Transferring annuities - a nil sum game

The pensions industry was woken sharply from its post New Year lull this weekend when Steve Webb put forward the idea of transferring annuities. This idea was, sadly, met with, dare I say it, derision by most of the industry.

Why do I say sadly? True, it was a half thought through idea. First the option already exists, although only a few providers offer it – presumably through lack of interest from annuitants. Second it will never quite get the results people want. People want to transfer to increase their income, probably because their circumstances have changed. But you have to remember transferring is almost always a nil sum game. Generally, actuaries don’t let people work options against them.

So, if you choose to transfer because you have developed health problems and you now want an enhanced rate, then the ceding insurer will work out the transfer value on your new current life expectancy and the instalments yet to pay. You may be able to get slightly better rates in the open market – but it won’t be a step change. Especially when you factor in adviser costs involved in transferring.

What about the incredibly unlikely scenario that rates increase and you bought your annuity at the nadir of the market? I am willing to bet my house actuaries will think about this possibility and work into the original pricing enough cushioning to make sure it doesn’t hurt if this situation arises. Some reckon that would reduce starting annuities by 25%. For everyone. Regardless of whether rates go up or not. Regardless of whether they transfer or not.

So the idea of transferring annuities is not really a flyer.

But it was sad it was met with so much mockery. At least Webb is putting forward a solution. Over the past six months we have spent much of it wringing our hands and saying isn’t it dreadful the annuity market isn’t working. I think the time of analysing is past. We now have to work together to come up with some proper tangible ideas about how to achieve better distribution of annuities and better incomes for pensioners. Let’s hope the FCA review  sparks off a few good ideas.

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The other piece of pensions news this weekend was that David Cameron committed to providing the triple lock guarantee on the state pension for the duration of the next parliament. This is not a light decision. Such a guarantee costs money. But as the PPI has shown it is by far the best way of providing a decent pension, and much more effective than tinkering around with charges. I only hope that in 25 years’ time when I retire the triple lock is still around. But I seriously doubt it.