News on annuity sales illustrates two-state pension landscape

Alan Collins

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Yesterday, L&G announced that individual annuity sales have fallen by 40% following the recent budget.  This follows on from Standard Life reporting a drop of 50%.  To me, the only surprise from this is that sales have not fallen further.

The brave new world of choice for pensioners is here.  And even better news for George and Steve is that it seems to be a happier world.  People like choice and people like people who give them choice.  Happy days…

But choice for all?  Well, no.

The detail of L&G’s statement notes that the bulk annuity market remains healthy.  Why?  Simply because the bulk annuity market is “not affected” by the reforms.   Members of defined benefit schemes (and the trustees and employers who look after them) are faced with a more restricted future.  With a possible ban on transfers out of defined benefit schemes looming and no mention of allowing defined benefit schemes the freedom afforded to individuals, the only choice for the vast majority of defined benefit schemes will be the bulk annuity market.  And the only choice for members will be the type of benefits offered by the scheme, even if that does not suit their individual circumstances.

So, what can we do about this?

First of all, transfers from defined benefit schemes must be allowed to continue.  Before retirement, members currently have the right to transfer the value of their benefits to a pension vehicle of their choice.  To take that away would be a disgrace.

Secondly, funded defined benefit schemes should be given a mechanism to allow current pensioners to receive their income in a much more flexible way.   Defined benefit schemes are holding “pots” of money to pay the pensions, so  the pensioners should be allowed access to those pots in the same way that individuals can going forward.  A pension of £10,000 a year might be worth £200,000.  So, why not let the pensioner take £30,000 this year and £20,000 the next?  Why should members of defined benefit schemes not be “trusted” in the same way as everyone else?  I say they should.  Trust the members; trust the trustees – that would give real choice for all.

Alan Collins

Post by Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.

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