Cash for pensions: Is Steve Webb’s annuity reform plan workable?

As politicians gear up for the long run in to May’s general election, pensions minister Steve Webb has begun pushing his own vote-grabbing idea.

Webb wants to give the millions of pensioners who have already bought annuities the option of selling the contracts on, effectively swapping a stream of payments for cash.

He says these people should not be left out of the reforms announced in last year’s Budget will give savers far greater control over how they spend their pension pot.

But while the pensions industry is agreed pre-Budget pensioners should not be left behind, there are concerns the minister’s plan further complicates a market in the midst of revolution and could leave consumers worse off.

Radical plans

Last weekend, the Liberal Democrat revealed he plans to launch a consultation and publish a coalition document on the proposals before the election.

He says: “The Budget freedoms for people who have yet to use their pension pot have been widely welcomed. But the millions of people who have already been forced to buy an annuity are so far missing out on these new freedoms.   

“As a Liberal Democrat I want to see people trusted with their own money wherever possible. That is why I am now working on plans to see if we can get these freedoms extended to those who are receiving an annuity but who might prefer a cash lump sum.”

Webb is pushing for the idea to be included in the Liberal Democrat manifesto, Money Marketing understands.

However, the complicated changes required would have to be implemented by the next parliament, meaning the LibDem MP needs the backing of the Conservatives and Labour.

Shadow pensions minister Labour’s Gregg McClymont says Webb’s focus is wrong.

He says: “Instead of making yet more policy on the hoof the pensions minister should spend his time actually sorting out the annuity sales process with all its defects and potential for detriment to consumers as most recently exposed in the FCA’s report. Accepting Labour’s plan to give all savers access to independent annuity brokerage would be an obvious place to start.

“If he is going to say things like this he needs to back things up with detailed plans, not just float it without any specifics.”

Conservative MP and Treasury select committee member Mark Garnier also has reservations. He supports giving people greater choice but warns the plan adds to the “increasing number of areas where people could fall vulnerable to bad decisions”.

He says: “It’s good that the market is being allowed to have more influence over pensions and people are being given more choice but with that comes greater risk and that needs to be mitigated with better advice, which the RDR hasn’t delivered.”

Experts say creating a second–hand annuity market would require fundamental reform at a time when the industry is struggling to meet a raft of existing deadlines by April.

In prectice

Webb has previously floated the idea of allowing people to unwind annuity contracts but until now has offered little detail. He says people should be able to sell the roughly six million active annuities for a lump sum.

The annuity would not be torn up and would continue to be tied to the life of the original holder. He says institutional investors, such as defined benefit pension funds or investment banks, might be interested in purchasing annuities in bulk and the Treasury would benefit from revenue brought forward.

Legal & General pensions strategy director Adrian Boulding says it’s a “fabulous idea” that could work on similar principles to the second-hand endowment market that existed in the 1990s.

He says: “There will be some consumers who find a cash sum will be better than a stream of income and on the other side of the table there will be some institutions keen to buy into long-term, fixed-interest investments.”

Experts have pointed out the need for medical underwriting to ensure a price that does not favour the buyer or seller, but Boulding says two markets could emerge.  

“I suspect there might be two markets,” he says. “One for wealthy people with very large annuities where it’s fully medically underwritten, and another for ordinary people who have a small pension they want to get rid of where it’s not medically underwritten.”

Fidelity Worldwide Investment retirement director Alan Higham argues those in ill health are bound to lose out in an underwritten system. He says: “Only the healthy, who stand to benefit the most from owning an annuity, will have a chance of selling one.”

Boulding also warns the idea could fall flat without creating a national deaths register so buyers can keep track of the original annuitants.

Aviva head of pensions policy John Lawson says the proposal could work and suggests insurers themselves might have an appetite for bulk deals as the decline in individual sales frees up capital.

But he warns “a large amount of legislative work” would be needed to bring the plan to life – including further changes to the pensions tax regime – and that the reform could encourage a “spendthrift mindset”.

Guarantees v cash

Partnership corporate affairs director Jim Boyd thinks the move would “make annuities very attractive” as people would have a combination of a secure income and provision for a “rainy day moment” if they need it.

However, Standard Life head of pensions strategy Jamie Jenkins warns the policy shift away from guaranteed income is dangerous and could leave more pensioners short of money as people live longer.

He says: “Is this proposal just a complete wholesale shift from income in retirement? It worries me there seems to be a sense that no one needs an income in retirement any more.”

Annuities may initially seem more attractive, he says, but providers could simply price in individuals’ right to sell on.

Advisers in the firing line?

Advisers say pensioners will struggle to compare the value of the guaranteed income for life provided by annuities and the cash offered by potential buyers.

Could this asymmetry of information force Webb to push people into taking advice before selling their annuity?

Dobson and Hodge financial services director Paul Stocks says: “People will get a lot less than they expect.

“It’s almost like a DB transfer – capitalising an income stream and then working through assumptions to create an income stream in another environment.

“You’re giving up a guaranteed income stream, which actually has even more certainty than a DB pension because DB schemes always have the risk of inflation fluctuating or scheme rules changing.”

Syndaxi Chartered Financial Planners managing director Robert Reid agrees.

He says: “It’s not as straightforward as Webb is saying. I wonder if he’s sat down and thought this through. What do you do with someone with a guaranteed annuity rate who decides to cash it out? It’s probably not in their interest.”

Expert view

A liberal taking liberties on pensions?

hugheshavard

The Steve Webb watchers amongst us may have been surprised by his recent much publicised remarks on yet further liberalisation of UK pensions. However, there is nothing surprising about politicians pulling rabbits out of hats ahead of elections. So much so that politics has been described as the art of looking for trouble, finding it everywhere, diagnosing it wrongly and applying unsuitable solutions. Particularly when some in the industry argue it will most likely generate a large volume of tax receipts for the Treasury.

Perhaps this is too cynical and an overly harsh judgement of Professor Webb, who has been without doubt the greatest champion of pensions reform since Beveridge first sketched out his five giants that founded the welfare state. However, what this announcement does demonstrate is we are on a fixed conveyor to a general election as never before. 

There is a huge list of changes that the industry and consumers are being expected to negotiate in the coming months. What is certain is that things will go wrong, sometimes spectacularly. This will generate irresistible pressure, probably from those same liberalising politicians, for regulatory intervention and action. It will doubtless be all the industry’s fault.  Whatever the result of the election, some reform of pensions regulation will surely be in the offing.

The Fixed Term Parliaments Act has stripped this Government of its traditional discretion as to when to seek a new mandate from the country. Consequently, we have been tipped into full-scale electioneering mode with politicians barely back from Christmas.  Webb may be sitting pretty in his Thornbury and Yate seat with over 52 per cent of the vote but the uncertainties of coalition politics could mean there will be surprises. Moreover, his position as Pensions Minister depends entirely on the coalition operating in “business as usual” mode after the election. 

With the general election being the most uncertain in some years, Webb does have a slim chance of being back in office post-May. However, should he return, he may come to live to regret his remarks.  Better than Beveridge; after all his pioneering work founding the welfare state, his Berwick on Tweed voters threw him out of office in 1945. You may win the public’s hearts and minds but you cannot always count on their gratitude. Unless perhaps, they’ve just bought a Lamborghini.

Havard Hughes is head of public affairs at MRM

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. There has been an alternative to annuities since 1995. If annuity was most suitable when the income commenced, then that should be the end of it.

  2. Steve Webb keeps the mantra ‘As a Liberal Democrat I want to see people trusted with their own money wherever possible’ as a reason for all these pension changes.

    All I would say, as one last parting shot from your role, is trust people to then invest their money in their pension fund and don’t penalise them for getting too much growth. ie remove the LTA.

    By all means restrict how much people pay in every year but don’t then cap how much that fund is allowed to grow to. …………………..its also penalising doctors, teachers etc with a 55% tax charge

  3. Webb is a classic example of a visionary. A man who finds it demeaning when you respond to his grand vision with “but how would that actually work?” In his eyes, he’s done his job by thinking up the vision, worrying about the details is someone else’s job. You don’t bother Frank Lloyd Wright with footling questions about the plumbing on the third floor.

    There is in principle no reason why someone shouldn’t be able to exchange an annuity for cash. But in reality, like transfers from DB schemes, it’s unlikely to be suitable for many people. It’s rather like the bookies’ new great scam, the “cash out”. It seems like a great idea to the punter when in fact they have been diddled twice – they paid the bookie’s margin once when they took out the bet and then they paid another one when they cashed out. There may be people for whom it is worth paying all over again to exchange an income stream for immediate cash, but not many, and the question is whether it’s worth all the legislative hassle for the good it will do that minority.

    Still, even to discuss this is to miss the point. Details! Don’t bother Steve Webb with details. Details are weeds in the garden of his mind.

  4. May I vote wholeheartedly in support of this. The legal changes only need be small, but the ability to trade annuity cash flows is hugely valuable to existing pensioners. Remember that because of QE most historic annuity purchases are likely to be worth significantly more than the purchase price- why should our customers not be able to take that gain

    It is in no sense reasonable that trading these cash flows should to be absolutely in customers interest.

  5. Politicians! No wonder the majority just don’t vote. I cannot think of any sector of society that is held in lower regard.

    Venal just doesn’t even come close. A a Liberal Idiot he wants to trust people – good point by Andrew Smith. But what about the fact that he doesn’t trust the majority anyway – that’s why we have compulsory AE. What a hypocrite.

    His latest wheeze – absolute nonsense. This is his swansong (or parrot screetch?) as he will be out on his ear come May.

  6. Saschas’ comments sum this situation up best. I completely agree that Steve is a visionary. And like most visionaries he does not always get it right. However without his constant pushing aginst the status quo, we would not have the reinvigorated pensions world that will shortly come into effect.

    To quote Voltaire “I disapprove of what you say, but I will defend to the death your right to say it”

  7. Notwithstadning all the underwriting issues, and the likelihood that there would be a zero underwriting quick and easy sell for a bad value lump sum; there are some near insurmountable technicalities. Life insurers themselves (and I am surprised at Mr Bouldings apparent enthusiasm) are not going to be keen to keep paying an annuity to a dead but unreported annuitant. There will need to be a robust (and expensive) regular life status tracking system in place else the new investor may find some years down the track having to hand back a lot of annuity payments that they were not entitled to receive.

    Mr Webb has looked at this form an original consumer perspective, but not looked at the near unbridgeable industry issues and the ramifications for the other consumer, the purchaser. Nor, it seems has anyone else commenting on the proposal. There has been too much concern about the possibility of a rip off, without seeing that the detailed logistics of operating this sort of market actually make it almost impossible to make work at all.

  8. To trade a life endowment also seemed a good and workable idea at the time. However, wherever there are imponderables and risk, especially when ‘betting’ against life expectancy, there are a fleet of ambulance chasers.

    Do it if you wish, but leave me well alone and yes, if that means I have to go restricted then OK, at least my PI Insurer will be pleased and I can look forward to a better prospect for a claim free retirement!

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