Should the secondary annuity market have been pushed back?

This is an important market development and rushing it would have led to weaknesses that would almost certainly cause detriment to individuals and providers, and untold damage to the industry.

There needs to be a way for policyholders to see real value in taking advice or guidance

Setting up a secondary annuity market is not the same as setting up a website like webuyanyannuity.com or it would have been done already.

Its effectiveness is crucial for the millions of policyholders who may wish to take advantage of the opportunity; so it's much better to think the issues through than go away only semi-aware.

Taking advice

One issue is asymmetry of knowledge.

Policyholders do not know as much about their policies as providers or a potential purchaser, so could be at a disadvantage in working out whether exchanging the income stream for a cash sum is good value or right for them.

This imbalance needs to be corrected with improved guidance and advice. But who pays for this? Who benefits most? It can’t all be free, much as we’d like it to be so.

There needs to be a way for policyholders to see real value in taking advice or guidance, or they will be seduced by what appears to be large cash sums.

In today’s climate, reducing the amount of money available through advisory fees is viewed as something on a par with robbery. However, advisers need to eat.

Pension Wise could provide basic guidance for all, but the funding will come from the public purse or though a higher levy on the financial sector.

Advice may be too expensive for many, but there is a middle way of good-quality guidance provided by the commercial sector.

Ultimately, the answer is to encourage people to see that paid-for advice/guidance is a natural part of considering financial change and offers options proportionate to the size of the pot.

Another issue will be the attitude of regulators. 

A secondary annuity market carries risks for consumers, but if it is actively deemed unsuitable for most policyholders, the market could be killed before it gets going.

To make it work, there needs to be buyers and sellers in sufficient volume. 

It also needs a mechanism to filter out the unsuitable sellers at an early stage, perhaps by a cautious, impartial valuation tool which could be free for policyholders to use.

Using case studies could help people see how others have fared when trading their annuities.

Spotting scams

A third issue is the soundness of the buyer.

800,000 eligible policies a year could attract sharks, so regulation of buyers is essential. The industry does not need liberation scams in this area.

Vetting of buyers could also be an integral part of a bidding infrastructure, matching up reputable buyers and sellers. Conflicts of interest will abound and will need to be managed effectively.

Another tough challenge is ensuring fair pricing for all stakeholders. A balance must be struck between the consumer and the market, as well as competition between providers.

Finally, administration systems, processes and skilled people will be needed to ensure it all runs smoothly and that information is collected and shared appropriately, including mortality checking for both the existing and reassigned provider.

There is no way of knowing how many of the 800,000 eligible policyholders will want to transact, how many it will be suitable for in reality or whether they will all rush at once then fade away as pot sizes reduce before building up again over the decades.

This makes predicting market size and processing capacity difficult.

These issues show that much needs to be done to make this initiative work well.

A secondary annuities market can be built appropriately from the outset, but it will take time and effort. Another year helps us to do this and is very welcome.

Margaret Snowdon is a director at JLT Employee Benefits