Last month we wrote about how a secondary annuity market may work and how large the market may be. We highlighted some of the potential challenges that may prevent its development and what options might be available to stakeholders (including the government) to overcome these.
Now that the government has provided its response to the consultation, we have a better idea of how this market will work. Below are some of the key outcomes for the major stakeholders.
Insurers will be able to purchase annuities they have written, but only indirectly. This means buy back will be allowed through an intermediary (such as an Independent Financial Adviser (IFA)) or blind bidding process. The government believes this will lead to better value for customers but we can see this having implications on the competitiveness of the market.
The so-called 'tertiary market', where annuities are re-assigned not once but twice (or more) will be permitted. This should make the asset class more attractive as it offers some liquidity and allow funds combining many secondary annuities to be set up and sold on, which is likely to be of interest to smaller insurers and occupational pension schemes.
Only those with individual annuities written in their own name can be re-assigned. This effectively rules out those receiving pensions from defined benefit pension schemes, although this is a complex area and the details are still to be finalised. Those who belong to pension schemes who have 'bought-out' benefits with an insurer will be able to benefit – giving the potential for a long term stream of annuitants looking to sell.
Partial sale will not be allowed due to the complexity it would create. Those wanting to swap a portion of their income for a cash lump sum, or commute future increases or spouse benefits will not be able to do so.
Ensuring customers understand the value of their annuity is a key issue. The government is to work with the Financial Conduct Authority (FCA) to design an online tool for annuity holders to receive an estimate of the value of their annuity to help them understand what it may be worth.
Consumer protection will take several forms:
- Pension Wise will be extended to include secondary annuities
- Independent financial advice will need to be sought for annuities above a certain (as yet undefined) value
- Risk warnings will be used to highlight the dangers of selling an annuity, in a mirroring of the pensions freedoms protections
- Annuity purchasers and intermediaries (or at least those in the UK) will need to be FCA authorised
- Consent will be needed from dependants or other potential beneficiaries of the original annuity
Details to be ironed out
The response still leaves several unresolved issues which the government is looking to work with the industry to develop solutions. These include:
- Death notification
- Re-assignment administration charges
The government is clearly keen for this market to exist and run smoothly. Whilst the consultation sets out some key features of how it will work there remains much to do before April 2017. It is important that the remaining issues are resolved well in advance to allow those involved time to develop their solutions.