Conservative Shadow Work and Pensions Secretary David Willetts is calling on the Government to issue gilts indexed to changes in longevity to ease risks faced by annuity providers.
In a speech to thinktank Politiea last week, Willetts claimed the plan would boost annuity returns by relieving product providers of some the risk they face from unforeseen improvements in longevity.
His plan calls for the Government to issue bonds that have a normal interest rate coupon based on the Government Actuary's central forecast for life expectancy. If life expectancy moved by more than 5 or 10 per cent outside that central forecast then interest payments would go up or down.
This would mean that dramatic advances in genetic medicine that increased longevity would lead to long-term savings institutions having Government bonds holding greater funds to discharge their annuity promises. Willetts estimates that deferred annuity costs could fall by at least 10 per cent.
Willetts also confirmed that the Conservative Party would remove the requirement to buy an annuity.
He said: “If we can cut the cost of supplying long-term savings, that can make as much of a contribution as changing the incentives facing individuals by rolling back means-testing. If companies do not have to set so much money aside to cover greater life expectancy then can offer a better deal to their savers.”
Winterthur Life pensions strategy manager Mike Morrison says: “Although it could be a more expensive way for the Government to raise capital, this is a better way of getting involved in addressing the problems that pensions face than compulsion. This is an easy way to assist with the pension crisis.”