There is much excitement at the Association of British Insurers. The Chancellor, it is reported, has agreed to consider alternatives to boring old annuity contracts on the condition that the new plans continue to guarantee an income for life.
This is excellent news for the ABI which has not had much to cheer about in recent years. What with the pension scandal, the endowment scandal and the rapidly developing with-profits scandal.
The ABI focusing its attention on annuities is, of course, not entirely altruistic. Unable to attract new money into its members' opaque coffers, it is looking for new ways to squeeze more profit from the vast funds they hold.
However, there is no doubt that the legislation surrounding annuities needs changing. Interest rates have fallen dramatically over the last decade, which has resulted in thousands of retiring consumers getting a raw deal.
Of particular concern is the rule which stipulates that you must invest your accumulated pension in an annuity by 75. Even if know you will die a year or so later, all your accumulated wealth must be invested in a policy that will provide little, if anything, to the family you leave behind.
Word is that the Chancellor is aware of this problem and wants to do something about it so long as the changes do not result in more people fall-ing back on state benefits.
His worst nightmare is to create a situation in which millions of oldies are handed free access to their money only to spend, spend, spend.
It is t
empting to argue that people should be free to do anything they choose with their money even if that does result in a boom in diamond-encrusted zimmer frames. But in this instance, the state does have a right to interfere.
Much of the money that pension funds contain would not be there if it were not for the tax breaks people enjoyed while they were working. That public money is rightly handed over on the understanding that it will be put to good use later on.
But the rules on annuities are too tight and there is plenty of room for change. One proposal being put forward is that people should be free to spend their accumulated cash as they see fit, subject to a minimum income for life being secured.
This minimum income could be set at a level which would preclude the pensioner from claiming state benefits in future. This seems a reasonable change but there is more the Treasury could do.
It should look very carefully to see whether people are in fact receiving all they should do from annuity contracts.
I have long suspected that the market is nothing like as competitive as it might be, with life offices making considerable and unjustified profits from many policies.
A quick scan of rates available shows vast differences between best and worst plans.
This clearly suggests competition is far from perfect. The Treasury should also look at any proposals made by the ABI which involve an entirely new investment contract being taken out at the point of retirement.
One of the very significant reasons that consumers are so disappointed with their retirement incomes today has to do not with annuity rates but with the charges that were extracted from their pension polices in the first place.
For insurance companies to be allowed to effectively double those charges at the point of retirement while pretending to reform the annuity market would be tantamount to fraud.
Yet this is exactly what the ABI will be seeking to do. It will argue for a new type of annuity – one with a strong equity element – and then insist it can only be provided as part of a new investment policy.
This is nonsense and the Treasury should not fall for it. If equity investment is to continue past the point of retirement, it can and should be done within the confines of the policyholder's original policy.
The marketing, distribution and admin charges on these plans have already been paid many times over.