Err, pensions minister doesn’t understand annuities?

Retired workers would be allowed to switch to better-paying pensions under government plans to tackle “murky” practices among insurance firms.

Steve Webb, the pensions minister, wants pensioners to be able to switch to better annuities regularly in the same way that home owners can change their mortgage deals every few years.

The proposal would end the current “lottery” in which many pensioners are trapped in potentially poor-value schemes until they die.

What?

So, someone retires at 65. Buys an annuity. They survive to 75. So now they can take their capital sum out of one fund and place it in another? What?

Doesn’t this “minister” understand the insurance nature of annuities? The pool?

62 comments on “Err, pensions minister doesn’t understand annuities?

  1. I do understand the “pool” bit, but it still isn’t clear to me why switching is bad. Could you offer a fuller explanation please?

    Tim adds: When you take out an annuity the government insists that the insurance company providing that annuity finances it. Largely, in long dated treasuries. That’s why annuity rates go down so badly in a low interest rate environment. Stocks are up, dividends are up, but annuities stay at rock bottom because they are financed by those long term bonds.

    If, after 5 years of being with one company you want to move to another, well, there is no pool of capital that can be taken off to some other company. There’s just those long dated bonds. And they’re going to return what they do whoever is actually administering them.

    Imagine, for example, that interest rates rose. Great, new annuities will be paying more, because the bonds that they have to buy to finance it are paying more in interest. But you can’t move your capital out of the old annuity to take advantage of the new interest rates. Because those old bonds, carrying the lower interest rate, have now gone down in capital value by exactly the amount of interest that is lower over the long term. You therefore have less capital to move: and your income is going to be the same at the new company as it was at the old because, obviously, the capital value of the bonds and the interest received from them are closely linked in an inverse relationship.

    You simply cannot have portable annuities between different investment funds. It doesn’t work.

  2. How odd.

    Isn’t the effect of this that we all end up buying a series of 3-5 year fixed-interest bonds for as long as we breathe? As poor as annuity rates are, I think they’re better than that would be. Although, if the ‘providor’ at time of death got to keep the capital then we would see pension income steadily rise over retirement as the ‘windfall’ potential rose. Then again, the financially illiterate do like to say how unfair it is that the insurance company benefits when people die.

    The comparison to mortgages is interesting. I’d argue that the deal-hopping culture in that industry is a bad thing. There’s a lot to be said for picking a payment level and sitting on it for the long term (it is, of course, a long term investment). The constant switching makes a lot of money for the banks and the middle-men, so most consumers will be losers over that long term.

    Isn’t it nice, however, that whilst Giddy is boasting about government’s wonderfully low borrowing rate.. his colleague is blaming the insurance industry for the implications?

  3. There’s also the point (William Connolley, above) that annuities are a return of capital and so to complicate Tim’s explanation you have to wrap in that some of the original capital is being returned each month as income and so is reducing the amount that could be transferred to a new provider for investment. The pooled nature of the annuity scheme means that the long-lived are subsidised by those who croaked early, something actuaries can factor in. If you take away the pooled characteristics the long-lived are going to go hungry……..

    On the wider question of Government ministers and polticians generally, in the course of many correspondences with those involved in pensions I’ve yet to find one that understands anything at all about the sorts of pension arrangements the real world – outside their cosy little bubble -, er, “enjoys”. They are contemptibly clueless.

  4. I can see how annuity hopping is possible.
    An actuary can calculate the life exptancey of a 75 year old and calculate how much of their firms capital is exposed to that longevity and then transfer that sum to the new company, its no loss to them. Its up to the new company to decide whether they can do a better job with that capital , and if they decide that they can, then annuity hopping is possible.

  5. formertory, it’s not just MPs. Before my brother entered the private sector, he was for somewhat over a decade a copper (fast-track admittedly, but still). I think I’m right in saying that in that time he accumulated a pension pot in excess of half a million. To be fair to him, he appreciated the con of it, but many of that Ilk do not, and think this stuff falls to them like manna, as their just desserts.

  6. So a 65 year old spends £100k on an annuity. 10 years later aged 75 they decide they can get a better rate elsewhere – though cannot use £100k anymore, perhaps only £50k. Will they get a better deal at age 75 using half the sum?

  7. As I’ve noted before, I’m an actuary and am involved in the pricing and reserving for annuities. I haven’t seen any of the proposals in detail, only this article. I strongly suspect that this is a case of a journalist completely mangling what has been said or proposed. Either that or Steve Webb does need some swift education.

    I’m back to work after Xmas hols tomorrow. If there is a mass resignation of actuaries then you’ll know which of the above scenarios it is.

  8. “I’m back to work after Xmas hols tomorrow.”

    And one wonders why the admin costs of pensions are so high?

  9. Actuaries are allowed to book holiday off at Christmas time. I suppose we could make them work 52 weeks a year, but it would probably be a bad thing in the long run.

  10. “And one wonders why the admin costs of pensions are so high?”

    “Admin” costs are high for a myriad of reasons: life offices trying to cope with legacy computer systems dating back to the 1970s (it really is long term business!), compliance with ever changing and expanding regulation, as well as employing lots of vastly overpaid actuaries like me to take Xmas off.

    As an aside, you’d be astonished at the real margins made on new annuities. Seriously, they are incredibly low – yes, low. It just isn’t the cash cow that the media makes out. It’s the classic high-volume, low margin business.

  11. they can get a better deal if a different new insurance company has less overheads , is more efficient, pays less to shareholders. The usual way competiton works. As for the finances of hopping Its a bit like when a bookie offers to close “a bet in play” .

  12. > GlenDorran

    As you say you are an actuary that calculates pricing and reserving for annuities then why are you skeptical of the proposal are you saying that the reserves are not transferable and if so why are they not.

  13. Didn’t say it wasn’t possible, just that the article was a garbled mess and it wasn’t clear what was actually being suggested.

    As with all of these things, the devil is in the detail. It could end up that the increased complexity and regulatory burdens make it uneconomic for a lot of providers who will just pull out of the market. Not sure how pensioners will benefit from that.

    You are entirely correct that a new company with lower overheads will be able to price better. The industry has been expecting this for years, but there hasn’t really been any sign of it happening – barriers to entry are extremely high. When it does finally happen at any scale then a lot of old-school companies (including my own) will be in for a rude awakening, and deservedly so.

  14. Dinero, I reread your comment and realised your use of “new” was in relation to a new company from the pensioner’s point of view, and you are entirely correct.

    I was referring to a new entrant into the marketplace, but the point still stands.

  15. So I was thinking that if a pensioner leaves an insurance company then they are releiveing that company of a liabilaty and being releived of that liabilaty is worth money to them, and so that is the some of money that the pentioner would be given to go elsewhere. Do you concir.

  16. @Jim & Glen Dorran
    I would refer you to a conversation on another thread:
    ” It’s a different worlds thing, and that tends to infect all these discussions. Everyone has a habit of thinking that their own experience of life is somehow representative, or the norm, or whatever.” IanB

  17. “You are entirely correct that a new company with lower overheads will be able to price better. The industry has been expecting this for years, but there hasn’t really been any sign of it happening – barriers to entry are extremely high. When it does finally happen at any scale then a lot of old-school companies (including my own) will be in for a rude awakening, and deservedly so.”

    So reminiscent of the situation with a managed share portfolio I have some responsibility for. The actual performance of said could have been equaled by a chimp with the aid of a copy of the pinkun & a pin. And having once managed portfolios I do know the quantity of actual work involved in managing said portfolios. Minimal. So the stupendous management charges involved. Consuming more than 50% of the appreciation of the portfolio. Are a direct reflection of the lifestyles portfolio managers are able to sustain due to the requirement imposed to use them. Mr Pin & Bonzo wouldn’t be demanding a four-bed in the stockbroker belt, late Merc, second home in France, ponies for privately educated daughters or two weeks paid break at Xmas.

  18. Not sure how or why a third person’s comment on a different thread is relevant. You were a bit snarky about actuaries being off at Christmas; I just pointed out that they have bookable holiday like (pretty much) everyone else. Might be the only fortnight this 12 months that GD has taken.

  19. Mortgages are relatively easy to switch because (in the UK) they’re usually at floating rates. I can’t see floating-rate annuities becoming a popular product.

  20. Since it is already possible to buy Fixed Term Annuities, which guarantee to leave a sum of capital over at maturity for you to use for another annuity, this seems to be a case of reinventing the wheel – or of making the wheel compulsory.

    The main problem with annuities is that people don’t save enough money in the first place. When defined benefit schemes were common, something of the order of 25% of pay would be directed into them. Does anyone save at that rate now, into DC schemes, ISAs, or whatever?

  21. Since he figured (correctly) that noone in his right mind would invest in the govt, Gordon Brown tightened the rules on annuities.

    Now HMG has a virtual monopoly on them. So it seems to me quite right that a Tory pensions minister would like to take another look. Who knows, maybe a FTSE tracker fund with low charges might be a better bet, and be better for the country in the long term.

    It also seems harsh to expect people (some of whom were “retired” for ill health) to take a whole life decision at what might be a difficult decision making time.

    Also, actuaries are clever guys. I’m sure they could come up with a scheme where in return for a lower pension you could have a transfer window, like they do in the soccer.

  22. jim
    I wasn’t a bit snarky. I was intentionally, wholly snarky.
    We are discussing the costs or the pension industry (Tim points out, The underlying investments are government requirements. Level playing fields)
    The productivity of actuaries is dependent on the amount of actuarying done.(If it isn’t why do we need actuaries?) As is the productivity of shelf stackers, on the amount of stacking done. GD may have sacrificed the major portion of his annual leave on a long winter break, but somehow I doubt it. Actuaries get better vacation deals than shelf-stackers.
    The cost of those vacation deals are paid by pensioners. Some of those were, no doubt, shelf-stackers.
    It’s a comment on how the system tilts the benefits in the direction of the powerful players.

  23. @ bif
    Steve Webb is a LibDem.
    A FTSE tracker fund should give a *higher* return over the long-term but the retired pensioner is concerned and paying for a *certain* income over his/her life-time and the stock market crashes in 1974, 1987, 2001 and 2008 would have wrecked that for anyone solely invested in a FTSE tracker.
    Yes actuaries are clever guys – the one we considered “dim” at my former employer got a Cambridge Maths degree in two years so that he could concentrate on playing rugby – and they could set up such a system but the cost of both companies investigating the annuitants’ health and lifestyle might wipe out the benefits, unless the company from which the annuitant was transferring was incompetent.

  24. @ bis
    When I worked for a Life Assurance firm, the top guys/gals (mostly but not inevitably Actuaries) got four weeks’ holiday*. My wife working in local government gets six weeks.
    Wake up!
    *One exception – the CEO when I joined had his holiday increased to one month for his last couple of years on health grounds.

  25. Actuaries get pretty much the same holiday entitlement as any profession.

    Some of it gets taken over Christmas.

    People in simpler jobs have worse conditions.

    Keep it coming. It’s revelatory stuff.

  26. @ bis
    “And having once managed portfolios I do know the quantity of actual work involved in managing said portfolios. Minimal.”
    I hope you are ashamed of yourself: when I managed part of one portfolio and advised on my sector of two others I worked 50+ hours a week (occasionally over 70 but not below 50) and, as a result, we did a *lot* better than a chimp with a pin like 20-30 times my salary. Your lack of performance presumably reflects you lack of competence or lack of effort.

  27. @ PaulB
    “I can’t see floating-rate annuities becoming a popular product.”
    They’d be better value than ones taken out currently based on negative real interest rates which cannot last for long!
    The trouble would be that the insurer would be forced to have a large amount of funds tied up in short- and ultra-short-term gilts/bonds so the returns, and income to annuitants, would be depressed. Only makes sense in current heavily distorted environment.

  28. Also, actuaries are clever guys. I’m sure they could come up with a scheme where in return for a lower pension you could have a transfer window, like they do in the soccer.

    That’s an interesting thought. Suppose we assign a value to each annuity, at which it can from time to time be cashed in and reinvested with an alternative provider. That value would reduce over time, as annuity payments eat up the principal (and as the actuaries take their fees). There would be a partly offsetting increase as the annuity value assigned to holders who die is redistributed among the survivors. And the value would go up and down with bond prices.

    If you wanted protection against interest-rate movements, so that if rates go up you could benefit from it, you’d need a built-in interest-rate option. That could be engineered, but it would be expensive.

    The other consideration is the pooling aspect Tim mentions. Suppose an annuity holder receives a medical diagnosis which substantially reduces his life expectancy. That would increase the annuity he could buy for a given sum, and make it more attractive for him to switch. But if relatively short-lived people are more likely to switch, the expected cost of an annuity at the time it is written goes up. So annuity rates would have to be lowered to compensate.

  29. @ PaulB
    No: good idea but the value given up by the existing provider is smaller – if X is only going to live 2 years why should you give more than 1.9x the annuity to the new provider? No-one would be allowed to switch out without taking a medical exam at least as thorough as for a proposer for a new life assurance contract.

  30. Since fixed term annuities, and income drawdown/withdrawal, both solve the problem (if problem it be) for new retirees, I suppose they must be thinking about people who have already bought a lifetime annuity. Great – retrospective legislation! That’ll go well, I’ll bet.

  31. @ Dearime

    “When defined benefit schemes were common, something of the order of 25% of pay would be directed into them. Does anyone save at that rate now, into DC schemes, ISAs, or whatever?

    There are about 100 people employed where I work. One person is putting c25% into a pension. I’m the next highest at 16%. The majority of people are at 2% (and only then because of the new auto enrolment scheme), and those who consciously opted to join a scheme are at 12% – it being, as is typical, a 6% ‘matched’ scheme.

    As a company would have a lower average employee age than most (not much above 30) – but other than that we’re probably quite representative.

  32. some commentators on this thread are conflating assets and liabilaties. Pensioners drawing there pension are a liabilaty for insurance companies and they would be quite happy to pay then to leave if there was a legal framework to do so.
    as
    deariemeJanuary 5, 2014 at 3:07 pm
    [oints out it is not an entirely novel idea

  33. @John77
    I was managing private client portfolios being paid what a young person earned in the City, those days. Less peanuts than a chimp rated.
    But, broadly speaking, all the portfolios were much of a muchness. The result of the same people answering the same requirements in the same way. The only work required was grinding out a valuations on a machine you wound the handle & repeatedly writing the same letters. Back then we weren’t charging for this service.
    The stuff I get from our fund manager is no different apart, from he doesn’t get wrist ache doing it. And he calls himself Investment Manager (it says under his signature) I think I got called “Oi you!”

  34. as far as I am aware the idea that a pensioner has a fund asigned to them that is “eaten up” as they receive payments is quite wrong. Once the annuity is purchased the thing the Insurance company is concerned with, on a continuing bases , is the persons longevity as calculated by an actuary, and how much of their capital that entails.

  35. That not all active fund managers can beat the index is such a trivial observation that I’m embarrassed to make it.
    But what is the alternative? A market 100% passive trackers would be a false market.
    As for those new fangled algos (coming to a junkmail in box near you!), I suspect they will turn out to be the real chimps.

  36. @ bis
    Checking company news and share price movements every morning, looking at the CGT impacts – which differ for different portfolios – of each potential switch triggered by share price movements and evaluating expected returns net of tax for each portfolio; then comparing expected benefits with switching costs and guesstimate of risk, keeping up to date with news and assessing impact of any change in economic circumstances for each company in my sectors, reviewing stockbrokers’ research.
    Portfolios should NOT have been much of a muchness because they should have been designed around the cash flow/income requirements of clients with the initial portfolio based on the best (not necessarily highest because other factors affect it) return at the time and switches only when the increased expected return justifies the expense of switching including CGT so portfolios started at different dates will hold different stocks – which means a lot of share prices to check every morning (I found that once Datastream had been invented and brought up to speed it made life easier).
    It was actually quicker to do valuations for portfolios by hand than on the computer (I was going to say “small portfolios” but it was equally true for the whole company’s stock exchange investments – we would come in on January 1st and the investment actuaries would take a print-out of the investment portfolio and a copy of SEDOL and calculate the valuation*: us juniors would check it and fail to find any errors so the valuation was completed on 2nd January. After it was computerised it took ten days and I found mistakes. At least I didn’t have to write letters.
    One of the nice things was that I was called “John” by *everyone* from the CEO to the lavatory cleaner.
    *without the slow mechanical adding machines.

  37. What he is proposing is somewhat reminiscent of the US mortgage system where homebuyers have the option to refinance at no cost when they want to.

    This means that the homeowner is long a bermudan interest rate option to the maturity of the mortgage. This option has to be priced and paid for by the homeowner through the payment of an otherwise higher interest rate. Most homeowners are not aware of this.

    If annuities were to be redeemable at par at any time so as to buy into a new annuity with a better rate then annuity rates would have to be even lower than they are now. Remember that this is an option that the pensioner holds – the annuity provider cannot decide to make the pensioner get a lower annuity, only the annuity holder can exercise this option and they will only do so when it is in their favour. It is asymmetric.

    An alternative is a variable rate annuity. This seems like a good idea to me. When rates are high the holder gets more and when rates are low the holder gets less. I think that real rates would be more stable since inflation is higher when rates are high and vice – versa. The problem is when you have highish inflation and low rates.

    Since it is symmetric there is no cost. And once everyone is happy that Libor is being calculated correctly then it would be best to link it to that. The problem here is that governments do not issue floating rate bonds (well not much) so the funds would have to buy govt bonds and swap them to floating using interest rate swaps. This is fine but does expose the pensioner to the credit risk of the bank providing the swap. But I am sure that this can be reduced using collateral.

  38. BiF
    One doesn’t expect fund managers to work wonders.
    But.
    I was just looking at our broker’s transaction fees. Back when I did it, our clients were charged 1,25% basic rate. For that a dealer toddled across the market & did the deal. Next morning a ‘Red Button’ went & physically ‘checked’ the deal with the trader. There was a whole, labour intensive, general office that produced contract notes did the stock transfers, registered & dispatched the certificate..
    Our broker has to leave his desk & the whole process is done by IT. You’d think it would be cheaper. He charges 1.85% basic. And he charges a portfolio management fees based on a percentage of the fund.
    One wouldn’t mind if the payment was by results. But for the ordinary punter the financial industry grazes off of the principals not the values added by their activities.

  39. John77
    Blue Buttons checked prices on the floor, but couldn’t deal (whistles quietly). Dealer’s badges came in 2 flavours. Authorised dealers & members.No women! Waiters wore pink & Mitch could get you anything. Red Buttons checked the dealing slips with the jobber’s clerks the following morning.in the Checking Room & talked a lot of football. Used to be in a basement near Cheapside when i did it. My experience was the old floor with the dome (boundary scored when paper ball, umbrella struck, stayed on the ledge) & the concrete & breezeblock temp monstrosity. Worked the dealing desk for a while. Remembering a hundred share prices, various positions & a day or two’s worth of trades seemed to be expected. .
    Fund managers:
    Relative of mine used to own one. Three unit trusts in the year’s top tens for growth & income, plus 4 more U/Ts insurance & pensions. Hundreds of millions under management. Three blokes including him plus half dozen staff to do the grunt work.
    My portfolio:
    Entered ’08 with all three bank shares. Clean sweep of horror. Currently, 14% of it’s 1/4 mil being in one lucky share is the only thing keeping it out of the gutter. For management proficiency over the past dozen years, I’d go with the chimp. But he won’t satisfy the lawyers.

    ,

  40. @ bis
    ’08?!? – that’s twenty years after “Big Bang” – even then we had five banks, including Standard Chartered.
    I’m talking about real life in the 1970s
    Fund Managers – well we owned one to run the unit trusts that marketing department demanded that we have to suit the idiot clients who wanted unit-linked in preference to “with-profit”.
    You and your relative may be chimps but I and my co9lleagues were not.

  41. I’m sorry John But I’m calling bollocks on this.
    The exhaustive list of stuff your saying managers do is what spreadsheets are for. Back when I was doing it, brokers employed people like me to look up &update share prices & dividends, crank out valuations, keep cutting files of company news, read Extel cards, calculate stock splits & rights issues…Unlike Tim, I can write spreadsheets. The share data’s inputable & if the portfolio’s on file the spreadsheet will generate the whole lot as soon as you open the file. The client data input comes from that endless questionnaire brokers waste your time insisting you complete before you can open even a simple trading account. It really isn’t that hard. This reminds me of the rigmarole of getting structural engineers to do load calculations for structural steels. You get them back with a bill for several hundred pounds. They’re simple calculations can be ground out with the appropriate formulae in half an hour in the tea break. No magic or passing over of hands. Just simple math.
    Truth is, financial industry’s gotten all the benefits of IT, hidden it behind smoke & mirrors & coined it. Shows up in transaction charges. Whole thing’s gone from a manual system to electronic, ledger clerks been fired yet transaction fees are 50% higher.
    This topic’s about pensioners switching annuities. They pay in all their working lives & half the appreciation of their pension funds evaporate in management charges. No wonder they want to switch to scrape a few quid back.
    It’s not a personal attack on anyone. You lot managed to get the regulatory framework lets you make the money, well done! Wish we could all do it.

  42. Interesting discussion. I also work in the annuities business, so thought I’d add a few bits:
    Annuities are a fixed monthly payment until you die – which legislation mandates you put at least 75% of your pension pot into. No annuity provider will invest any of it’s assets-backing-annuities into equites (they are too volatile, with uncertain cashflows, so not a good match at all for an annuity cashflow stream – plus the regulator would hate it).
    Annuities are long-term investments (>10yrs on average) – current 10yr rates are ~3%. If these were replace by floating rate annuities, the reference yield would be much shorter (6m interest rates are ~0.6% currently).
    So very few people would choose the floating rate annuity, as the immediate income is far lower. This is the same issue (but opposite way round) as with mortgages – almost everyone chooses the lowest mortgage rate, being the shorter term floating rate mortgage.
    The option to switch can be priced, it is not a particularly difficult piece of financial engineering. It is just that no-one would want to pay for it (through lower annuity rates), just as no-one wants to pay more for a long-term fixed rate mortgage.

  43. @ bis
    Firstly, we’ve got spreadsheets now but you were talking pre-general use of PC days if you had a stock exchange floor and blue buttons. Secondly any spreadsheet that gives you the same portfolio for a 25-year-old with surplus income and a 75-year-old living on his investment income is unfit for use. Thirdly the decisions have to be made on the basis of the data whether or not you automate record-keeping. And you get different decisions for different portfolios depending on different tax positions. So “all the portfolios were much of a muchness” is or should be nonsense: the tax-exempt pension funds had noticeably different equity portfolios from the taxable funds and CGT meant switching should only be done when shares are overpriced by more than the CGT payable on sale, so private client portfolios started on different dates will hold different shares (maybe they all held Glaxo)

  44. John, Really. I do remember doing this job.
    “all the portfolios were much of a muchness”
    They were. There’s a limited number of shares & they repeatedly turn up in portfolios. If you dealt with 1000 GUS “A” yesterday with Mrs S the 500 owned by Mr T come as no surprise. You don’t have to research the company again. Mr T’s personal details being much the same as Mr W’s indicates their investment needs won’t be too dissimilar. FFS. it was being able to make these simple deductions i was paid for.
    To aid, I used to keep a card index of companies & clients who held shares in them & how many. Updated it for splits & issues. Pulled the card when a bit of company news floated by, might affect the clients. That all took time. That was my job. It isn’t a job any more. You don’t need lads scribbling on file cards. So why’s it now twice as expensive to do the same thing with IT?
    Mainframe computers were just coming in. Ours occupied a large office with a support staff of 5 & cost a fortune. I’ve got a £25 RaspberryPI i could program to run rings around it.
    You’re trying to make something should be easy & cheap look difficult & expensive. it’s what professionals do

  45. The rates would not have to be have to be lower, the pensioner is not an asset. Their depatrure costs the firm nothing.

  46. They would pay money to someone else to take on the liabilaty, which is of course what is being proposed.

  47. @PaulB et al., is this a more sane scheme? I’m not an actuary, so I’m thinking like the mathematician & investor that I am. It may be totally insane, but I suspect not? (I can think of tax as one area of wrinkles.)

    So the annuitant pays a sum of money to receive a certain income for life, subject to various additional conditions.

    If the annuitant subsequently desires to switch, then the life company calculates the price of an annuity on the same terms as originally, except for any new information about the annuitant, such as age (for sure) and possibly ill health etc. The annuitant is then entitled to receive back some proportion of that figure. (Failure to disclose materially significant information at this stage would, naturally, be fraud.) The annuitant can then take this capital sum and shop around for a better rate on the same or new terms.

    So you don’t have to worry about calculating capital drawdown, because a promise for life is a promise for life: but clearly it costs less to promise £5,000pa to a 75 year old than to a 60 year old. The capital winds down naturally, though there is always going to be something in the kitty so long as the annuity is still being paid.

  48. Philip Walker

    if you were running an pension company and another company offered to take an annuant off you hands in return for a payment to them that was less than you expected the rest of the term to cost you then would you take it , I think so.

  49. Philip Walker: I’m not an actuary (I’m a quant). But that looks like a sensible proposal to me. The difficulty, I think, would be in ensuring a fair buy-out price. You couldn’t oblige providers to make a price regardless of the annuitant’s health status, or they’d be crippled by very sick people cashing out. (In my earlier comment I speculated that the cost of this adverse selection might be priced into annuity rates at the time of writing, but on reflection, influenced by john77’s comment, I suspect that’s unworkable).

  50. PaulB:

    You couldn’t oblige providers to make a price regardless of the annuitant’s health status, or they’d be crippled by very sick people cashing out.

    Do you mean the danger of being swamped with claims from people knowing they’re on death’s door but fraudulently failing to disclose this? This is a real issue which would definitely need addressing: just as when purchasing an annuity, it is in the annuitant’s interest to disclose anything which might minimise their apparent life expectancy, so also when cashing out, it is in their interest to maximise their apparent life expectancy. The opportunities for fraud are clear: cash out, reveal your diagnosis, then buy back in again (assuming you expect to live long enough for this to be worthwhile). Hey presto, you’ve just raised your income by a substantial fraction.

    I don’t think this would be the case for people disclosing health issues when wishing to cash out, though, because the life company would cut the capital sum payable to the very ill on the basis that they expect the annuity to be payable for a shorter duration.

  51. you could confine capital transfers to being only between pension companies and keep the originating company as the one who handles the payments, thus keeping a check on the longevity of transferers.
    It works in the sercuritised mortgage industry ie payments are still payed to the originator and banks are not wiped out by all the good payers transfering and leaving them only with defaulters.

  52. “which legislation mandates you put at least 75% of your pension pot into”: golly, you are years out of date.

  53. @ bis
    I do not doubt that you remember doing the job but I am saying that if all the portfolios were much of a muchness then your bosses were not doing a good enough job. We’re talking pre-70s hyperinflation so the elderly clients relying on their investments for retirement income should have been in safe, solid, slightly boring, high-yield stocks and the young ones trying to build up capital should have been in “growth” stocks. e.g. the old ones would have Shell and the young ones BP; if they liked to drive abroad, they would have European Ferries, if not then P&O; oldies would hold Bass, youngsters Scottish & Newcastle; good quality engineers for the oldies, property or electronics for the young.

  54. ” We’re talking pre-70s hyperinflation”
    Christ! I must of missed that. 1% in 1960, 5.4% in ’69. 3.9% av over the decade.
    My bosses were a bunch of ex-military officers wouldn’t have known a PE ration from a PE session.

  55. Back to annuities: what I’d suggest would be to create a medical score, to be used by all providers, which can be calculated from a health questionnaire. Providers would then quote a buy and sell price for each age and medical score.

    Anyone wanting to change provider could certify their own medical score, and would then be allowed to sell their existing annuity and at the same time buy a new one with the proceeds, using the same medical score – this eliminates most of the possible gain from misrepresenting one’s score.

    Alternatively, if one wanted to cash in one’s annuity one would have to pay for an independently certified medical score (and satisfy the tax authorities).

    In practice, I suppose that market transparency would tend to eliminate the possibility of profitable switching. But that’s what we’d want to achieve – the switching itself is inefficient, we just want everyone to get a fair rate.

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