GARs – a simpler way out for insurers…


This blog offers insurers a simple way out of the problem they have with Guaranteed Annuity Rates- it means paying the reserved for value of the policy rather than the (lower) investment value of the contributions.

By way of explanation..

Guaranteed Annuity Rates (GARs) are defined benefit plans. They guarantee you an income based on the value of your fund at a defined point in your life. The Equitable life’s 200 years heritage was destroyed when Roy Ransom and his colleagues forgot this.

The Equitable had assumed that the guaranteed annuity rates embedded in their policies would never bite and for decades they didn’t. Then came the hungry years for income seekers, interest rates and inflation fell and guaranteed annuity rates suddenly became attractive. But the Equitable had insufficient reserves to meet the costs of paying these annuities and the rest is history.


The fate of the Equitable has always troubled insurers, especially mutual insurers who have limited access to the capital markets to meet unforeseen cash calls (again see the Equitable Life). So any statement from a mutual insurer suggesting the rules on advice be altered to make for easier transfers from GARs need to be looked at carefully and with some suspicion.

A touch of the Equitables…


In his recent letter to Ros Altmann, quoted in full on my previous blog , Phil Loney of Royal London makes a distinction between GARs and guarantees offered from occupational pension schemes.

We do not, however, believe that this solution should be extended to those with DB pensions. The complexity of these schemes and the nature of the guarantees that apply can only be assessed and communicated by a professional adviser with the appropriate level of qualification.

I think both in the legal and moral senses, Phil is wrong here. As I started this blog by saying, GARs offer a Defined Benefit- which is a pension. The guarantees that come from insurers are – it’s true- more straightforward. They are backed by the stringent regulatory requirements, not just of the FCA and PRA but of Europe’s Solvency rules. Some would argue they are too well reserved – the impact being the low annuity rates in this country (relative to those in the United States- for instance).

The guarantees from an occupational pension scheme are varied in quality. Some of them were worthless- some people got nothing from bust DB plans prior to the Financial Assistance Scheme and its successor the Pension Protection Fund (PPF). Some of them are AAA rated – such as those offered from Government Schemes and from the largest companies in the land. In-between, the chances of the guarantees being paid, depends on an assessment of the covenant from the employer and of an evaluation of the rules of the PPF.

Frankly, to most people a guarantee is a guarantee like a bottle of wine is a bottle of wine. Most people won’t countenance paying £30 for something they can get from £5 – unless they are expert. Arguing that occupational DB plans are so far removed from insurance policies that pay guaranteed income could come back to bite insurers in the bum.

An equitable transfer policy?

The transfer value offered from a “DB pension plan” is based on the value of the benefit given up – a value that is calculated by an actuary. It is calculated on a formula but can be adjusted to reflect the scheme’s solvency (its ability to pay). If an occupational scheme is in deficit, the transfer value may be less than were it fully solvent. All this could (and in my view should) be explained when the transfer value is offered.

But the transfer value offered by an insurance company for its transfers is based on the money that is in the policy that will purchase the annuity – not on the value of the benefit given up. Since the benefit being given up is typically much higher than could be purchased by the money on offer, almost everyone with a GAR is a muppet to use it for cash. This was the point made in the previous blog.

Sacrifice your pension for the good of the insurer?

Phil’s argument to justify Royal London’s position on GARs (outlined above) is posted in the comments column of the previous blog and runs as follows;

We are a mutual so any capital released by lower take up of the GAR option still belongs to customers and flows back to them via our profit sharing mechanic.

I can confirm that Royal London are very good at returning excess profits to policyholders, a practice that is winning them many friends.


But I very much doubt that any of his customers would be prepared to give up 60% of the value of their personal policy for the good of the millions of other policyholder- not to mention the CEO who picked up a bonus last year north of £3.5m.

If Royal London want out of their GARs – and this goes for all other members of the ABI, they are going to have to buy their way out. That means offering transfer values that reflect the cost of the GAR to the insurer, not the money being used to purchase the benefit. After all, that is what the insurer is reserving for.

Pay up or shut up?

I am not saying that Royal London (or other members of the ABI) are lobbying to use the limited protection of Pension Wise to get out of their obligation. In my previous blog I was saying it is better for their customers to be told “don’t be a muppet” for free than to pay £1000 for the privilege.

However I am (now) saying, what I thought about saying a couple of days ago, that Phil is batting on a very sticky wicket (I blame the old uncovered pitches of the 70s and 80s!).

The policyholders who got GARs were generally lucky not skilled purchasers. The GARs were given away by marketing departments keen to get on the selection panels of the large actuarial firms who controlled the AVC market. Some smart policyholders always knew that the GAR offered valuable protection but most didn’t.

If you’ve got a GAR, you now have to be told about it and should be told how valuable it is. If you don’t get advice, then you should be told by Pension Wise who should also guide you to the conclusion but nobody but a muppet lets the insurer off the hook by throwing away the guarantee.

I have a GAR and would like my insurer (Zurich) to make me an offer for the guarantees well in excess of the money used to purchase the GAR.

If the insurers insist – as Phil does in his letter that

Two months into the new pensions regime it is very clear that this policy to safeguard savers with GARs is a failure

then let’s demand that insurers, like occupational pension schemes , have to pay a cash equivalent value for the benefit being given up (the annuity) and not the value of the pot.

That is the logical conclusion that my senior actuary took and I suspect it is the position that any consumer focussed Regulator would take as well.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to GARs – a simpler way out for insurers…

  1. Phil Loney says:

    Henry I realise that these issues around the valuation of Guaranteed Annuity Options are new to you but you might have found it useful to confer with one of the many fine with profit actuaries who have been dealing with this issue for years before opining, as it really is well travelled territory by both regulators and consumerists and much of your analysis is off the mark.

    The key point is that insurers are pricing a Guaranteed Annuity Option which is available at a particular point in time. If a customer chooses to cash their policy in the option lapses and lapsed options have no value. This is not a new issue, for years it has been possible for customers to ignore the option and take up rates were never 100%. Of course with the advent of pension freedoms we are seeing even lower GAO take up rates as customers now have more options. However, nobody has lost their right to a GAO, they simply have more options / alternatives.

    Your call for a valuation of the lapsed GAO to be included in the value of cashed in policies is deeply unfair to the millions of other with profit pensioners who do not have GAOs and would have to pay for your policy prescription. You fail to grasp that many ( not all ) GAO policies sit in with profit funds where all or 90% of the assets belong to policyholders. This is true whether the company is mutual or shareholder owned. So the price of higher values for encashing GAO policyholders is lower pensions for everyone else who bought a with profit pension in the 1970s and 1980s. It is hard to see why this is fair and many companies will have gone through this logic when evaluating GAO compromise schemes in the past.

    I’m afraid that your belief that insurance companies are trying to duck “toxic” liabilities is simply a fantasy. The real issues are about fairness between policyholders, and even in a shareholder owned company your proposal would essentially impoverish the majority of pension customers at the expense of a minority who already have the benefit of a valuable option.

    Once you put the “big insurer paranoia” back in the toy box, the remaining real issue is how to ensure that those customers with a GAO realise the value of what they have, before making a decision. I think most insurers are working hard on improving disclosure and have plenty of risk warnings in place. The legally required advisor referral for GAO pots above £30k was designed to offer consumer protection but as the coverage from the Daily Mail has shown, has quickly collapsed into a conspiracy theory that advisers and insurers are colluding to deny people their pension freedoms. Hence our call for a fresh start and a free service from TPAS. At least we appear to agree on this point Henry.

    Best wishes

    Phil Loney
    Group CEO
    Royal London

    • henry tapper says:

      Phil. I am well aware of my GAO t&c! I did not mis buy my AVCs! But what I wasn’t awRe of was that my scheme rules do not allow me retire early and take my AVCs later!

      I think they should and hope they will. As for your arguments about my irresponsibility to other policyholders, I will treat them with good humour! Zurich is not a mutual, my GAO is from unit linked funds and the impact on the employer covenant of letting me have what the actuaries have already reserved for is minimal.

      I hope the IGCs take a dim view of any profiteering by insurers hoping to offload guarantees for freedom. I am sure Michelle Cracknell, were she providing guidance would dob you all to the IGC and escalate to FCA if fobbed off!

      Not that I’m accusing you of profiteering Phil😀. The memory of the Equitable persists!

  2. Phil Loney says:

    It’s a fair debate Henry and there is nothing about it which is personal. One of the great strengths of this site is that we can all debate and disagree earnestly and then meet up at the cricket for a few beers afterwards. As is so often the case one’s view of what is fair depends on which pair of policyholder shoes you are standing in.

    • Chris Wrightson says:

      Cricket and pensions. Oh dear ! Maybe that’s why I’m more of a football fan? However, that one day series against the Kiwis was pretty tasty!

  3. Stephen Alan Greybe says:

    Perhaps my comment is not relevant, because my knowledge is based upon the South African Retirement Fund Industry. In SA any actuarial deficit is funded by the Employer in a DB Fund. However since 1987 there has been a switch to defined contribution plans and many Employers switched their DB Funds to DC Funds (for obvious reasons). In so doing they offered members “sweeteners” to move their accrued DB benefits to a DC Fund. Most members were fooled and took the sweeteners but many did not, which left the Employer with a partial DC/DB fund but still the responsibility to make up any losses through actuarial deficits of a the DB portion. In this regard, I agree that no transfer value from a DB plan can be compared to an offer of a sweetener from an Insurer to evade the responsibility of a Guarantee which in effect was “bought and paid for” by the member of the DB fund just because the Insurer did reserve properly.

  4. It appears to me that the argument employed by Phil Loney, that the insurer is the protector of the interests of all the other policyholders who don’t have a GAR and would otherwise see their funds diminished if GAR policyholders were not treated differently, is a rerun of that employed by Equitable Life for many years to justify their treatment of GAR policyholders. This was ultimately rejected by the highest court in the land. Actuaries responsible for with profit funds may wish this were not so but it is.

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