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The freedom to get screwed

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We measure out our lives by different things. J Alfred Prufrock measured his out by coffee spoons. For many of us our lives are marked out by Christmases, Hogmanays, birthdays and anniversaries.

But in financial services, our lives are marked out by two things: politicians dicking around with pensions, and mis-selling scandals.

This being an election year, it seems inevitable that we’ll see a considerable amount of the former, at least some of which will lead to the latter.

Such an instance of said dicking may be found in the pronouncements of the usually-sensible Steve Webb, who has suggested that it might be a whizzo jape to extend the new retirement freedoms enjoyed by those who haven’t yet crystallised, or ‘taken’, their pensions to those who have already annuitised.

Says Steve, “…given that we now accept that individuals should be given more control over their retirement savings, I would be concerned if we were to exclude up to five million people who are currently receiving annuity income”.

Webb’s new gambit is annoying on a number of counts, not least the fact that it neatly demonstrates the ‘thin end of the wedge’ argument, which is beloved of conspiracy theorists, UKIP and my wife when I open a bottle of whisky. This is not helpful.

I’m on record as loving the other freedoms that have been opened up, and encouraging the industry to trust savers with their own money. So why buck and kick against these freedoms being extended to current annuitants?

There are two reasons.

Firstly, on a micro level, it’s going to be terrible value for those who participate. If we accept the mighty Ned Cazalet’s recent figures that up to 20% of the purchase price of an annuity is snaffled in charges, then annuitants have already borne significant pain.

Do we really believe those that purchase second-hand annuities will be doing so pro bono? Of course not. We don’t know how the figures might look, but the purchase has to be profitable for those putting up the capital, and that’s just another way of saying that the annuitant will receive what we like to call a ‘secondary screwing’.

For sure we won’t be multiplying monthly payments left to the actuarial cohort’s expected age of death and paying that to the individual. And you can expect medical underwriting and postcoding to work in reverse.

As Cazalet’s 129-page blockbuster proves, annuities are anything but simple, and unwinding them will be even worse – think Ginger Rogers’ famous quote that she did everything Fred Astaire did, except backwards and in heels.

Can we expect the industry to behave itself and not give annuitants looking to flee a worse-than-usual screwing? No, we can’t. And it is for this reason – the supply side, not the demand side – that at an individual level this proposal shouldn’t go ahead.

Freedom to get re-screwed by an industry hell-bent on loading the decks against you is no freedom at all.

At a macro level it gets even worse. Purchasers of second-hand annuities will only make it work by pooling – that is, by buying lots and lots of them to spread mortality risk. Once we’re in that world, we’ll start profiling those pools.

We might have ‘A’ pools, with healthy folk in good postcodes, ‘D’ pools for people who didn’t listen to their wives about the bottle of whisky and all that.

Once that’s happening, it’s only a matter of time before we have second-hand annuity funds in the life settlement/second-hand endowment fund style, and we know how well those went. And am I the only one who can see packages of annuities being bundled up, collateralised and sold on on what I suppose would be a tertiary market? CAOs anyone? Anyone? Bueller?

Any policymaker will tell you that you aim for the line of best fit and try to hurt as few people as possible along the way.

I don’t doubt that Steve Webb is the best pensions minister we’ve had for a long time. I don’t doubt his populist instinct. But I also don’t doubt his electioneering instincts, and in this case a short-term vote winner will, I fear, turn into something quite unpleasant in the medium and long-term.

Maybe he doesn’t care. But he should, and this omni-screwing proposal should be put down humanely before it has a chance to breed.

 

This blog first appeared in Professional Adviser.

Posted in: #pensions   #Uncategorized  

About Mark Polson

lang cat founder and boss. Expert on all things platforms, pensions and investments. Prolific writer and public speaker, even when people ask him not to be. Knows more about Scandinavian black metal than you, and isn't afraid to prove it.