The Treasury is also consulting on what guidance or advice would be needed to ensure the proposals do not lead to significant consumer detriment.
The consultation paper asks whether occupational pension annuities, including defined benefit income, should be included or excluded from the plan, although it states that a resale market for DB benefits is not currently within scope.
The government says traded annuities could potentially be of interest to institutional investors looking for a partial hedge against the longevity risk they already hold. But it accepts that longevity and mortality risks would not be matched perfectly for these providers – in part due to the risk of adverse selection, with people in poorer health potentially more likely to want to assign their annuity income.
The holding annuity provider will not be allowed to buy back their own annuity, to protect them from coming under public pressure to offer higher rates, the consultation says.
Nucleus pensions technical manager Jon Gwinnett says: “We welcome proposals to extend pension freedoms to those who have already committed to an annuity. But, we have very real concerns about how any secondary market would be regulated, and also over whether the re-sale or surrender value of annuity contracts will offer good value for consumers. Consumers need to have the correct advice available to them.”
Buck Consultants at Xerox head of pensions policy Kevin Legrand says: “Care is needed to avoid these new flexibilities being a short term gain at the expense of a long term loss.
“The extension of freedoms needs an effective life support system. The common aim must be to assist vulnerable pensioners and employees in making sensible decisions throughout their working lives and beyond.
“A challenge will be to ensure that there is a robust guidance and advice regime, of similar weight to the one protecting transfers above £30K from DB to DC schemes, to protect pensioners.
“There is also a key role for the pensions industry and employers, working together to help, in particular, today’s pensioners and older employees. There are many potential media, from simplified products and clearer rules, to workplace support, developing and deploying interactive member-focused tools such as retirement modellers incorporating all of an individual’s assets.
“The proposals will no doubt focus concerns around the problem of low levels of financial knowledge generally, and of pensions in particular. There is much to be done to improve that, but it is a long-term project.”
“The pension freedoms give those nearing retirement – and now those who have already bought an annuity – the chance to make their own decisions. It empowers individuals to choose how they want use their retirement savings, something we’ve never had before. However, the removal of restrictions on buying and selling existing annuities could expose yet further people to pension scammers, unless, for instance, the buy-back is restricted to insurance companies. It could also leave people being hit with charges or worse, poorer retirement savings than they had before, by cashing in and making a poor selection without the proper advice.”
Intelligent Pensions managing director Steve Patterson says: “The market only applies to defined contribution pensions. Those receiving defined benefit annuities will not have any flexibility to cash these in. People can transfer before retirement to take advantage of pension freedom, so it makes sense on one level to extend this to those receiving a defined benefit income. Trustees of schemes may also find this an interesting proposition. Exchanging annuity liabilities for cash could be attractive for scheme balance sheets. But none of this is simple, and extending the market to defined benefit annuities may simply be a trick too difficult to pull off in practice.”
Aon Hewitt head of liability management Ben Roe says: “Now that members with annuities in payment have access to the new flexibility, the next obvious question is should this be allowed for defined benefit pensioners as well?
“At the moment, DB members need to transfer their benefits to a DC scheme in order to access the flexibility – and current legislation makes this nigh on impossible for DB pensioners. We know that the Government is intending to consult on whether members should be able to access their benefits directly from a DC scheme, so this provides an ideal opportunity to provide more flexibility for DB pensioners.”
Consultation questions in full
1. In what circumstances do you think it would be appropriate to assign one’s rights to their annuity income?
2.Do you agree with the government’s proposed approach of allowing a wide range of corporate entities to purchase annuity income in order to allow a wide market to develop, whilst restricting retail investment due to the complexity of the product? What entities should be permitted and not permitted to purchase annuity income and why?
3.Do you agree that the government should not allow annuity holders to access the value of their annuity by agreeing to terminate their annuity contract with their existing annuity provider (‘buy back’)? If you think ‘buy back’ should be permitted, how should the risks set out in Chapter 2 be managed?
4.Do you agree that the solution to the death notification issue is best resolved by market participants? Is there more the government should be doing to help address this issue?
5.Do you agree with the proposed approach of the government working with the FCA regarding the fees and charges imposed by annuity providers?
6.Do you agree that the scope of this measure should be annuities in the name of the annuity holder and held outside an occupational pension scheme?
7.Are there any other types of products to which it would it be appropriate for the government to extend these reforms?