News that Government has finally put the Secondary Annuity Market down is no surprise. It was one of Steve Webb’s worst ideas and has proved about as popular as Osborne.
Economically, the creation of a market in annuities is a good idea. Life companies and pension schemes can buy longevity insurance back from people who don’t value it and use it to back their annuity books and the long-tail risk of a scheme’s pensioners.
But the concept of creating a market based on individual life expectancy is fraught with Regulatory risk. Imagine the indignation of the Daily Mail in 2067 when the person who sold her annuity in 2017 when she was 60 – turns 110!
Then there’s the emotional risk. You own an income stream that depends on the continued existence of someone you don’t know. If I wanted to write a screenplay , I could do worse than base it on an annuity purchaser, hunting down the identity of the person whose life he depended on. Imagine the bullying that could go on, with the aged pensioner being forced down the gym three times a week!
“Don’t die – I was enjoying your annuity!”
No matter how anonymous we made this market, data would get leaked. Coronation Street would run a story where a child discovered he owned his mother’s annuity!
A blow to 5m pensioners or the end of a crap idea?
But the Mail is right in its headline. What of the 5 million people who are locked into annuities , purchased during the time of quantitative easing? What happens when the great rotation returns us to a high inflation high interest world where annuities become popular again?
What will those struggling on annuities that they bought on a conversion rate of 1;30 say to those buying at a rate half that?
We are already seeing life companies that sold standard rate annuities to impaired lives hauled in front of the regulatory beaks.
Those who didn’t enjoy the pension freedoms but were clubbed like seals into inappropriate products have every right to ask why did this happen. From 2009-2014 this blog was screaming on their behalf for Government to do something. When the Freedoms were announced, this blog asked what would be done about the culled.
5m pensioners would not have benefited from the secondary annuity market- a handful would, many would have been marched into cashing out by the wrong kind of people.
The secondary annuity market was bound to fail as it was constructed. What is still needed is assistance for the 5m, but the conversion of the annuity need not be into cash, it could be into another pension , better suited to their needs.
For once I fully agree with John Ralfe
— John Ralfe (@JohnRalfe1) October 19, 2016