22 November 2016
Five questions from the secondary annuity U-turn
The year 2016 will no doubt go down in history for many notable events, but it will also be imprinted on the memories of some entrepreneurs because of the dramatic government U-turn on the secondary annuity market. The move certainly disrupted several business plans and, in the case of established firms, meant they had done quite a bit of ground work to comply with a reform that eventually didn’t happen. They were given little more than half a year’s notice of its cancellation so firms with annuity books would have been remiss not to have already completed a considerable amount of planning on the issue already.
At Space, we conducted a significant amount of research work for clients to help them understand the attitude of their customers and potential customers in this new market. We wrote about it earlier this year in a column in Professional Adviser giving our initial reaction.
Now, having had a little bit more time to review what happened, we suggest five questions to help us draw out a few lessons from what happened.
Could we have predicted the U-turn?
Policy U-turns tend to be abrupt and cost money. They can happen because key industry players oppose a reform or because their key political sponsors move on. A decade ago, the Labour government performed a sharp U-turn when it decided not to allow residential property into pensions after promising to do so. Some believe the key moment came about when the usually gung-ho Halifax warned that the ombudsman would have been inundated with complaints if the reform went ahead. With home seller’s packs, several housing ministers changed roles, making it easy to dump the idea though most of the mortgage industry was opposed too. With secondary annuities, the decision by Hargreaves Lansdown not to play in the market combined with George Osborne losing his job made a U-turn much more likely. So could we have predicted this? Just maybe, in late summer, but not before. It was a very late decision by historical standards.
Should the industry think twice before investing time and energy in any new Government proposals?
Financial services businesses know that the boundaries that govern the products and services we sell are often set by government decisions about tax, spending, regulation and more. The decisions are mostly made by the Treasury but also the Work and Pensions department and sometimes the Business department and, of course, the FCA. In many ways, that’s life in financial services. Reforms can be fantastic news. Whoever thought up the idea for the Pep/ISA, surely deserves a medal from fund managers, advisers and from retail investors too. Perhaps we should try and prevail upon the government to run pilots in much the same way as the industry does to understand the market before proposing or certainly confirming big changes. In these uncertain financial times, however, we may be wishing in vain. Regulated businesses still have to work on the basis that what the government says will happen, will happen most of the time.
How disappointed will annuitants be?
We suspect that some people will be very disappointed. It is now received wisdom that annuities are poor value. That may or may not be true depending on an individual’s circumstances. What is clear from our research, as we highlighted in the Professional Adviser article is that people with annuities especially plain vanilla ones have limited understanding of what they have got. Our research showed that many people believed they could trade in their annuity for something like the amount they had saved, minus the sum they had received in payments. They had a profound misunderstanding of the nature of the contract they held. It would have been interesting to see what sorts of sums of money would have convinced them to trade in their annuity, but whatever the eventual decision a lot of retirees may have been disappointed. There is, of course, another round of poor headlines due as at least a handful of companies are reviewing their annuity sales at the FCA’s behest.
Was there any good news?
Yes. Retirees with enhanced annuities – who had shopped around or at least received an enhanced offer from their pension company – were much better informed about what they had. This may auger well for the future of the enhanced market especially as gilt rates may be set to rise. Most advisers are very concerned it remains as an option especially for clients in ill-health.
So is it time to put the whole episode behind us?
No. Not in our view. We think everyone should be concerned that so many retired people, who have an annuity underpinning their finances don’t really understand what it is and how it works. We worry that a lack of appreciation about the financial aspects of retirement may persist. In many ways, the stakes are higher now given pension freedoms although the reforms will have prompted some retirees to find out more. That said, there remains is a huge challenge for providers, the government, IFAs and the reformed Pension Guidance in whatever form it takes. Maybe the press can play a role too. (Maybe). The system has changed, but better informed retirees are surely less likely to feel resentment about the industry and to pass their doubts on to the younger generation. So rather than put the whole thing behind us, we think it is one to think about in 2017.
That is the Space view of one unfortunate episode from 2016. But we would love to hear your views too.
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