Aviva considers dip into secondary annuity market

Aviva considers dip into secondary annuity market

John Lawson, head of retirement solutions policy at Aviva, said while no decision has been made on whether the provider will buy annuities it is eyeing the possibility of insuring DB schemes who may want to purchase second hand policies.

Mr Lawson predicted defined benefit schemes would be the major investors in secondary annuities.

He said: “There is interest [in the secondary annuity market] from some members of the DB market. But what DB schemes lack is the ability to underwrite that sort of risk, and potentially that is a market we could get into.”

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Given their complexity, Mr Lawson cautioned against allowing secondary annuities to be sold to retail investors, saying individuals were unlikely to understand these highly complicated funds and would potentially end up getting “their fingers burned”.

He predicted that, rather than buy annuities directly, many DB schemes would buy units in “annuity funds” packaged up by investment managers.

Mr Lawson’s comments came after the Financial Conduct Authority closed its consultation period for the regulation of the secondary annuity market, ahead of the scheduled launch of the market in April next year.

The FCA is yet to decide on the key points of how the secondary annuity market should be regulated, most notably on what will be the value threshold after which the annuitant must get financial advice.

Mr Lawson said Aviva would not take any steps into buying second hand annuities until it was comfortable that consumer protection was adequate.

Consumer protections, he said, should include a mandatory Pension Wise consultation for annuitants who fall under the advice threshold.

But once satisfied the consumer protections were in place, he said Aviva would explore various areas of the market.

As for buying back Aviva’s own annuities, Mr Lawson said: “We’ve not made a decision yet, but it is certainly on our radar.”

But he said that before the provider could enter the market, it would need to prove to the Prudential Regulation Authority that it could handle the risks.

This, he said, would take six to nine months, meaning it was unlikely Aviva would actively enter the market in April.

He urged the government to play down the launch of the market, and recommended annuitants not rush in to selling their annuities, because the market was likely to be “soft” at first.

Last week, the Association of Professional Financial Advisers called for the start of a secondary annuity market to be delayed due to the UK’s vote to leave the EU.

Scott Gallacher, a financial planner at Rowley Turton, said the word “barge pole” came to mind at the mention of a secondary annuity market, both on the sell side and the buy side.

He said: “From a seller’s perspective it’s a nightmare. From a buyer’s perspective, it’s more difficult. It is protected by an insurance company, but how much money can you make on it?”

He said the costs associated with such an exotic investment would probably strip away any significant value for the retail investor.