Steve Webb may be accused of many things, but adhering to conventional thinking is not one of them.
As the Liberal Democrat minister for pensions, Mr Webb has enjoyed a very high-profile year in the wake of chancellor George Osborne’s pension freedom bombshell which announced the removal of the need to buy an annuity at retirement. Mr Webb’s latest idea is that 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. This article looks at some of the aspects of this proposal, which Mr Webb claims has been warmly received by the insurance industry, and whether we will see the creation of a new market in “second-hand annuities”.
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 lump sum. Mr Webb has speculated that this could lead to the establishment of a wider market in “second-hand” annuities.
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 endowments – mostly with profits – 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 while offering a reasonable return from the ultimate proceeds of the policy –particularly as with profits payouts increased fairly steadily during the 1980s and 1990s.
First, let us make it clear that a lot of legislative and tax changes would have to be made in order to make this idea a reality – we will return to these later. Essentially, a policyholder who was receiving a regular income from an insurance company or a previous employer could go to the market and see what price he or she could 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 remained alive – exactly in accordance with the terms of the original agreement.
The cynical view is that insurers believe they can pick up some assets at a cheap price. For example the company or provider which is making the payments to the pensioner might think it can recapture the contract for a price lower than it has valued it in its books. This would lead to a profit or at least a release of the provisions held against the future payments.
Perhaps more obviously though, the insurance company that bought the contract would be in receipt of regular payments which would depend upon the life expectancy of the policyholder – as such it would have an asset which was clearly closely aligned with its own obligations to pay its pensioners.