FSA to make disclosure rules on open market options and traded endowments

• Policyholders of individual pensions must be informed when they approach retirement that their annuity may be purchased from a life office other than their present pension provider; and
• holders of some life policies, who seek information on their surrender value, must be made aware that they may be able to sell their policy instead.

These proposals are intended to achieve certainty that the disclosures will be made and consistency in the way that the information will be given to consumers. The closing date for responses is Wednesday 31 October.

David Severn, Head of Conduct of Business Policy at the FSA, said:

Our aim is to encourage competition by making sure that consumers make decisions having received all relevant information.

The decision to buy an annuity is one of the biggest financial decisions customers will take but few shop around for the best annuity rate for their circumstances. The measures we are proposing are aimed at ensuring consumers get a clear message about their right to exercise the open market option and buttress the welcome steps the industry has taken to inform consumers about the option.

Open Market Option (OMO)

Given the significant differences possible between annuity rates, and the no going back nature of the decision, where a member of an individual pension approaches retirement the pension provider must:

• Explain that, by shopping around, consumers may get a better deal in retirement;
• Explain the open market option, including the fact that there is not necessarily one best company or product for all individuals in all circumstances; and
• Include a brief explanation of how to make use of this option, including the desirability of taking advice.

Traded Endowment Policies (TEPs)

Given that higher values might be available if an endowment policy is sold rather than surrendered, where appropriate, the life assurance company must:

• Explain that higher values might be obtained through the traded endowment market; and
• Explain how the market works.
  

Notes for editors

1. The proposals on open market options are that:
   • Firms must inform policyholders, no later than 4 months prior to their planned retirement date, that they have the right to shop around for the best pension annuity deal;
   • A reminder of the right to shop around must be sent to policyholders at least 6 weeks prior to their retirement date; and
   • A reminder of the right to shop around must be given whenever a quote to take benefits is requested outside of the dates detailed above.

2. Included within the scope of the proposed rules for Open Market Options will be:
   • Personal pension schemes
   • Stakeholder pension schemes
   • Free standing additional voluntary contribution contracts
   • Retirement annuity contracts i.e. section 226 policies (where an open market option is available under the contract terms)
   • section 32 buy-out policies approved under section 32 of the Finance Act 1981 (now incorporated in Chapter I Part XIV of ICTA 88) where an open market option is available under the contract terms.

3. The Association of British Insurers has published a Statement of Good Practice entitled Pension Maturities Statement of Good Practice (August 2001), which recommends minimum standards for handling pensions on maturity. This initiative is welcomed by the FSA.

4. CP106 'Disclosure: Trading an Endowment Policy and Buying a Pension Annuity' is available on the FSA website at www.fsa.gov.uk.

5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

6. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.