Personal Pension  

Annuity ‘insurance’ pitched to solve longevity risk riddle

A new breed of deferred annuities could provide a solution to risk concerns which are emerging ahead of the radical overhaul of the pensions system, the National Employment Savings Trusts’s investment chief Mark Fawcett has said.

Speaking to FTAdviser ahead of the publication today (24 November) of a major 130-page consultation on the future of investment in money purchase pensions, Mr Fawcett said Nest had had a discussion about how it can help protect people from the longevity risk.

He said in the wake of a roundtable with senior industry figures the organisation, which provides the default auto-enrolment occupational pension solution, had added questions to the consultation on whether deferred annuities could provide an answer.

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“At the roundtable we had a discussion about the use of deferred annuities. So maybe at some point, say 85 say, the annuity kicks in and gives you that rest of life comfort that you won’t run out of money. It kicked up quite controversial discussion.

“One of the big issues about buying a deferred annuity - and we’ve discovered this by talking to providers overseas and schemes overseas who are thinking about this problem - is the loss aversion.

“So you’ve built up a pot of £100,000 and then someone asks you to give away £25,000 of it away in the event that you live to 85 and at that point you can start drawing down that money and that is really hard for people to take.

“One of the ideas that is being explored is the idea that you might pay over several years, sort of an insurance premium for longevity insurance. We would call it longevity insurance.

“Maybe we can reframe the deferred annuity, the longevity problem, as you are buying protection at a small premium every year... that product doesn’t hardly exist in this country so our challenge is can we think about innovating in this space.”

Mr Fawcett’s comments come in the wake of debates over longevity risk as flexible drawdown sales surge in the wake of the Budget - and an expected explosion in flexi-access drawdown, its successor, when new freedoms come into force next year.

A greater number of mainstream consumers accessing drawdown has dragged average pot size down 24 per cent year on year to a little more than £63,000, according to Association of British Insurers figures. Some suggest it could drop substantially further from April.

Longevity insurance was suggested by the government as one of a number of solutions to provide a middle ground option to replace defined benefits pensions as they disappear from the market.

The model would be funded through the purchase of an income insurance product on an annual basis from a set age, for example 50 years. Income guarantee insurance would kick in if a fund reduced to zero, meaning there is no risk of the individual exhausting their fund and falling back on the state.

Elsewhere at the discussion on the Nest consultation, Paul Todd, assistant director of investment, said Nest was looking for respondents to challenge some of the conclusions the organisation has already reached and build a richer picture of what the auto-enrolment generation will look like.