APFA RESPONSE TO THE HMT AND DWP CONSULTATION CREATING A SECONDARY ANNUITY MARKET

APFA RESPONSE TO THE HMT AND DWP CONSULTATION CREATING A SECONDARY ANNUITY MARKET ABOUT APFA The Association of Professional Financial Advisers (APFA) is the representative body for the financial adviser profession. There are approximately 14,000 adviser firms employing 81,000 people. 40% of investment and protection products are sold through financial advisers, with annual revenue estimated at 3.8 billion ( 2.2 billion from investment business, 1.2 billion from general insurance and 400 million from mortgages). Over 50% of the population rank financial advisers as one of their top three most trusted sources of advice about money matters. As such, financial advisers represent a leading force in the maintenance of a competitive and dynamic retail financial services market. Summary APFA welcomes this opportunity to respond the joint HM Treasury (HMT) and Department for Work and Pensions (DWP) consultation paper on creating a secondary annuity market. We note the general thrust of the government s current proposals regarding a secondary annuity market; we believe it is fair in principle to extend the current pension reforms to those people who had already retired and purchased an annuity before 6 th April 2015. We believe it appropriate that annuity income rights be assigned to corporate entities; some larger insurance firms have already expressed an interest in purchasing annuity income. However, we believe that only regulated entities should be allowed to purchase annuity income to better safeguard consumers. We believe retail investors should not be able to be assigned third-party rights to annuity holders income streams; secondary market income streams can be complex and consumers must be protected as far as possible from making financial decisions which are to their detriment. However, we have some concerns surrounding the detail of the proposals; firstly, we would strongly recommend the provision of further guidance to financial advisers and other intermediaries around what constitutes a suitable reason for assigning annuity income rights. The continuing regulatory uncertainty on adviser liability both generally and around the new pension freedoms has meant many advisers are unwilling to engage in the DB to DC pension transfers. We hope this will be looked at by the government and the regulator elsewhere. We also believe that there should be a requirement for individuals to seek advice if they are considering assigning the rights to an annuity income which is above a certain level; annuities are a complex area, requiring detailed calculations of the relative costs and benefits of deciding to give up a lifelong guaranteed income. We believe it is in the best interests of consumers to require advice where it is not uneconomic to do so. Finally, we are concerned about the tight timescale for the creation of a secondary market; in order to ensure the most efficient and well-functioning market possible, the necessary amount of time must be take to allow for e.g. product innovation in the simplified advice area as well as for the appropriate consumer safeguards to be put in place. The pension industry, 1

including advisers, are still getting used to the rapid pace of pension reform over the last few years and it will take time for the full consequences to be understood and adapted to. Response A new secondary market for annuities 1. In what circumstances do you think it would be appropriate to assign one s rights to their annuity income? We recognise the logic of ensuring the new pension freedoms are extended to those who have already purchased an annuity and we understand that for some consumers, assigning their annuity income stream to a third party will be the appropriate course of action. We do, however, think that the pool of people to which this will apply will be relatively small. This is particularly the case as those who choose to do so will have effectively paid twice; first when they purchased the annuity from their provider and then when they assign their annuity rights to someone else. We believe the cases outlined in HMT s paper give a good flavour as to potential circumstances where assigning annuity income rights might be suitable. We would appreciate further guidance as to what constitutes a suitable reason for assigning annuity rights and in particular, we would like it to be made absolutely clear that, if advice is sought, no liability attaches to an adviser where the client proceeds with assigning their annuity rights against the recommendation. This is particularly pertinent should the government pursue the option of requiring those annuity holders to seek advice and provide proof of having done so, before being allowed to assign their annuity rights to a third party. 2. Do you agree with the government s proposed approach of allowing a wide range of corporate entities to purchase annuity income in order to allow a wide market to develop, whilst restricting retail investment due to the complexity of the product? What entities should be permitted and not permitted to purchase annuity income and why? We do. The types of calculations and cost-benefit analyses that need to be undertaken by retail investors in deciding whether to make investments in a secondary market where they assigned an income stream and where estimations of longevity, mortality etc. need to be made are complex. We have seen from high-profile cases in the life settlements area in the 1990s that it is difficult for even relatively sophisticated investors to accurately make these kinds of calculations. Indeed, even if advice were required to be taken by individuals before purchasing annuity income products, it is unlikely that the advice industry would have the confidence to advise on such products given the history of life settlements products. This could potentially result in consumer frustration with any secondary annuity market. Ultimately, however, we believe that despite the government's intention to allow a wide market to develop, the opportunities for the market to strengthen over the long-term are small; as we have mentioned previously, the number of people for whom assigning annuity rights would be the appropriate course of action is likely to be small. In terms of which entities should be permitted to purchase annuity income, we believe that it should only be open to regulated entities; it is important to maximise consumer 2

safeguards in what will be a complex area as soon as possible, even if it is at the expense of market-size maximisation over the short-to-medium term. 3. Do you agree that the government should not allow annuity holders to access the value of their annuity by agreeing to terminate their annuity contract with their existing annuity provider? If you think buy back should be permitted, how should the risks set out in Chapter 2 be managed? We do not. Although we appreciate that there are concerns that allowing buy back would exacerbate the consumer inertia that already characterises the retirement income and savings market, we believe that placing such restrictions would be detrimental to achieving the wide, well-functioning secondary annuities market that the government would like to see. Assigning annuity income rights to a third party will probably only be suitable for a small proportion of individuals, as we have argued previously. The transaction will already be sufficiently complex and confusing for consumers and in many cases, buy back will be a relatively straightforward way for annuity holders who want to assign their rights to do so. It is also likely to help achieve the market maximisation the government is aiming for. We note that one potential remedy suggested would be guidance to ensure annuity providers take certain steps to make annuity holders who were considering assigning their rights aware that they have the option of shopping around. However, we do not believe this goes far enough and that instead, as we argue later in the paper, regulated advice should be required on any income above a certain level as the decision to assign annuity rights to a third party is a complex one. 4. Do you agree that the solution to the death notification issue is best resolved by market participants? Is there more the government should be doing to help address this issue? We do. We think that the costs associated with a central government database and notification system would be disproportionate. We believe the most workable suggestion proposed by HMT in its paper is the requirement that annuity holders put in place death notification arrangements before being able to assign their annuity. Or we believe there could be scope around the extension of the government s Tell Us Once service; while we understand there are data protection concerns, we believe that the government should be prepared to take steps to address these and adapt the service. 5. Do you agree with the proposed approach of the government working with the FCA regarding the fees and charges imposed by annuity providers? Although we agree that the government should work with the FCA to monitor the fees and charges imposed by annuity providers, we think the government should take a much more proactive approach in ensuring providers do not charge an excessively, and off-puttingly, high fee to annuity holders. This could be in the form of a cap on possible fees, an indicative set of prices issued by the government or even a ban on charges otherwise we are concerned that the wide market the government is aiming for will be more difficult to achieve. 6. Do you agree that the scope of this measure should be annuities in the name of the annuity holder and held outside an occupational pension scheme? 7. Are there any other types of products to which it would be appropriate for the government to extend these reforms? 3

Legislative changes 8. Do you agree that the design of the system outlined in Chapter 3 achieves parity between those who will be able to access their pension flexibly and those who will be able to access their annuity flexibly? Are there any other tax rules which the Government would need to apply to individuals who had assigned their annuity income? 9. How should the government strike an appropriate balance between countering tax avoidance and allowing a market to develop? Consumer protection 10. What consumer safeguards are appropriate is guidance sufficient or is a requirement to seek advice necessary? Should the safeguards vary depending on the value of the annuity? We welcome HMT s recognition of the central role of guidance and advice to those consumers seeking to assign the rights to their annuity income; as mentioned above, calculating mortality and longevity and trying to price these in when comparing products is often too complex for consumers to undertake alone. We do not believe that for most individuals guidance alone is sufficient and would instead recommend the government take forward their proposed requirement for annuity holders to take financial advice from a professional adviser and that the annuity provider be required to check that advice has been taken before the annuity is assigned. Perhaps a similar framework to the current proposals for DB to DC pension transfers, where the consumer is required to present a letter which demonstrates they have sought advice from a regulated adviser is appropriate. We would also suggest that the letter contain details of the recommendation they have received. However, we are aware that the cost of taking advice on an annuity with a relatively low value may be uneconomic so we believe that the requirement to take regulated advice should only be placed upon those annuity holders with a value above a given level. Although member opinions as to the precise level at which this should be set varied, we believe that a level of annuity income analogous to the 30,000 financial threshold pot size where people seeking to transfer from a pension with safeguarded benefits to one without are required to take financial advice, may be a sensible level. On a more technical point, albeit one which has important implications, we do not agree that the phrase Independent Financial Adviser under paragraph 4.8 (p.20) of the consultation paper is appropriate. The market has developed significantly since the Retail Distribution Review and it is not the case that the advice received from a directlyauthorised adviser is necessarily any better than the advice received from an adviser that forms part of a network. However, we have noticed the use of Independent Financial Adviser used in other government consultations where, upon our raising the issue, it has been noted that the original intention was not to imply that one advice route was necessarily, in and of itself, better than another. 11. What is the best way to implement these safeguards? Should the safeguards include expansion of the remit of Pension Wise? In order to ensure that advisers have confidence in the system and rise to the challenge of offering advice in what will be a complex area for consumers and one which, as this paper notes, is prone to misinformation and mismatched expectations, we believe the 4

FCA would need to give advisers greater certainty on where liability would attach and under which circumstances. We would also appreciate clarification that no liability should attach to the adviser for giving a recommendation against an assignment of annuity income where it enables the client to do so. We believe that it should be made absolutely clear that under such circumstances the client is responsible for any action ignoring the advice and that no liability would attach to the adviser for giving enabling advice in these circumstances should any future complaint arise. We note that lack of clarity for advisers surrounding liability on pension transfers (e.g. from those pensions with safeguarded benefits to those without) has already meant some advisers are refusing to participate, leaving consumers frustrated with the pension reforms if they are unable to access their money. Alongside the requirement to seek, and demonstrate that one has sought, regulated advice could be an expanded Pension Wise service, particularly for those whose annuities are of relatively low value; however, it must be made clear that the information provided is guidance only, and guidance service providers must clearly signpost to advice where appropriate. We would strongly advise against the provision of guidance by annuity providers; any guidance must be obviously impartial in order for consumers and other market participants to have the fullest possible confidence and ensure a well-functioning market. This is particularly the case if buy back is, as we recommend above, allowed. Finally, we are aware there have been reports of some concerns about a lack of fully trained actuaries and other relevant technical specialists who are capable of properly assessing and valuing annuities. However, we do not believe that this would necessarily cause a capacity problem (with its knock-on impact on fees) depending on the approach the government took in setting the framework for value-for-money comparisons. Specifically, we think there may be some merit in an approach which compares the estimated lump sum figure that an annuity holder has been given for assigning their annuity rights with what kind of annuity income that figure would purchase in today s market; this may give at least a rough indication as to whether or not assigning annuity rights makes sense for a given individual. Although one would expect this annuity income to be less than the annuity income they had given up, because of the charges and fees incurred in the course of the transaction, it may be feasible for the government to set an approximate percentage difference standard between the two income figures that would give a general idea as to whether an offer represented good value or not. This kind of calculation would not necessarily require specific technical expertise to make and could ease any potential capacity gap by giving an indication of value using existing market mechanisms. 12. Should the costs of any advice or guidance be borne by the annuity holder (mirroring the arrangements for conversion from a defined benefit scheme)? If not, what arrangements are appropriate? There are already concerns about potential consumer frustration arising from the understanding that they are required to take advice on DB to DC transfers and to pay for this advice. However, we still think that placing the cost of advice on the annuity holder 5

is the fairest way to proceed; it is well understood in other retail transactions that a cost attaches to a financial service. The advice industry is already exploring new ways of offering simplified advice with lower fees and we are hopeful that it will respond to the development of a new secondary annuity market accordingly. 13. Do you agree that the government should introduce a requirement on individuals to obtain a number of quotes? How else should the government best promote effective competition to ensure consumers obtain a competitive price? We do not. The current pension freedoms and associated policy changes are predicated upon a philosophy of giving greater responsibility to the individual for their retirement income. While clearly some consumer safeguards need to be placed including the provision of sufficient information, we feel that introducing such a microlevel requirement upon individuals runs counter to the principles of greater individual autonomy that underlie the current government s approach. We would recommend a less overly micro approach to managing the risks inherent in HMT s proposals. 14. Does the government s approach sufficiently protect the rights of dependants upon assignment? If not, what further steps should the government take? a. Should the government or FCA issue guidance to annuity providers about protection for dependants? b. Are there particular classes of beneficiary which require special consideration, for example minors or following a divorce or dissolution of a civil partnership? c. Are there specific equality impacts that should be considered in this context? Please see our answer to Question 13 above. 15. Should the government permit the principal annuity holder s income to be assigned while dependants retain their own income stream? Should the decision on whether to do so be left to the discretion of the parties to the transaction? 16. How can the proposed consumer protections for the assignment of annuities ensure that any impact on means-tested entitlement is understood by those deciding whether to assign their annuity income? 17. Should those on means-tested benefits be able to assign their annuity income? Yes. The government should ensure that there is sufficient clear and accessible information available to those on means-tested benefits but anything too restrictive would, as we argue above, run counter to the current philosophy behind the government s retirement income reforms. We also believe that there are some situations where not being able to assign annuity income may lead to a detrimental outcome for vulnerable consumers if they then need, for instance, to access high-cost short-term lending. 18. What are the likely impacts of the government s proposals on groups with protected characteristics? Please provide any examples, case studies, research or other types of evidence to support your views. APFA 18 th June 2015 6