A consultation on plans championed by pensions minister Steve Webb to enable 6m legacy annuitants to trade their income stream for cash could be launched at next week’s Budget, according to sources quoted in a report by FTAdviser sister title the Financial Times.
The paper cites “Whitehall sources” revealing that a meeting is to take place on the issue tomorrow (13 March) among the “coalition’s most senior figures”.
A consultation, probably undertaken by the Financial Conduct Authority, would be needed on how to regulate any secondary market.
Speaking to FTAdviser in January, Mr Webb said a secondary annuities market would be targeted at institutional investors such as insurance companies and pension funds, who have often called on the government to launch longevity-based investment products.
This would also help to fend off criticism over sales to retail buyers, following a previous ban on sales to mainstream consumers of life settlement products which are similarly based on the persistency of third party policyholders.
However, concerns continue to be raised over potential detriment for those selling the policies, who could face discounts of up to 20 per cent according to some estimates.
In the interview with FTAdviser, Mr Webb sought to play down such worries by claiming demand for longevity-related products would ensure healthy competition. He added that people “know whether they would rather have £5,000 now or £20 a month until they die”.
Another potential pitfall is whether or not insurers and others would be interested in buying secondary policies. Royal London, for example, told FTAdviser that it would be “unlikely” to participate in a re-sale market in the future.
A separate FT article states that only a few larger firms of the 25 that currently sell annuities have expressed an interest in joining such a market, including Aviva and Legal and General. Standard Life has also previously stated the idea has merit.
The plan would likely appeal to many of the legacy 6m people with an annuity contract - Mr Webb said during a speech to an FTAdviser conference last month that he has seen direct evidence of demand - and could be seen as a vote winner.
Some have argued, however, that it would be unlikely to help those who have been left most out of pocket by poor value annuity deals, such as those who bought standard annuities when they would have qualified for an enhancement.
Following a thematic review late last year, the FCA instructed insurers to conduct a “statistically significant” review of enhanced sales since its ‘open market option’ guidelines were published in May 2008, which could yet lead to more direct action.
Tom McPhail, head of pensions research at Hargreaves Lansdown said that plans to allow resale of existing annuity contracts “could make sense” but only for a “minority” of existing annuity investors.
ashley.wassall@ft.com
