No Second Chances for the secondary annuity market
11th November, 2016
Whilst many in the industry felt the secondary annuity market was destined for the long grass, I was beginning to wonder, as it managed to hang around a bit longer than expected.
The concept was clear, how it could actually be delivered, not so much. The purchase price of an annuity includes a risk premium built in by the provider. Insurers after all, are not charities and must make prudent assumptions about the risks they are taking on and also generate a profit to satisfy their shareholders. Those who purchase annuities in any secondary market would also, in arriving at a price they would be prepared to offer, make prudent assumptions about the risks they were taking on and be seeking to generate a profit for their shareholders.
Therefore, individuals selling an annuity would be offered a price that factored in two sets of prudent assumptions and two providers’ profit margins. With annuities perceived as offering relatively poor value given current low interest rates there had to be a serious chance that individuals, blinded by the opportunity to realise some ready cash, would compound the poor value they believed they had locked into with their annuity by crystallising an even poorer value surrender price. All in the name of freedom and choice.
For individuals the reality behind the superficially attractive concept was likely to be disappointing.
Then there was…the question of underwriting and managing medical concerns of annuitants, confronted by their own mortality, rushing to sell their annuity before they shuffled off their mortal coil.. This had the potential to lead to all sorts of emotive issues, including recourse to a member’s estate in the event that they were found not to have disclosed relevant medical information.
Then there was…the issue of tracking the annuitant’s death, without regular income there is very little incentive to fill out existence questionnaires.
Then there were…the consequences of members making the aforementioned poor decisions, and potentially impacting their long term best interests. Those members reliant on non DB annuities are potentially underfunded already. Surrendering their annuity would in all likelihood result in greater reliance on, and costs for, the welfare system.
I could “then there was” ad nauseam but hopefully this triplet will suffice.
The secondary annuity market was an ill thought out reaction to a section of the press hell-bent on championing freedom of choice for all – even if the consequence of that choice was to increase the possibility of poverty in retirement for those of their readers “trapped” into receiving a guaranteed income for life.
The timing of the Government’s announcement is interesting. With Parliament having bigger fish to fry, knocking issues like this into touch may be a sign of where pensions will sit in the political agenda over the next few years. Especially with LISA looking like that holiday romance that might have died in the departure lounge of the home-bound flight. It is hard to think that the new Chancellor will come to visit our little world as much as his predecessor. Perhaps a good thing, although failing to build on auto enrolment and the better concepts developed in recent years, may be to the national detriment.