The Government is driving ahead with plans to create a secondary annuity market but providers remain unconvinced savers will be better off.
Insurers have been in talks with the Treasury over how a market could function ahead of the 18 June consultation deadline on its proposals.
Money Marketing revealed last week how the Government plans to reverse its initial decision to block providers from buying back their own annuities and introduce a ‘blind bidding’ process delivered by central exchanges.
Some are concerned the Government should be focusing its resources on implementing the pension freedoms, with one provider even refusing to take part in the talks.
But former pensions minister Steve Webb, who was instrumental in pushing the reforms forward, says the industry needs to be “careful not to be stuck in the old paternalistic ways of knowing what’s best”.
In April insurers including Legal & General and Scottish Widows called on the Treasury to reverse its decision to block providers from buying back their own annuities.
The Government said providers could come under pressure to sell annuity-backing assets and warned customers might mistakenly believe they could only sell their annuity to their existing provider.
But some annuity firms argued if they were barred from the market policyholders would get worse rates.
Others who were initially opposed to the idea now say they are comfortable with original providers being allowed to buy back their own annuities, but with some caveats.
Partnership, Just Retirement and Retirement Advantage back the plan on the condition there is effectively a compulsory open market.
Just Retirement director Stephen Lowe says: “Buyback should be permitted but only under certain conditions. You have to intervene to create a commercial open, transparent market – effectively institutionalising shopping around.
“This could be done through what we called ‘authorised bureaux’. If a provider wants to buy back an annuity, the customer is banned from going directly to them. They can go to the bureaux, then the provider has an opportunity to put in a price bid for that.
“That removes the public pressure on providers to have to sell back annuities, because the customer just gets the best price and at that stage the customer doesn’t know who the purchaser is.”
Partnership head of product development Mark Stopard says original providers are needed in the market to ensure people with small pots are not excluded.
He says: “It’s much harder to provide a viable market for someone with an annuity paying them £30 a month. That’s where it makes more sense to allow existing providers to bid, but only in a competitive, open market. We need to have one or more exchanges in a blind bidding process.”
But Aegon regulatory strategy director Steven Cameron says there is a “false impression circulating” that customers’ existing providers will be able to offer better rates because of administration cost savings.
He says: “I’m not at all convinced by the claim that the existing provider will be able to offer a higher price. This will depend on many factors, including the price at which the assets underpinning the annuity might be sold for and on complex reinsurance arrangements.”
Standard Life head of pensions policy Jamie Jenkins also says allowing providers to cancel contracts could mean those firms run into technical difficulties.
Cameron adds: “There’s a real tension here. The Government wants to be seen to be offering something valuable, but on the other hand if it overplay that it may create the impression that all annuities are bad and everyone should cash them in.”
In its consultation, launched as part of the March Budget, the Treasury hinted it could “mirror” the requirements from defined benefit to defined contribution transfers, and force consumers to take advice if the value of their annuity was £30,000 or more.
Retirement Advantage pensions technical director Andrew Tully says the Government needs to act to prevent people starting the process of selling their annuity without knowing if they will need to take advice.
He says: “The Government should put it in a slightly different way. For instance, putting it in sample tables and saying if you’re aged 60 and getting less than £100 a month, you don’t need to take advice. That way at least people have clarity on day one.”
But Stopard says fluctuating interest rates make it “very hard to come up with arbitrary hard and fast limits”.
He adds: “Advice has to be provided unless we can satisfy ourselves that there is sufficient consumer protection in other ways, such as through Pension Wise and The Pensions Advisory Service.”
Before she was appointed pensions minister, Baroness Altmann suggested the remit of Pension Wise could be expanded to include sessions covering tradeable annuities.
But Cameron warns guidance staff might find it hard to “stay on the right side of not giving a personal recommendation”.
He says: “If there’s a cut-off below which advice isn’t compulsory, we shouldn’t assume Pension Wise is the best delivery mechanism.
“Selling your annuity is a binary decision concerning a specific investment. It will be harder to ‘guide’ a customer here without stepping over the advice line. And if, like Pension Wise, such guidance is offered free to annuitants, can it really be argued that advisers and providers should fund it because they will benefit?”
Jenkins also predicts there would be limited appetite from advisers to take on annuity reselling work, based on networks’ attitude to DB to DC transfers. He also says it is unclear whether advisers have the appropriate skills to assess a client’s state of health.
Tully says it is crucial the Government manages the public’s expectations to avoid a repeat of the rollout of the pension freedoms, where customers have been left frustrated when access to their pot was not as smooth as they expected.
He says: “People in the street won’t necessarily understand those nuances, and they will often not know where the income comes from. Without strong communication from the Government we risk the scenario we have at the moment with pensions likened to bank accounts. All this does is create false expectations.”
Craig Palfrey, certified financial planner, Penguin Wealth
The idea of a secondary annuity market might seem to create a level playing field but it actually undermines the lifetime contract that is the basis upon which annuities are priced. Will some annuitants cash in without advice, without proper understanding of what they are doing? There have been enough pension scandals, we don’t need another one.
Daren O’Brien, director, Aurora Financial Services
It’s fraught with dangers for advisers. The main problem is people are trying to sell these things because they don’t think they’re good value for money. They are almost like life settlements, which have a bad name in the industry.
It will be a very difficult market and I can envisage lots of issues that would mean we wouldn’t want to be involved. The work involved for us I can see being very painful for us and for a client as the time needed would make it expensive for them. It could be another bit of bad press for advisers, people complaining their advisers won’t help them cash in their annuity.”
Webb calls for protection for older retirees on cash for annuities
Former pensions minister Steve Webb says the Government should consider introducing extra protection for older retirees accessing the secondary annuity market and the wider pension freedoms reforms.
Since the Treasury launched its consultation on the secondary annuity market in March, concerns have been raised that older people could struggle to understand what represents a ‘good price’ for their annuity.
Speaking to Money Marketing, Webb says: “We need to think about the ability of those in later retirement, and how this interacts with the freedom and choice reforms. It is fine to say at 55 savers can have a mix of whatever investment options they want. But should we expect consumers to go on reviewing that throughout their entire retirement without some additional prod, default or nudge? The position of the older retired will need to be looked at for these reasons.”
He argues there may be occasions when savers want to cash in their annuity, despite the price on offer being below what an actuary deems fair.
Webb says: “It’s going back to the old ways to say an income for life is the only proper choice. We have to be slightly careful not to be stuck in the old paternalistic ways of knowing what’s best.”
He suggests the industry code on enhanced transfer values, which states ETVs should only be offered to those over 80 years old on an opt-in basis, could be used as a guide.
Webb also thinks Pension Wise sessions could include guidance on selling annuities and believes there will be a supply of advisers prepared to specialise in the market.
He says: “Guidance can absolutely work here. Just as Pension Wise will tell savers about the tax consequences and try to make them think 30 years down the track, some information and guidance is better than none.
“There will be specialised advisers, it’s not an easy calculation and judging what’s right for a client is not straightforward. I can understand why some advisers won’t want to get involved, but I would have thought there will be some supply.”