Automatic enrolment into workplace pensions will see the vast majority of people enrolled into risky ‘defined contribution’ schemes in the future. They probably don’t realise it yet, but this means they need to annuitise their pension pot when they get to retirement, in order to turn their savings into a regular income, guaranteed for life.
The problem is that annuity rates are particularly low at the moment, undermining the value of pensions saving. The market for annuities has always been fairly opaque, plagued by huge information asymmetries between consumers and providers, chiefly insurance companies (and remember that auto-enrolment is based on the notion that consumers should be able to remain disengaged yet still receive good outcomes from saving).
So the news that the Financial Services Authority (FSA) is to review the annuities market is very much welcome. But will their review go far enough to address problems in the marketplace? The initial signs are not encouraging.
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