The pensions industry has been forced to tear up almost two years of work after the Government abandoned its plans to create a market for retirees wanting to cash in their annuities.
With less than six months to go before the secondary annuity market was due to be introduced, it has emerged that a number of important industry issues remained unresolved, including data protection.
Pension Wise staff are also understood to have not yet begun training on delivering
secondary annuity guidance.
Plans to launch a market for secondary annuities struggled to get off the ground after they were proposed by former chancellor George Osborne in the 2015 Budget. Their initial launch date of April 2016 was pushed back 12 months amid concerns raised by providers and advisers. Research for Money Marketing earlier this year based on a survey of 258 advisers found that 65 per cent thought the Government should scrap secondary annuities.
Despite this, the sector had eng-aged in initial work to prepare for secondary annuities being launched. For example, some companies had started allocating IT budgets and considering data protection issues. Experts argue that much effort could have been saved if policymakers had “sobered up” to market issues before pulling out so close to the implementation date.
The Government cited a lack of buyers and insufficient consumer protection as the key reasons for pulling the plug on secondary annuities, but providers tell Money Marketing several other sticking points arose in discussions.
“There is no point changing IT until you know what is happening. There were a lot of outstanding issues so we did not know enough”
In a statement last week, Treasury economic secretary Simon Kirby declared he was not prepared to put customers at risk.
Kirby said: “Allowing customers to sell on their annuity income was always dependent on balancing the creation of an effective market with making sure consumers are properly protected. It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited.”
Ministers estimated back in April that only 300,000 people – out of a total of five million annuity holders – would make use of the reforms.
The FCA had also previously flagged consumer protection issues, saying the secondary annuities market presented more danger to consumers than pension freedoms.
For providers, one issue was how annuity providers would know if someone had died. Aegon UK pensions director Steven Cameron says several providers were encouraging the Government to create a central register that the industry could use to access that information.
Cameron says: “The Government often has this information and they were concerned there would be data protection issues if they gave us that information. That had not been
resolved and, in the absence of that [register], annuity providers might have been reluctant to sell on their annuities.”
He adds while it was pointed out data protection rules do not apply to the deceased, the Government continued to raise concerns about sharing information.
The number of firms willing to play in the market was another problem, with the Treasury admitting there were “insufficient” buyers to create a competitive market.
KPMG partner David Fairs says the more the market was scrutinised, the more this issue was brought to the surface.
He says: “What you ended up with were a small number of IT providers and a smallish number of regulated bodies who were going to participate in that market. A lot of players prob-ably decided for reputational reasons, just because of the size and viability of the market, that they did not want to play.”
Fairs says there was also extensive discussion between Government, providers and trade bodies about preventing the market from being manipulated and open to money laundering risks.
He says: “The players that would have participated in that market would need to be regulated in some way so there is control of the money going around. The fact the market had to be regulated cut down the number of people thinking about those things.”
There were also unresolved issues related to annuities linked to spouses.
Cameron says: “You might find that someone sold their annuity and that annuity was due to be paid to the current spouse. But what if the person remarried before they died and there was another person that thought under the annuity contract they were due to receive some entitlement. There was another big question mark around how you would stop that person being able to claim something.
“It was a complicated legal problem but it was something that those involved in the discussions kept coming back to and finding very difficult to come up with a practical way of addressing.”
The Government’s U-turn on secondary annuities has meant work by providers has been abandoned.
The FCA had launched a consultation into the standards Pension Wise workers would have to meet when giving guidance on the secondary annuity market. But there were still two outstanding consultations from the Treasury and the FCA one expected to cover the regulatory permissions for those wanting to buy annuities and the other related to the advice requirement for those selling an annuity. Many in the market had expected the papers to be published last month.
Separately, Money Marketing understands Pension Wise had not yet recruited or trained guiders to deliver appointments.
Aviva head of financial research John Lawson says most of the insurer’s work involved speaking with the Treasury, the FCA or HMRC about the potential rules that would govern the secondary annuities market.
Aviva had done some internal work on what the process might be for dealing with customers, buyers and intermediaries but, he says, without the regulation there was little point in proceeding too far.
Lawson says: “There is no point changing IT until you know what is happening. There were a lot of outstanding issues in the secondary annuity market so we did not know enough. We had discussed how we might interact with potential buyers or Pension Wise and we had also done some high-level work around pricing. We were just generally looking at prices people might get in the
secondary annuity market. We had not costed in the price we might offer if we were to buy back, we had not made the decision internally.”
Standard Life head of pensions strategy Jamie Jenkins says: “We have never signalled any intent to be an active buyer of secondary annuities so our work has primarily focused on how we would facilitate a change in beneficiary. As such, the cost has been very minimal.”
Retirement Advantage pensions technical director Andrew Tully says the company had not changed any systems and its major investment in the market was staff time. He says: “There were so many outstanding issues we had held off making any decisions or committing to any work. Most of our time was people and keeping up to date with chan-ges. We were talking to a lot of people who might have been involved in the market but we had not done anything system-wise, so we were in a fortunate position.”
Defending the data
Retirement Advantage was involved in discussions with intermediaries to find out how they might work together in the market.
Tully says: “If we did want to buy – which we were lukewarm about – we would have to pass information between us. The discussions were about how that was going to be set up, what information they would need from us, and how the information would pass back and forward.”
Data protection was also an important consideration for LV=.
LV= retirement solutions product head Vanessa Owen says: “We were trying to understand from the technology providers and a couple of firms who were going to be buying annuities what their processes would look like and how we would support a customer around access to portals. We tried to focus on how we would deal with some of the more complex issues around data protection. If you are going to put customer details on portals we needed to make sure we had nailed all those issues.”
Providers and trade bodies were also engaged in Government lobbying.
Aegon would not have been a player in the market, having sold its annuity book, though Cameron says it was involved in discussions about potential risks in the market.
He says: “We were looking to identify the risks to consumers because we were keen they be mitigated. If they weren’t, there was a risk the whole pensions industry would suffer reputational damage.”
But the Association of British Insurers wants to make clear its members did not lobby against the proposals. An ABI spokesman says: “The key thing is we were engaging constructively with the Government. That is not to say we weren’t pointing out issues to be addressed – not least that there would need to be added protection for consumers.”
Expert view: Douglas Anderson
Firms would have been thinking about whether to offer a buy-back option or whether to leave people to sell their annuity on to another insurer. There is a huge interdependency here for the insurer – there was no good pricing reference point to decide how much to offer because the market did not exist.
Insurers would also be worried about the reputational risk as once they allow for all of the costs and risks, those customers will get back a lot less than they expected in some cases, so individuals would feel hard done by.
There is also a cocktail of quite tricky market conduct issues and difficult pricing issues associated with the secondary annuity market. The appropriate price to offer someone for the income stream you are giving up will be dependent on your life expectancy and would require people to go through a medical underwriting process. The people who are in the poorest health will be the ones who get less money than the people who are in good health. However, the people who would be keenest to sell would be the ones in the poorest health.
Some people – particularly the firms which manufactured or distributed enhanced annuities – were definitely trying to repurpose the infrastructure they had for medical underwriting for the sale of a secondary annuity.
Some will be quite disappointed that they have already seen a shrinkage in the enhanced annuity market taking place following freedom and choice. They thought they were going to get some relief from the loss of revenues only to find out that now the secondary annuity market will be stopped before it has begun.
Even the time people spent thinking about the issues would have been a considerable cost to the industry that could have been avoided if plans had been thought through first. It is unfortunate the policymakers did not think through the consequences before they made the announcement in the first place. There have been some of us who thought this was an unimplementable piece of legislation and it was only a matter of time before the Government sobered up and realised they could not implement it.
Douglas Anderson is partner at Hymans Robertson