It’s official: pensions are “in”. They are actually (sort of) interesting and, following the Budget, “normal” people increasingly want to talk about them. Most experts I speak to agree this represents an enormous opportunity for advisers and the wider financial services sector.
But there is also an election on the horizon and politicians are sniffing around for ways to win votes and shake up the market (again).
Last week, Money Marketing pensions reporter Sam Brodbeck revealed the Treasury had summoned senior industry representatives to discuss the idea of creating a “secondary” annuities market.
With the final Coalition Budget due to be delivered by George Osborne next month and pensions minister Steve Webb pushing for the idea to be given teeth before the general election, a consultation looks to be a racing certainty. The very fact the industry is being kept in the loop will be a relief to many, given the “shock and awe” tactics employed by HMT in the Budget announcement and the subsequent reforms to death tax rules.
The big question policymakers and the industry are already wrestling with is straightforward – is it a good idea?
For politicians (and particularly the Conservatives), the calculus is fairly simple. The May plebiscite looks set to be the closest in decades and the retired demographic will be voting in their droves, so for Osborne and Co any policy proposal that appeals to pensioners will be hugely attractive. Given how popular the Budget reforms have been with the electorate (so far at least), allowing people to cash in their annuities is a politically attractive extension to the changes. It would certainly play well to Telegraph and Mail readers who, rightly or wrongly, believe they have been sold a poor value product by their provider.
But popularity itself does not ensure a policy is a good one, and some experts believe allowing the industry to offer people cash for their existing guarantees will inevitably see savers lose out. This is because “hyperbolic discounting” – whereby most people valuing money today over money tomorrow – will provide a ripe opportunity for the industry to siphon cash from consumers.
Hargreaves Lansdown head of pensions research Tom McPhail also warns that competition in the “secondary” market would be no guarantee of value for money.
He says: “Steve Webb wants to create an active secondary market for annuities and that will ensure people get good value.
“But the rather more simple proposition of selling someone an annuity in the first place failed to create a competitive market. There is no obvious reason why the market in reverse would be any better.
“You could potentially bundle up a book of annuities and sell them on the market, but then you get into life settlements territory and selling those to retail investors doesn’t look great.”
McPhail suggests if the reform is taken forward an advice requirement, similar to that proposed for DB to DC transfers, may be needed to prevent vast swathes of the population giving up valuable guarantees for cash.
Clearly allowing people to reverse an existing contract creates huge complexities and potential risks. But the Tories and LibDems are hungry for votes and, in pensions, they have lasered in on an easy target.
A period of stability post-April? Don’t count on it.
Tom Selby is head of news at Money Marketing