It was never going to be straightforward. When the idea of secondhand annuities was first mooted, commentators were at once delighted by the idea of being able to reverse the irreversible, but perplexed as to how it could generate a good deal for those involved.
The ensuing consultation on the subject has now closed and the industry – and retirees – are eagerly awaiting news of the next step.
The rationale for freeing annuitants from the products seemed an obvious one in light of the wider flexibilities.
It levelled the 'freedom' playing field between retirees and those yet to retire – with the added bonus of being another revenue-raising opportunity for the government.
But the mechanics of the policy were problematic from the off.
On the consumer side there were questions as to how many would want to sell and what kind of deal they’d be likely to get.
After all, if the reason for selling was to undo a bad deal, it would hardly be sensible to layer another bad deal on top. Early estimates from insurers said cashed-in annuities could cost retirees a fifth of their value.
Illustration by Ben Jennings
Though while that may be an expensive move on the face of it, they might well glean value from the move in other ways.
A study by the Institute and Faculty of Actuaries published last week showed just over half of around 1,500 respondents would not want to sell their annuity, with two in five fearing they could end up worse off through selling to the highest bidder.
This, coupled with the fact the minimum costs of establishing the market could exclude smaller pots from being sold at all, still makes it difficult to determine both appetite and capacity.
And on the other side of the transaction, questions remain as to the commercial drivers and risk for investors.
In January, Legal and General’s Adrian Boulding said larger defined benefit funds would be attracted to secondhand bundled annuities to get exposure to the illiquid debt investments backing insurers’ annuity books.
And others have argued bundling by cohort could provide schemes with an opportunity to match investments to the profile of their membership.
As ever pricing – and how this stacks up against the risks – will sit central to the discussion in trying to align all parties’ needs.
Maxine Kelly is editor at Pensions Expert. You can follow her on Twitter @MaxineEK and the team @pensions_expert
