‘You know if you want £5,000 or £20 a month until you die’

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‘You know if you want £5,000 or £20 a month until you die’

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.

We certainly would encourage products where if people don’t make an active choice in retirement they do then get an income

“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.”

Tackling concerns

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.”

His fears surrounding the people it would be inappropriate for were focused on the “eldest elderly”, adding that just as when you buy an annuity you have to answer health questions, when you are sold an annuity you would have to do the same.

“We will form a view as to how far we can go with it, there won’t be a time to pass a law this side of the election.

“But if before the election we can make good progress, work out the practicalities and come up with a proposition... that’s the territory we are in... so that an incoming government, assuming this all seems sensible, can act on it pretty quickly.”

Decision making

What else does he foresee in the future in the retirement income market, in light of radical new freedoms granted from April?

Well, firstly Mr Webb does see a future for annuities and he suggests reverting to annuity later in retirement would be a common feature.

“Indeed, I almost hope it will in the sense that one of the issues I don’t think we have quite resolved yet is financial decision making amongst the very elderly,” he asserts.

Although clearly some elderly people are perfectly capable of conducting their decision making, Mr Webb acknowledges some are not and so the question of what defaults will be in place for pensioners throughout their retirement will become more critical.

“It might be we promote products, but we certainly would encourage products where if people don’t make an active choice in retirement they do then get an income that will keep them going for as long as they do - I can imagine that sort of thing.”

He added that drawdown could be a mass product if value for money is achieved, despite the fact that there’s still a current worry about charges.

Of course, any discussion about decision making also leads to a dissection of the government’s guidance service, designed to help people navigate the brave new world of retirement income. More specifically: is it enough, and what about those that avoid it altogether?

Mr Webb also says the government is aware that people at the top of the system in terms of their financial wealth might bypass the guidance and pay for regulated financial advice, while many of those with small pots might simply take the cash - “and to be honest I’m not too troubled if they do”.

The group he is most interested in are those the middle who did not have a choice before and who wouldn’t necessarily go for regulated financial advice.

He hopes that “one of the consequences of the guidance will be that people recognise the value of financial advice.”

Mr Webb adds: “You’ve got a whole set of people who’ve never had a choice before who’ve now got a choice. They’ve got a worthwhile amount of money but not a fortune; if we make sure that there is affordable advice out there for them, then this feels like a new market.”

A second line of defence

But what about those that do not take guidance and have enough to lose that we’ll all be reading about them in months to come, having lost all of their savings investing in schemes promoted by unscrupulous, unregulated opportunists currently peddling pensions ‘liberation’ options?

Mr Webb says there could be a greater role here for providers and that he is pushing the regulator to allow more leeway for providers to push back on clients they believe may be making poor decisions, in response to calls for a ‘second line of defence’.

He explains that so far, everything is being done to maximise the uptake of the ‘guidance guarantee’, with new Financial Conduct Authority rules requiring this to be effectively signposted and recommended.

“It’s pretty full on: they [providers] have to signpost heavily and, if at the end of all that you are still insistent then we are already at the stage where the FCA has told the companies if they think the product doesn’t look right, then they can ask questions without anybody suggesting they are straying into advice.

“My question is whether we can go further than that, as far as saying that they should query whether this is the right product [for the client]. I’d like us to get as close to that as we can. I think the FCA is continuing to reflect on all of that and I hope they will have more to say - I can’t say more than that.”

ruth.gillbe@ft.com