The launch of the secondary annuity market hangs in the balance as a decision still needs to be made on capital rules by the Prudential Regulation Authority.
It has come to light the decision surrounding matching adjustment, which will be framed within Solvency II regulation, is one of the cornerstone factors in providers deciding whether to participate in the new secondary annuity market.
Under Solvency II’s provisions, insurers are given relief for holding certain long-term assets which match the cash flows of a designated portfolio of life or annuity insurance and reinsurance obligations.
If this rule is enacted by the PRA for the secondary annuity market, this would make it more attractive for providers to become involved in it.
The PRA opened a consultation on matching adjustment on 15 April this year, which closed on 15 July, however the industry awaits a final decision on this.
John Lawson, head of policy for retirement solutions at Aviva, told FTAdviser as matching adjustment applies only to insurance companies, it is not a factor affecting other potential participants in the secondary annuity market, who would have their own solvency regime.
But for life companies - which are expected to be the main players in the secondary annuuity market - he said they will need extra capital to cover the risk associated with the end of the term of the annuities they buy.
“There is a risk at the end of the term, and you have to cover the risk with capital. In this case the asset would be an annuity that you had bought”, he said, adding this means an annuity is covering the capital for another annuity, which could result in a mismatch.
Annuities purchased may not match the risks, he said, because the demographics of the customer base may differ, for example they could have shorter or longer life spans.
“Insurers if they were thinking about the secondary annuity market may want to use assets to offset against future risks, but if it was unclear they would offset it, they may not want to enter it [the secondary annuity market].”
He added that as a general rule, insurers have to submit plans six months in advance to the PRA to get them approved and that as such providers are running out of time for the start date of the market in April 2017.
Andrew Tully, pensions technical director at Retirement Advantage said if the PRA decides a secondary annuity qualifies for a matching adjustment then providers will need to hold less capital.
However, if the decision is that it does not qualify for a matching adjustment then providers would need to hold more, making the secondary annuity market less attractive.
He said: “It will certainly have a bearing on whether companies will enter the secondary annuity market and how much they decide to do it. From a financial perspective it is an important consideration.”
He added that time was reasonably short to get a functioning market for next April.
Stephen Lowe, director of external affairs at Just Retirement Partnership, told FTAdviser this decision was an important factor in the firm’s participation in the secondary annuity market.
He said: “We judge there are a number of necessary conditions for us to fully participate in the secondary annuity market, and very material is whether secondary annuities are eligible for matching adjustment.”
Mr Lawson told FTAdviser matching adjustment was high on Aviva’s agenda with regard to consideration of the secondary annuity market, but not in the top three issues, which include further details on the advice threshold for the market, as well as making sure Pension Wise is a compulsory part of the journey for participants.
“To us it feels like equity release - we already have experience of offsetting assets like that which feel similar to the secondary annuity market. Yes we need information but we already have some clarity.”
A spokesperson for the Prudential Regulation Authority said: “We are considering the responses to the consultation.”
Paul Lindfield, director of wealth management at Manchester-based Sedulo Wealth Management said: “The secondary annuity market is generally - although in principle seems like a good idea - a mis-selling ticking time bomb waiting to happen.
“You are giving up a regular lifetime income for a capital sum that could be spent in days, months, years.
“It’s just like the secondary endowment market a few years ago, but it is a really high risk area for advisers and for me it is unviable. It will lead to bad outcomes for consumers.”
ruth.gillbe@ft.com
