The government aims to extend the new pension freedoms to those who have previously bought an annuity by allowing pensioners to sell their annuities from April next year. However an independent study published by The Open University Business School (OUBS) suggests there are fundamental barriers to effective competition for secondary annuities that are likely to prevent pensioners getting a fair deal, and that current government proposals appear insufficient to address this. Stronger intervention to bolster competition and consumer protection is necessary to give the market a chance to succeed.
To inform the debate academics at The Open University have conducted research into the secondary annuity market – how one might function, what impact different policy options may have, and which are most likely to enable effective competition and alleviate consumer harm – which we hope can help the government and regulators create a market that does work for pensioners.
There are also consumer protection risks from pensioners selling an income they rely on. The government has published proposals to address these issues but our analysis suggests they have underestimated the scale of the problem, especially the real risk that competition will simply not emerge, and that their proposals may not prove sufficient to create a market that works for pensioners.
Our research points towards the role and advantages of annuity providers, the availability of information for buyers to value annuities, the lack of cheap-but-effective advice, and the risks to vulnerable pensioners, as the main issues that need to be addressed. We must caution that these are very complex issues in a market that does not yet exist, where the detail of interventions is likely to be crucial in determining whether they are successful, so it is impossible to say with certainty what the best policy response is. But our analysis does suggest that sales being via a platform that encourages information sharing while not revealing the precise identity of the annuitant could help alleviate the first two issues, while adapting and improving Pension Wise and firmer regulation of sales by vulnerable consumers may offer a chance of addressing the latter two.
It remains plausible that no effective secondary annuity market will emerge regardless of the policy options chosen. However, we hope our study helps the government and regulators enact policies that give it the best chance to do so, as in the absence of careful intervention it is highly unlikely pensioners will get a good deal.Will Brambley
lead author of the report
The report, entitled ‘How might we create a secondary annuity market that works for pensioners?’ can be found online.
This study was kindly funded by the European Life Settlements Association, and the authors are very grateful for their support.
The authors are both researchers at the True Potential Centre for the Public Understanding of Finance (True Potential PUFin). True Potential PUFin forms part of OUBS, and was launched in November 2013 to provide the general public with free and open access to short courses that develop personal finance skills.
True Potential PUFin is working to improve public understanding of personal finance through its research and the delivery of free modules providing individuals with the tools to make sound financial decisions. For more information, please visit www.open.ac.uk/pufin.