Drastic proposals for annuity reform are well-intended, but implementing them could prove nightmareish
If God loves a trier, Pensions Minister Steve Webb’s reward awaits him in heaven: while his proposal to allow pensioners to sell their unwanted annuities will certainly be popular, it will require a monumental effort to get it anywhere near the statute book in the final four months of this coalition government.
Let’s at least applaud his ambition. Whatever your views about the abolition of compulsory annuity purchase in April, there’s no doubt many savers will embrace ‘pension freedom’.
Webb’s latest idea is an attempt to level the playing field – a sizeable number of the UK’s 6 million annuitants probably wouldn’t have bought an annuity either had the reforms come in time for them. So enabling these savers to sell their annuities gives them the same freedom as those yet to cash in their pension pots.
That seems only fair. The question is whether Webb can find solutions to the barriers standing in the way of annuity sales.
Most obviously, how will this work in practice? Any buyer of an annuity will have to make subjective assessments about the contract based on questions such as the age and health of the seller. Even if a buyer is some sort of pooled fund set up to diversify risk, the due diligence process will be time-consuming and expensive. Only the largest annuities are likely to be attractive for most buyers.
The issues continue post-sale. How will insurers and buyers track the original annuitants so that both sides know when sellers have died and income therefore needs to stop? And what happens if the annuity is sold on again?
Some of these issues might be solved by allowing insurers to buy back their own annuities, which they could then cancel. But sellers negotiating with just a single buyer rarely get a good deal – such arrangements would have to be very tightly regulated.
Indeed, the broader consumer protection issues here are difficult. Ensuring annuitants receive a fair price for their contracts will be vital – including any surrender values charged by the insurer - particularly since many people find it difficult to appreciate the true value of a permanent income stream compared to an upfront lump sum. Over-regulating the market, on the other hand, will make it unattractive to buyers.
The precedents are certainly not good. The traded endowment policy market, which prospered briefly in the 1990s, managed the unusual achievement of offering a poor deal to buyers and seller alike.
Can these reforms be achieved without producing a similar level of detriment? Possibly – but certainly not before Webb and his colleagues stand for re-election in May.