuity market. The focus was entirely on non-advised annuity sales and included a review of materials sent to customers as well as listening in on at retirement telephone calls. The findings indicated that firms sales practices were contributing to customers not shopping around, not switching provider on the open market, or not purchasing an enhanced annuity.

3 3 COMMON THEMES HUNTSWOOD HAS ALREADY PROVIDED SUPPORT TO A NUMBER OF PROVIDERS COMPLETING ANNUITY REVIEWS AND THERE ARE COMMON THEMES EMERGING WITHIN CASE POPULATIONS. FACT FINDING PROCESSES Often the fact finding process was not conducted in the necessary depth. Inadequate fact finding prevented firms from being able to demonstrate suitability and often led to customers not purchasing the most suitable products for them. REDRESS FIGURES It is in the earlier cases where enhancements were missed where we typically see trends of discrepancies in redress figures, and these figures also tend to be much smaller. However, in more recent cases, customers have been compensated with much larger, more significant amounts. Systemic failings in the earlier cases are often more difficult to assess in terms of materiality which is why these lower redress figures may occur. ENHANCED ANNUITIES Poorly captured medical information is another common failing. Providers have been failing to ask important questions around smoking, heart problems and high blood pressure. Missing such questions can, and has, resulted in customers who are unaware they qualify for an enhanced annuity, and are therefore missing out on better rates. For providers that did not offer enhanced annuity products it is particularly important to ensure that from 2008 onwards, customers were taken through all relevant medical questions, and informed that enhanced annuity options were available elsewhere in the market, especially if they met the qualification criteria. In supporting firms in their past business reviews, we ve noticed that the qualification criteria for an enhanced annuity varies greatly from firm to firm there is no generic criteria. Interestingly, one of the providers we worked with did not offer an enhanced annuity rate unless both high blood pressure and high cholesterol levels were present together something which has since been revised.

4 4 CHALLENGES, CONSIDERATIONS AND RISKS OPEN MARKET OPTIONS In reviewing past business, ensuring that customers have given appropriate consideration to OMO has been one of the main challenges for firms. Your firm must look at the information you supplied to your customers and ensure that it covers all appropriate OMO available to them at the time. CUSTOMER AWARENESS It is important that before selling any annuity products you have made sure the customer is both aware of the options available to them, and has given due thought and consideration to these. If you were dealing with new customers you should be asking how they came to decide upon your firm as their best option. In this vein, with lots of different products available, you should ascertain whether customers were, or were not, led into an unsuitable product. Some examples of unsuitable products include: Customers buying annuity protection with nobody to leave the money to in some instances the only quotes given to customers were protection rates with the maximum guarantee length Customers not taking their tax free cash as they were not aware they could Annuities being taken in arrears rather than advance simply to achieve a higher monthly amount regardless of the fact it would take years to break even Many providers now outsource their annuity quote calculations and we have come across incorrect annuity quotes being sent to customers through this model. With one provider in particular, customers were receiving quotes with overlap, used to protect a guaranteed annuity term, when they had not asked for this. Even if your firm does outsource its quote calculations, it is still your responsibility to make sure the output is correct and suitable for customers. WHAT SHOULD FIRMS HAVE DONE ALREADY? The firms included in TR14/20 have been required to review a small sample of their post-2008 annuity sales under instruction from the FCA. Firms not involved in the study are encouraged to do the same. Firms potentially affected by the aforementioned annuity risks should consider reviewing a sample population to ensure they understand the inherent risks in this legacy population. For any firm considering reviewing areas of their annuity book, there are three important questions to ask: 1. Business model was your business model focused on retaining customers? 2. Product were your annuity rates competitive? 3. Sales process - did you offer enhanced annuities or explain this option to your customers? Did you offer your customers OMO?

5 5 HUNTSWOOD ANNUITY REVIEW FRAMEWORK If your firm is reviewing its population of annuity sales post 2008, Huntswood has designed a riskbased annuity review framework, which has been carefully developed to ensure a well-balanced review of your past business. The Huntswood review framework ensures rigorous case investigation in line with regulatory expectations, targeting activity at the highest risk areas of your book. It is important for firms to take the key risk factors into account when reviewing annuity populations. We ve detailed the Huntswood framework on the following pages to help guide you through some of these. ESTABLISHING YOUR BUSINESS MODEL FOR NON-ADVISED ANNUITY SALES Were your sales based on: OMO An in-house product Referral to an independent financial adviser A partnership A combination of these By breaking down your entire sales population we are able to identify the segment populations with the highest levels of risk. Based on the information in the FCA thematic, TR14/20, we can ascertain that the highest risk segment in the example business model would be small pots with no OMO offered. Therefore it is important to further investigate this segment of the population to ensure sales were of a suitable nature. Whilst we will discuss our framework in the context of OMO, it is worth keeping in mind another potential area of risk would be where customers are referred on to partner providers; the FCA highlighted that referral fees should not result in a reduced annuity rate for the customer. An example business model breakdown for a pension provider s annuity sales PARTNERSHIP OTHER INTERNAL NO OMO (small pot) INTERNAL OMO (mid size pot) IFA (large pot size)

6 6 HUNTSWOOD ANNUITY REVIEW FRAMEWORK RISK-BASED SAMPLING In order to investigate and review these two segments of the population, Huntswood uses a riskbased sampling method to produce a representative sample of the segment. Based on the results of this segment sample review, it is possible to determine the level of risk within the entire segment and whether further review is necessary based on crystallised risk factors identified. Representative samples The first step when identifying potentially at risk cases is to establish a sample which is representative of the entire population of that segment. Huntswood completes an annuity product level heat map to ensure the segment sample includes all the relevant product types in the appropriate proportions - typical annuity product types seen include: Investment linked annuities Level annuities Escalating annuities Capital protection annuities Temporary annuities Quality assurance process The quality assurance (QA) process itself holds another important potential risk factor if not structured resourcefully and / or executed correctly. A sample of QA cases will be checked by Huntswood prior to these being discounted as low risk.

7 7 HUNTSWOOD ANNUITY REVIEW FRAMEWORK Triage Each case in the segment sample is run through a triage process to identify those with high risk factors. In relation to annuities, these risk factors will be those identified in the FCA thematic review: INTERNAL NO OMO (small pot) The health of the customer (did they qualify for an enhanced annuity?) Pot size ANNUITY PRODUCT Additional factors can form part of a subsequent triage process based on any further elements that your firm or Huntswood may consider pertinent to the review, for example: Investment appetite (or attitude to risk for short term and with profits annuities) Death benefits Need for income LOW RISK TRIAGE OPTIONS HIGH RISK REVIEW** FAIR CUSTOMER OUTCOMES Suitability of segment ** sample review will determine whether or not a full segment review is neccessary

8 8 HUNTSWOOD ANNUITY REVIEW FRAMEWORK REVIEW PROCESS FOR HIGH RISK CASES Following the triage process the segment sample will have been split into high and low risk cases. The focus of our review is those cases categorised as high risk which will go through the Huntswood review process: 1. Cases will go through a desk-based review to determine suitability. If following this there are any cases where suitability cannot be determined, customer contact may be necessary. 2. Once the high risk cases have been reviewed a report is issued detailing the crystallised risk factors so that remedial action can be taken to address these. 3. The report also ensures that risk areas of the entire segment are identified without the need to review the whole segment population. 4. Once the review and remedial actions have been completed there will be a go / no go decision based on the suitability levels observed. 5. Should the segment sample have a significant amount of cases (90% confidence interval) that are suitable with no customer detriment the segment population can be closed without extending to the full population. Conversely, if results are poor then certain case populations can be accelerated to reduce the scale of the full case review.

9 9 HOW CAN HUNTSWOOD HELP? Huntswood is a specialist resourcing and consultancy firm operating in the area of governance, compliance and complaints. We are known for providing our clients with the right people through resourcing and managing project teams, offering smart advice and consultations from industry leading professionals, as well as high-level financial recruitment. Whether your firm has already begun to review its annuities back book or is considering a review, Huntswood can provide the following end-to-end support: 1. Initial population risk identification / validation 2. Managed resource to deliver the review Where we have done this previously, in annuities or elsewhere in the pensions market, key to the success of these projects has been the combinations of detailed technical and regulatory insights from our consulting team / conduct specialists coupled with access to a large pool of appropriately qualified and experienced associates to meet the scale of this type of work.

10 10 HOW CAN HUNTSWOOD HELP? Huntswood s managed services team can be relied upon to provide managed support throughout the entire lifecycle of your organisation s annuity review. The benefits include the following: We deliver teams of qualified and experienced specialist resources from our large pool of contractors to conduct your case reviews We provide accelerated training to our contractors including a route to competence tailored specifically to your firm and its products for swift and wellorganised project mobilisation Our rapid selection, training and deployment of resource means you avoid lengthy recruitment processes and the resulting increases in fixed overhead costs Improved levels of productivity, when compared to employed staff / firm resource with no degradation in the quality of output We can ramp up and scale back resources at short notice, in line with your business needs Our delivery managers project manage the entire review from process embedding to people management, which means your firm s management team can continue to focus on business as usual and value adding activities We are self-sufficient and operate at arm slength which means that, although we keep communication open, our efficiency and experience means our dependence on you is minimal In addition to providing case reviewing resource, Huntswood also provides clients with a number of value add services to ensure your annuities review is performed both efficiently and in line with customer and regulator expectations: Regulatory knowledge and insight Huntswood are members of the s166 skilled person panel for conduct of business Share best practice - Huntswood s delivery methodology is based on a commitment to continuous improvement and a track record of successful delivery. As industry experts in the provision of outsourced past business reviews, our clients look to us to provide guidance and best practice around their outsourced arrangements Embed continuous improvement initiatives - Huntswood will operate in an environment of continuous improvement. On one of our complaints projects the benefits tracker denoted annualised savings of 7.5m driven by Huntswood initiatives alone Strategic alliance - Huntswood partners with a number of actuarial firms who specialise in redress calculation - consequently we have access to remedial calculations and are able to identify market proximate rates quickly and efficiently

11 11 HUNTSWOOD S OFFERINGS AND BENEFITS SKILLED RESOURCE FEATURES Short-medium term basis Provision of delivery / execution resource Integrated into BAU operation SDM oversight On client site Time and materials (T&M) pricing Insource basis MANAGED SERVICE FEATURES Medium to long term basis Full completion of project resource (including team / quality management) SLA / service credit provision Continuous improvement programme Our client s or Huntswood site T&M or price per case commercial* Out-task basis OUTSOURCING FEATURES Long term basis On Huntswood s site Responsible for defined deliverables Fixed price / price per case Outsource basis BENEFITS Rapid / quick deployment High calibre resource Straightforward commercial construct Flexible contractual terms BENEFITS Huntswood managed Continuous improvement cost savings Performance management / SLAs Implementation support (e.g. capacity planning) Contractually committed outcomes Operational infrastructure supplied at cost Mitigate service delivery risk Regulatory insight (optional) Business process improvement (optional) *subject to a proof of concept being undertaken

12 LUKE WOOTTON 12 CLIENT PARTNER M E lwootton@huntswood.com HUNTSWOOD ABBEY GARDENS ABBEY STREET READING, BERKSHIRE RG1 3BA HUNTSWOOD.COM