Is it ‘fair’ to unpick billions’ worth of annuities?

What started out as an ostensibly barmy notion, being touted for potentially political reasons at the outset of a transformational election campaign by popular pensions minister Steve Webb from the deeply unpopular Liberal Democrats, is gathering momentum.

We may yet see the day people are able to unpick their annuities.

Mr Webb first tentatively raised the notion at the National Association of Pension Funds annual conference, when amid equivocation and prevarication - and stressing all the while that the government had ruled it out at least in the short term - the minister said the plight of savers disenfranchised from the radical reforms and stuck in their lifetime contracts was “gnawing” away at him.

My initial reaction was to be utterly dismissive - and we initially published a blog to the effect that what was being countenanced was a reckless breach of the sanctity of contract law, which would have catastrophic and unforeseen ramifications.

Remember the last time a senior figure intimated that legacy life and pensions contracts worth billions of pounds might be ripe for regulatory intervention? There was pandemonium in markets, panic in boardrooms, and an inquiry which is costing the Financial Conduct Authority (and therefore the industry) £2.5m was set in train.

For the record, the annuity market was worth £12bn and £14bn respectively in each of the past two years; hundreds of billions will be tied up in policies from years past still in payment.

I also struggle to reconcile this idea with the concept of ‘fairness’ Mr Webb is seeking to enshrine. If a contract is signed in good faith and within the rules as they stood at the time, is it not a dangerous precedent to simply step in and rip it up because times have irrevocably changed? Rules in this sector are in a near constant state of flux.

I find it hard to disagree with the sentiment that the industry has brought these consequences on itself

And practical considerations make the policy look a non-starter: do you set a time limit (no good surely, as there will still be those that sit ‘unfairly’ on the wrong side of the divide), or go for broke? Do you demand investment returns/interest are added to policies many years old, adding what will surely be unbearable cost for most providers, or ask savers to accept an inflationary penalty?

Some concur with this critique. Informed Choice owner Nick Bamford asked on Twitter yesterday: “If we unwind annuity contracts what other legally binding contractual agreements should we abandon?”

Other unapologetically anti-annuity advisers, many of whom are the biggest fans of the proposed pension freedoms, think differently.

One reader commented under our blog: “I planned my life around giving these people as little as possible for as long as possible and thank goodness they’ve been stopped in their tracks. For those affected I really do hope there’s a near-future coalescence around a national campaign to get people’s pensions back from them.”

And I have to say, I find it hard to disagree with the sentiment that the industry has brought these consequences on itself. Many have willingly misled consumers into rolling over into poor-value annuities for far too long, getting rich themselves in the process.

My own father is a perfect example of what was so egregiously wrong: a life-long smoker with an incurable and life-limiting lung condition, he was sold a conventional annuity on the basis of communications and language which suggested he was “cashing in his pension”. The rate was poor; the decision final.

All of which means that despite my initially raised hackles, I’m amenable to some of the more considered ideas we reported yesterday that were put forward by government older workers tsar Ros Altmann, who told Mr Webb during a committee hearing in the House of Commons that unwinding annuities was “not impossible”.

In particular, she told FTAdviser after the session that one option could be for savers who believe they were ‘mis-sold’ an annuity in the past to demand a refund, probably comprising of their initial fund minus what has been paid already.

She said: “... [A]nyone who considers they were mis-sold an annuity, perhaps as they are in poor health but were never asked, or they wanted partner cover but were not told what single life meant, to challenge their insurer and ask for a refund.

“This would need some FCA or Ombudsman support and could, in my view, be justified under TCF rules.”

In truth, this has very little to do with Mr Webb’s tub-thumping troublemaking over pensions freedoms and everything to do with righting wrongs that were visited upon too many savers in the past.

Frankly even if the pension reforms were completely undone under an unlikely Labour majority government, this feels like a proper interpretation of ‘fairness’.