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, pensions minister Steve Webb envisages.
Setting out his vision for extending pension freedoms to legacy annuitants, Mr Webb tells FTAdviser the unwinding of annuities would mirror the way endowment policies are currently sold in the market.
The Liberal Democrat MP for the constituency of Thornbury & Yate in Gloustershire adds that his ideal scenario would see a pensioner offered range of quotes from prospective buyers, allowing them to choose the highest bidder or even to retain the income stream.
“People aren’t actuaries: they don’t know what the actuarial fair equivalent of the actuarial stream of income of selling is, of course they don’t. But they know whether they would rather have £5,000 now or £20 a month until they die.
“Clearly you have to make sure that there is more than one purchaser out there. In a sense if there is only one purchaser then there will be no competition.”
He feels, though, that competition will come and that demand will be high among those investors who have frequently asked the government to issue “longevity bonds” that would provide a positive hedge against people living longer.
“I’m saying well here they are; here’s a set of products that will pay out more if people live longer. So you can see why pension funds and indeed insurance companies might want to buy these products potentially.”
Mr Webb first brought up the idea to the public of unwinding annuities at the National Association of Pensions Funds’ annual conference in October last year. It caused quite a stir.
At that time, Mr Webb said he did not expect the government will change anything for people who have been locked into an annuity before the pension reforms come into effect in April 2015; but he wanted to change that.
The idea sparked a flurry of debate within the industry, with in particular the fate of annuity providers coming under scrutiny under his suggestion.
But this month he clarified that we are “very much in secondary market territory” here, ameliorating the dissent of those concerned at the precedent of unpicking contracts which were legally sound when sold.
This, however, doesn’t address all of the concerns, such as whether or not the sort of discounts that would be applied will make them good value for buyers, how to assess and ensure suitability, and how to ensure the market isn’t skewed in favour of the buyer.
The minister highlights the need for the annuities to be underwritten, but states that there is a definite audience for the proposals.
“My view is that there is a set of people for who this might be an attractive option so we should try and enable it, but there is a set of people for who this clearly wouldn’t be appropriate. So we have to do this in a sensible way.”