Treasury scraps plans for secondary annuity market amid consumer protection concerns

In 2014 the government announced that it was considering plans that would enable pensioners to sell their regular annuity income from 2017. People could then swap it in for a cash lump sum, benefitting pensioners who were stuck with annuities they did not want.

Market was 'likely to be small'

But on Tuesday it became apparent that the Treasury has decided to scrap this idea, primarily due to the protection of consumer rights.

It’s probably the most insane idea that I’ve seen come out of the Treasury in my time in pensions

Ian Neale, Aries Insight

The government explained that creating the conditions to allow a competitive market to emerge could not be balanced with adequate consumer protections.

“It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited,” said Simon Kirby, economic secretary to the Treasury.

“Pursuing this policy in these circumstances would put consumers at risk – this is something that I am not prepared to do,” he added.

The government has estimated that only 5 per cent of people who currently hold an annuity would have been able to take advantage of this reform. It said that the best option for the majority of people would be to keep their annuity incomes.

“I read the announcement with some surprise and a sense of relief, because it’s probably the most insane idea that I’ve seen come out of the Treasury in my time in pensions,” said Ian Neale, director at intelligence resource Aries Insight.

Scope for reputational damage

Neale said that a secondary annuity market “was never going to work” and noted that the scope for reputational damage to the pensions industry was "huge".

“It was the industry that was going to get the flak when, inevitably, the whole thing fell apart,” said Neale.

“The frictional costs which were involved in the process would mean that the annuitant was not going to get anything like the kind of sum that they’d hoped for in selling their annuity, even if they got to the final stage of getting a quotation,” he said.

Neale also said he thought the Treasury’s announcement was somewhat disingenuous, because "they ascribed their decision to their newly discovered risk to consumer protection, which a number of people in the industry have been pointing out to them from the beginning".

He noted that although the government would be able to facilitate the market, it would not have been able to form it.

Not off the cards?

Mark Futcher, head of defined contribution at consultancy Barnett Waddingham, said that setting up a secondary annuity market “was always going to be very difficult to implement” in the “unrealistic” timescale that was given.

However, Futcher said that it might not be completely off the cards. “Eventually it will come back on to the agenda.”

He said people who made the decision to take out an annuity 15 to 20 years ago, for example, would want that freedom.

Choice for pensioners

Rob Dales, director at JLT Employee Benefits, said he had hoped that the secondary annuity market would give defined benefit members more more choice. 

It would not be difficult for the government to allow pensioners in a DB scheme to transfer out in a similar way to deferred pensioners, he said.

Former pensions minister Ros Altmann said many people did not need that income and could be better off in retirement if they had not bought the single life level annuity they were forced to purchase‎.

She noted that “obviously we need consumer protection”, but said that it could be achieved “in a much better way than the sales process they engaged with in the first place”.

Altmann added: “This is an opportunity now denied to many people and seems a real shame.”