The Government has announced that it will not be going ahead with plans to create a secondary market for pension annuities. Despite the steps that have already been taken - including FCA guidance and internal preparation at potential market participants - concerns over mis-selling and market size led the Government to conclude the plans were not workable. While the announcement has been broadly welcomed across the industry, it will come as a disappointment to pensioners with relatively poor-value annuities who might have benefitted from market liberalisation.
Background
In tandem with other moves to liberalise the pensions market, in December 2015 the Government committed to create a secondary annuity market by April 2017. This market would have enabled pensioners drawing income via an annuity to sell that annuity to a third party for a cash sum. This had the potential to particularly benefit those pensioners who, prior to the recent pension freedom reforms, were obliged to buy an annuity on retirement, given the widespread perception that such annuities offer relatively poor value for money.
After consultation on draft secondary legislation, the Government has announced it will not proceed with these plans. In summary, the Government has stated that the steps needed to create sufficient ‘buy’ demand for annuities could not be reconciled with ensuring adequate protection against fraud and mis-selling. These risks were particularly sensitive from a consumer protection standpoint given the significant risk a pensioner would be taking by selling their guaranteed source of income. Ultimately, the Government concluded that only 5% of eligible pensioners might elect to sell their annuity, and there would be insufficient purchasers to create a competitive market in any event.
Comment
Industry comment indicates support for this decision and echoes the concerns over the limited market potential; the Association of British Insurers welcomed the move as "the right decision for the right reasons."
Conversely, some groups acting for pensioners have reacted with disappointment, given the proposals offered the opportunity for some pensioners to improve their financial situation. Other sources have also noted that insurers may have invested time and effort in designing processes for a market which will not now exist. The announcement reflects a period of considerable regulatory reform in the UK pensions market, and employers and scheme trustees should continue to closely monitor future proposals from the Government.