The National Association of Pension Funds (NAPF) has today (Thursday) published its response to HM Treasury’s consultation Creating a Secondary Annuity Market.
In its response, the NAPF expresses concern that the creation of a secondary market may be so expensive as to greatly reduce the value available to most annuitants. The NAPF highlights a number of issues, including: The number of sellers (people with an annuity today) is uncertain and likely to be time-limited. The advent of ‘Freedom & Choice’ has greatly reduced the market in annuities, so the only likely source of sellers for this market will be people who already have an annuity. Buyers will be wary of adverse selection and will compensate accordingly, either through pricing ‘short longevity’ into all contracts or through individually underwriting each transaction, both of which will increase costs. Either way, the value available to all, or some, sellers will be reduced. Many sellers will need protection in the form of independent advice. This will come at a significant cost and reduce the value of the transaction to the seller.
By releasing the annuity’s value in a lump sum sellers risk a higher tax bill than if they had drawn the income from an annuity, further reducing the value the annuitant ultimately receives. The Government’s own forecasts suggest the Exchequer will reap over £1bn in additional taxes from the introduction of a secondary annuity market in the first two years. The cost of building the infrastructure needed to package and sell annuity contracts will be significant – especially as the lifetime of the market looks limited and all costs would need to be recouped within a short period of time, rather than spread over decades. This will further erode the value to sellers.
Even if the infrastructure for a market were to be put in place, it is not clear who will be the buyers of the annuities. A NAPF survey1 of members suggests a very limited appetite from pension schemes for packaged annuities. Only 13 percent of defined benefit (DB) respondents to our survey expressed an interest, with 67 percent ‘not interested’. It should be acknowledged that there will be circumstances in which it would be appropriate for a member to ‘sell’ their annuity, for example where an annuity was the only option open to them under the previous regulations but the income stream is not needed to support the household income. Clearly this market will require specific regulation to protect savers.
Graham Vidler, Director of External Affairs, NAPF, commented: “The idea of creating a secondary market in annuities has obvious appeal – but what’s far less obvious is how to create this market in any comprehensive way, without it being imbalanced or overly expensive. The Government has a knotty problem to unpick if it wishes to create the full market it originally set out for savers and ensure it consistently provides value for money. That said, we can see pockets of value for both seller and buyer – especially in the smaller annuity section of the market. We encourage the Government to explore this area more fully and work with the industry and the regulator to develop a market that is fair and robust.”