A lack of medical underwriting expertise and prohibitive costs could undermine the valuation process underpinning the advice the government has proposed to ensure viability of a secondary market for annuities.
Several experts spoken to by FTAdviser said that many secondary sales would be at low values below the current £30,000 exemption for advice on defined benefit transfers, with costs eating into the lump sums offered to consumers.
They also said few actuaries would have the expertise to undertake the full medical underwriting required to establish required longevity estimates.
The comments come in the wake of plans announced at the Budget last month, during which the chancellor George Osborne confirmed plans for the establishment of a secondary re-sale annuity market which is aimed to be in place from next year.
In the consultation paper published alongside the Budget, the government admitted that safeguards will be required to stop annuitants losing out once they are allowed to sell on their policy.
The paper said there is a “strong case for requiring annuity holders to take financial advice from an independent financial adviser, with a requirement for annuity providers to check this before they enable the annuity to be assigned”.
Jon Gwinnett, pensions technical manager at Nucleus, said there will be an increased need for advisers and that valuation methods will need to be “regulated in a similar way to the DB transfer market”.
Transfers from DB schemes require advice to have been taken, including a transfer value analysis, which follows a prescribed approach to valuing benefits, estimating mortality and income escalation.
Martin Tilley, director of technical services at Dentons, pointed to the exemption from advice for DB transfers under £30,000, which is in part because the process including the full valuation report would be prohibitive in terms of cost.
“The transfer analysis process and advice from a qualified adviser is not going to come in under a four-figure sum very often, if at all.
“Quite probably, appropriate advice on an annuity sale would be of a similar value and thus might be a high proportion of any annuity sale value - on which of course the individual is going to have to pay tax as well.”
Mr Gwinnett suggested a further problem was the lack of knowledge in medical underwriting, which would be required to ensure consumers received fair valuations.
Mr Tilley concurred that while actuaries will be able to determine a value factually, this is most likely to based on standard mortality assumptions “and this is where the difficulty lies”.
“Some form of factual health assessment will be required. Thus actuaries on their own may not have this knowledge to offer this service unless it done in conjunction with specialist health underwriters; the sort of people you find in annuity departments of the life company annuity providers.”
Paul Darlow, an actuary from Xafinity, noted that actuaries are not best placed to value annuities which want to be re-sold, again due to the medical underwriting involved.
“Analysing that is very specialist, only a few companies do that and they are the ones who sell annuities themselves. Even if they could, it would be very expensive and practically for big actuarial firms to do this, they would need to do anti-money laundering on each client.
“If individual clients are approaching them, the cost would be totally prohibitive; I can’t see how it could work.”
Gavin Markham, associate at Barnett Waddingham, added that it was likely actuaries would be involved, but on the other side of the fence and working for the institutional buyers, rather than on an individual level.
“It’s hard to see how an actuary could be in the advice process - it is more likely the actuaries will be making the offers.
“The Partnership’s and Just Retirement’s on this world would be well placed to value them, but I doubt they will want to be involved in the advice process. Similar rules must apply to this market though as to the DB transfer market otherwise it is hard to see how this will work.”
donia.o’loughlin@ft.com
