Plans to re-sell existing annuity contracts proposed by pensions minister Steve Webb have been deemed ‘unworkable’ by Hargreaves Lansdown’s head of pensions research Tom McPhail.
Mr Webb used the weekend media to float once again the idea of facilitating the resale of existing annuity contracts, having previously suggested it last October.
An estimated 5m pensioners who have already retired will miss out from the new pension reforms, that are set to be implemented in April, because they are locked into their annuity contracts.
Mr Webb told the Daily Telegraph that he wanted the law to be changed which would enable these pensioners to re-sell their annuities. This would create a “second hand” pension market, Mr Webb said, with insurance firms and others buying up these annuities and selling them in bulk.
He said details were being drawn up by the Department for Work and Pensions and that he was seeking cross-party agreement that proposals would be implemented by the next government.
Mr McPhail responded that there is an obvious appeal in finding a way to extend the pension freedoms to existing annuity holders and giving them the option to take their money back as a lump sum if they want, adding that the move would be a vote winner.
“It is to the government’s credit that they are continuing to seek new ways to reinvigorate the retirement savings sector and to encourage investors to take control of their own money; we just don’t think this latest idea will ever work.
“It is also worth noting that most market participants who have the necessary skills to engage in such transactions are the same insurers, actuaries and pension companies who are all currently working flat out to deal with all the other pension changes the government has thrown at them in recent months.”
He set out two possible options for how annuity re-selling might work in practice, the first being for the annuity holder and the insurance company agreeing to cancel the contract, with annuity payments ceasing and the investor being paid a lump sum by their annuity provider.
This however, does require the provider and the investor both being able to agree a fair price for the cancellation, which would probably mean the investor having to undergo a medical examination to try to assess their life expectancy.
Mr McPhail also pointed out that the investor might need sophisticated financial advice to assess the surrender being offered and the costs of the process would probably be prohibitive for all but the more valuable annuity contracts.
The second option would be for the annuity income stream to continue, but with the annuity holder selling it to a third party in exchange for a lump sum.
This would work similarly to ‘life settlement’ investment schemes, which involved the sale of second hand insurance policies which the Financial Services Authority previously labelled as “high-risk, toxic products”.
Mr McPhail noted that individuals are unlikely to buy second-hand annuities off other individuals as they generally do not have the actuarial and longevity assessment skills necessary to undertake such a transaction.
He suggested that they could use a competitive market to ‘bid’ for the income streams, however no such market exists today and there is no obvious incentive to set one up.
“Purchasers of the second-hand annuities would probably look to buy a portfolio of investments rather than a single transaction (to spread risk); this would therefore require the establishment of pooled funds for these contracts,” Mr McPhail stated, adding that this is unlikely to be an attractive commercial undertaking.
peter.walker@ft.com
