It was the big story of last week and speculation over how it might work in practice for 5m disenfranchised pensioners remained a key theme across the money pages in this weekend’s papers.
I’m talking of course about pension minister Steve Webb’s laudable efforts to use what could potentially be his final months of office to realise a dream of extending pension freedoms to the millions of legacy annuitants locked into an income for life.
In an interview with the Telegraph last week, he raised the prospect of offering re-sales of annuities and said plans would be drawn up by the Department for Work and Pensions in the hope of securing cross-party consensus before the election.
This week, building on a swath of stories across the trade press in the intervening days, there was some informed speculation on how (and whether) this could work.
I have to say I’m not convinced.
As we’d stated in our coverage last Monday, instructive pieces in both the Telegraph on Saturday and the Sunday Times highlighted two options: a secondary market based on sales of the annuity income stream to ‘third parties’; or buybacks by the insurers themselves.
The first of these seems to be potentially “high risk” and “toxic”. Those remarks are in quotations because they are not mine, but the then Financial Services Authority’s comments several years ago in relation to similarly sold traded life policies, or ‘death bonds’.
As with the latter, secondary annuity re-sales would involve selling the income stream from one person’s mortality policy to another person or entity, who would receive this until the first person died.
The second person would effectively be offering a price in the hope that the first person died later than expected and thus they would win on the deal. As a hedge against the original annuitant having the temerity to die earlier, most would likely low-ball the assumed residual value.
This is precisely how life policy sales work in the US. After a series of failures affecting UK investors, the FSA spoke out against them strongly and banned them from being sold to retail investors.
I can’t imagine the regulator being too enamoured at a secondary market for retail investors gambling on death in this way, which as the Sunday Times states leaves the most likely buyers being institutional investors such as pension funds.
The income stream will be welcome, for sure. But I can’t see a pension fund buying thousands of individuals policies from sexa- or septuagenarians, so this would only work if annuities were bundled together and then ‘syndicated’. Who fills that role?
The alternative looks neither that much more attractive nor that likely to be realised.
Again, we raised the concept of insurer ‘fair value’ buyouts when Mr Webb first started on his crusade last October. It’s simple in theory: the original insurer buys back the contract at a mutually agreeable price.