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NAPF concern over secondary annuity market

25 June 2015

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The National Association of Pension Funds (NAPF) has expressed a number of concerns in response to HM Treasury's consultation, 'Creating a Secondary Annuity Market'.

In its response, the NAPF says that the cost of creating a secondary market may be so high that it will greatly reduce the value available to most annuitants.

Graham Vidler, Director of External Affairs, NAPF, said: "The idea of creating a secondary market in annuities has obvious appeal – but what's far less obvious is how to create this market in any comprehensive way, without it being imbalanced or overly expensive.

"The Government has a knotty problem to unpick if it wishes to create the full market it originally set out for savers and ensure it consistently provides value for money," he added.

The NAPF response highlights a number of key issues:

First, the number of sellers (people with an annuity today) is uncertain and likely to be time-limited.
NAPF says the advent of 'freedom & choice' has greatly reduced the market in annuities, so only likely source of sellers will be the people who already have an annuity.

Second, buyers will be wary of adverse selection and will compensate accordingly, either through pricing 'short longevity' into all contracts or through individually underwriting each transaction, both of which will increase costs.

Either way, the value available to all, or some, sellers will be reduced.

Next, the NAPF said, many sellers will need protection in the form of independent advice, which will come at a significant cost and reduce the value of the transaction to the seller.

The organisation also commented on the infrastructure of annuities.

The cost of building an infrastructure needed to package and sell annuity contracts will be significant, it said, especially as the lifetime of the market looks limited and all costs would need to be recouped within a short period of time, rather than spread over decades.

Even with an infrastructure for market in place, it is not clear who will be the buyers of the annuities - an NAPF survey of members suggests a very limited appetite from pension schemes for packaged annuities with only 13% of defined benefit (DB) respondents expressing an interest and 67% 'not interested'.

Lastly, by releasing the annuity's value in a lump sum sellers risk a higher tax bill than if they had drawn the income from an annuity, further reducing the value the annuitant ultimately receives.

The Government's own forecasts suggest the Exchequer will reap over GBP 1bn in additional taxes from the introduction of a secondary annuity market in the first two years.

Despite its misgivings, the NAPF acknowledged there would be circumstances in which it would be appropriate for a member to 'sell' their annuity, for example where an annuity was the only option open to them under the previous regulations, but the income stream is not needed to support the household income.

"We can see pockets of value for both seller and buyer – especially in the smaller annuity section of the market and we encourage the government to explore this area more fully and work with the industry and the regulator to develop a market that is fair and robust," said Graham Vidler.

First published 25.06.2015

Lindsay.sharman@wilmingtonplc.com