Liability fears could derail the Government’s plans to let five million pensioners cash in their annuities from next April.
Advisers could find themselves faced with a rerun of the rollout of the pensions freedoms as customers are confronted with the advice requirement but face a dearth of firms willing to participate.
Last week the FCA set out how the secondary annuity market will operate, with head of pension policy Maggie Craig telling Money Marketing the regulator’s measures were designed to combat the “significant risks” facing consumers.
However, key details remain unclear – including where the advice threshold will be set – leaving potential customers, advisers, brokers and annuity providers waiting.
History repeats itself
Despite the problems encountered with the pension freedoms – where customers complained the advice requirement was blocking access to the reforms – the issue remains unsolved.
Now it threatens to stifle the secondary annuity market.
Four separate consultations were published last week, by the FCA, the Treasury, HM Revenue & Customs and the Prudential Regulation Authority, predicting that about 300,000 people – out of five million – would make use of the reforms.
The precise level of the advice threshold is yet to be set, with the FCA waiting on the Treasury. The Government has indicated, as is the case with the freedoms, that customers are free to act even against the recommendation of an adviser.
Yet most advisers appear reluctant to commit to the market.
“This is a really good example, like the pension freedoms, where the Government is saying ‘wouldn’t it be great if we did this?’ and not asking anybody before they do it”
Libertatem director general Garry Heath says: “This is a really good example, like the pension freedoms, where the Government is saying ‘wouldn’t it be great if we did this?’ and not asking anybody before they do it.
“And then they blame us because we can’t do something that was very expensive to do in the first place. The average Joe will not be in a position to pay the cost.”
But Craig is confident advisers will be willing to work in the fledgling market.
She says: “We have to wait and see. There will be advisers who get into this space. We’ve taken soundings from advisers and some will, and that’s entirely up to them, as it is with any part of their business.”
In 2015 the regulator published a factsheet on dealing with insistent clients but Craig hints there will be no further action in this area.
She adds: “We recognise there will be occasions when a client wants to take a different course of action to that recommended by the adviser and we’ve reminded advisers of the steps they should take when advising an insistent client.
“A client does have the freedom to not follow the adviser’s recommendation and so there is a limit to how much further we can take that.”
There are also concerns over how strong competition will be among annuity buyers. FCA rules mean providers will have to show their quotes alongside how much it would cost to purchase the same income stream at today’s annuity rates.
Just Retirement, Partnership and Retirement Advantage have pledged their involvement in both the buyback and secondary market, but others have been less gung-ho.
Craig says the regulator has identified 10 to 12 firms likely to be involved in one or both areas.
Aviva head of financial research John Lawson says the firm is likely to buy back but is less sure about buying other insurers’ annuities.
He says: “Given where we are, we’ve got 11 months to make this a reality and that’s quite a challenge.
“You have to take a proposal to the PRA about how you are going to use those assets and how you’ve taken into account the various risks that might arise and how you’ve mitigated them.
“When you take a proposal to the PRA it usually takes a long time to agree that, maybe six months, so unless you have a proposal by September it’s unlikely you will be in a position to say how you are going to use those assets from April next year.”
Government figures show it expects to bank £960m in the first two years after the launch of the market before seeing £295m leave its coffers in 2019/20 and 2020/21. The projection suggests an early gold-rush before demand quickly trails off, meaning providers have to be ready for launch or risk missing out entirely.
Final salary boost
HMRC’s consultation reveals how members of defined benefit schemes will be able to cash in.
Members of schemes where pensions are paid by bulk annuities purchased by trustees will also have access to the market. However, it will be left to trustees’ discretion to assign the annuity to individuals.
Just Retirement group communications director Stephen Lowe says opening up the reforms to defined benefit schemes boosts the lifespan of the market.
He says: “When freedom and choice launched, everyone’s predictions on withdrawals were wrong. This is not a static market because every year there is £15bn of bulk annuity transactions. That creates a whole new stream of people who will be eligible when it moves to buyout.
“The more bulk annuities you do, the more you fuel the market’s potential. So it’s not like it will end after three years, there will be at least 10 years of it.”
But Lawson sees the Government’s decision as “bizarre”.
He says: “It’s highly unlikely members will know if their pension is insured or not. It will come out in the media that some DB members can sell their annuity, and some can’t. It’s going to be an unholy mess.”