Can the insurance industry blame anyone other than itself for the “anti-annuity” Budget?
For some time, insurance companies have been the target of criticism about their role in providing annuities. Newspaper headlines have regularly accused them of setting out to mislead their customers by deliberately loading their communications with unfathomable jargon, being preoccupied with their own profit margins at the expense of good customer service, failing to encourage shopping around and so on.
Some of this is justified, some of it is not – but was it the clinching factor in influencing the Government to launch what many saw as an attack on the industry and the annuitisation process as a whole?
The Chancellor’s announcement that he intends to abolish the effective requirement to buy an annuity took everyone by surprise but, with the benefit of hindsight, perhaps we should have seen it coming.
Annuity rates have been on the slide for a number of years and their value as part of the decumulation process has come increasingly under question.
Most of this was not the fault of the annuity providers themselves; increasing longevity, gilt yields, quantitative easing and other factors were more significant contributors.
But the industry failed to convince its critics that it was serious about reforming some of its more dubious practices and its reputation has suffered as a result.
Similarly, in relation to the forthcoming investigation by the Financial Conduct Authority into old personal pension plans (so-called zombie funds), the industry has continued to drag its feet and resist any attempt to move forward.
These schemes are a blot on the landscape with their high charges and hefty exit penalties, trapping the plan holders within them and perpetuating low net returns.
Surely the time has come for some sort of amnesty, with exit fees for pension plans older than, say, 10 years waived to give customers the opportunity of getting a decent-sized pension.
It is only by taking the initiative in these and other respects that the insurance industry has any chance of regaining the support of the Government and, just as importantly, the respect of the public at large.
The changes in the Budget were not as revolutionary as many people seem to think. It is right that savers are more in control of deciding how and when to spend their own money but many of them already had that choice previously: small savers under the triviality rules and bigger savers under flexible drawdown arrangements.
Once the hype about purchasing expensive cars and buy-to-let properties settles down – as it will do once the consequences of withdrawing big lump sums out of a tax-sheltered pensions vehicle are fully understood – there will be a demand from many savers for some kind of good-value, guaranteed income for life which is precisely what an annuity is (or ought to be).
If the insurance industry can up its game and deliver a better and more flexible lifetime income product over the coming months, I have little doubt that annuities (perhaps under a new name) can rise, phoenix-like, from the ashes.
Restoring public confidence fully, however, in a system which the FCA described as broken is sure to be a challenge for the industry but one which it cannot afford to ignore.
Malcolm McLean is a consultant at Barnett Waddingham