OpinionJan 19 2015

Of course life companies are backing annuity re-sales

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Of course life companies are backing annuity re-sales
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It would appear a groundswell of opinion is beginning to rise in favour of Steve Webb’s idea, variously branded “crackpot” or “unworkable”, to allow legacy annuitants to cash in their lifetime income policies.

Of course many of the annuitants themselves are in favour of the idea. Why wouldn’t they be: many of their younger friends will be busy devising exciting strategies for their own stockpile of savings from April, some perhaps flicking through holiday brochures or car magazines; others eyeing up alternative investments such as property to provide an income.

Instead those who took the erstwhile prudent step of guaranteeing their income are disenfranchised from a revitalised retirement market, receiving a (no doubt modest) monthly income. “Cash lump sum, you say? I’m in!”

Now it seems even the life companies which sold them the policies are in favour of the idea. A report in our parent paper FT Weekend on Saturday cited no less than three, Standard Life, Aviva and Legal and General, stating the idea had “potential”.

If you think about it, though, this is similarly intuitive.

Mr Webb, a well regarded pensions minister with clout within the Department of Works and Pensions at least until the election - and with a fair wind and some resilience in the Liberal Democrat vote maybe beyond - has made the plight of past annuity purchasers a personal crusade.

When he finally crystallised the ‘thoughts rattling around his head’ last October into the less nebulous notion of re-selling annuities earlier this month, there were only two viable options. Either the company which sold the policy buys it back, or someone else does.

Much better for the life company that it’s a third party. Quite aside from the fact that a bias to the healthier members within the risk pool who would get better value from a sale would undermine the risk cross-subsidy, the sheer volume of interest could see buyout costs existentially escalate.

On the other hand, if a third party does the buying through a mediated secondary market, the policies and the underlying actuarial assumptions remain in place and the integrity of the risk pool is retained. The providers also don’t need to write a welter of cheques.

If this is the prevailing solution, the issue of value is going to key, as to be fair all three companies spoken to by the FT acknowledged.

A re-sale would only make sense for a third party if the lump sum paid was likely to be recouped through greater aggregate payments. Given current longevity assumptions and a margin for error, buyers will likely apply sizable discounts.

Now of course, these sales would be voluntary and if all the information is made available to the individuals concerned, why should anyone stand in their way.

In one case cited by the FT, the roughly £40 a week the annuity is paying in addition to other pension income would probably be far more useful as a lump sum, whatever the discount. There will be other examples where this is not the case and the person wishes to proceed anyway.

Even so, I worry about the detriment that could result. About the people who might take a paltry lump sum because their monthly income is low and end up far worse off in the longer term; about a market that could easily become skewed in value terms away from the very people it is designed to help.

Practical issues persist, too. Given that death bonds are considered too illiquid and toxic for retail investors, why should secondary annuities sold on a similar basis be any different? If they are to be packaged and syndicated to pension funds and the like, who fills this intermediary role? Maybe this is another reason why the insurers see “potential”.

If the market can be made to work and some of these concerns overcome, I would support it. But I also think we should remember why this might appeal to some providers, who would love the heat to die down over their probable past mis-sales of especially enhanced annuities.

It is justice for these trapped annuitants that must remain the more pressing concern.

ashley.wassall@ft.com