Insuring for the future

The government has now consulted on whether these freedoms should be extended to all pensioners, including those who already have a pension in payment, enabling them to sell their annuities and receive cash or take a more flexible form of income. This article considers some of the issues around the creation of a new market in “second-hand annuities” and the potential impacts for the insurance industry and their customers.

The essence of the idea is that all pensioners in receipt of a pension will be able to sell their future income in return for a cash lump sum or an alternative more flexible form of income. The diagram below shows the general workings.

Essentially a policyholder who is receiving a regular income from an insurance company or a previous employer could go to the market and see what price he or she can get for the future stream of income.

Having agreed a price, the pensioner would assign these payments to the new owner to be received while the policyholder remains alive – exactly in accordance with the terms of the original agreement.

We believe that transparency would reduce the risks for customer detriment the government has noted

This idea has some sort of precedent in the second-hand endowment market which developed during the 1980s and 1990s. Here the market grew as market makers saw an opportunity to buy (mostly with profits) endowments from policyholders dissatisfied with the potential surrender value quoted by their insurance company.

The market grew as it offered a more attractive payment to the policyholder and also offered the new investor a reasonable return as the ultimate proceeds of the policy were expected to be more generous than those quoted at surrender.

We think there are several aspects of the government’s consultation that need to be right for a market to flourish:

• Consumer protection

• Transparency

• Simplicity

We examine each of these in turn

Consumer protection

The government consultation correctly notes that there are risks with the introduction of these new freedoms that consumers could be short-changed. It would be very easy for unscrupulous advisers to give poor value prices to consumers. Therefore we think the market should be provided by regulated companies and authorised advisers, with few exceptions.