How Might We Create a Secondary Annuity Market that Works for Pensioners?

Brambley, Will and Lowe, Jonquil (2016). How Might We Create a Secondary Annuity Market that Works for Pensioners? In: ELSA’s 7th Anniversary Symposium, 23 May 2016, London.



In April 2015 the government’s pension freedoms came into effect, removing the requirement for pensioners to turn their pension pot into an annuity in order to retain the tax benefits. Later last year they announced plans to extend these freedoms to pensioners who had already bought annuities from April 2017, by creating a secondary market and allowing pensioners to sell their annuities on it. The government’s expressed aims were to “achieve parity between those who are able to access their pension savings flexibly… and those with existing annuities” by developing a secondary annuity market that “best suits the interests of pensioners” (HM Treasury, 2015b).

Creating a secondary annuities market that works well will be a difficult task. It is an unusual and complex market, with ‘consumers’ as the sellers, firms as the buyers, prices that are individual to each pensioner, legal complexities with the original annuity provider having to agree to any sale, and the product being one of the most important we ever purchase – an income for life. There is huge potential for it to go very wrong, with the details of government policy and regulatory action likely to play a big role in whether or not the market works for pensioners. To inform the debate, and help the government and regulator decide how best to intervene, we have conducted a study of the secondary annuity market: how one might function, what problems are likely to require addressing, and which policies appear most promising in doing so.

A secondary annuity market must function on two axes if it is to deliver good outcomes for pensioners:
 Competition must be effective in driving value-for-money
 Pensioners must be adequately protected from harm.

Neither of these axes is as simple as they may seem. The role and potential advantages of the original annuity provider in the secondary market may present a barrier to the emergence of competition, and the behaviour of pensioners and information difficulties may render it ineffective. Preventing harm to pensioners involves not just regulation to protect the most vulnerable, but also stopping ordinary people from making significant mistakes. Our analysis suggests there are fundamental problems that need addressing, which the government and regulators have underestimated when designing their proposals, including a real risk that there will be no functioning market at all when the laws come into force next year.

Normally a study such as this would analyse how the market is currently working and look for evidence of market failure, however this market does not yet exist. Instead we have focused on how the market might develop and the potential impacts policies may have on our two axes – effective competition and consumer protection – both of which there is considerable uncertainty about. We therefore caution against overconfidence in any particular option, and strongly recommend that the government and regulator review the market carefully once it has launched and reconsider what intervention is necessary and beneficial in light of that evidence.

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