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Pensions: Sale of Annuities

Volume 774: debated on Wednesday 19 October 2016


My Lords, with the leave of the House, I shall now repeat as a Statement the response to an Urgent Question given in the other place by Simon Kirby, Economic Secretary to the Treasury. The Statement is as follows:

“Mr Speaker, this Government have taken a great step forward in giving more and more people freedom over how they choose to use their pension savings when they retire. We have, in fact, already seen over 300,000 people choosing to access their pension flexibly since the reforms were introduced.

Alongside our efforts to do this, we also said that we would look at how we could spread this flexibility to people locked into existing annuities. We consulted extensively with the industry and with consumer groups to explore whether we could put in place the right conditions for a market to develop that could facilitate this. Throughout our investigations, one of our very highest priorities was to establish whether people would be able to get a good deal through such a market. But in the course of our efforts to investigate the viability of a secondary market in annuities, two things became clear. First, without compromising on consumer protections, there would be insufficient purchasers of these annuities to create a competitive market in which British pensioners could get a good deal. Secondly, pensioners trying to sell their annuities would also be likely to incur high costs in doing so.

This Government have made it very clear that we want this to be a country that works for everyone. That includes making sure that everyone gets a high level of consumer protection. It has become clear now, through our extensive research, that a secondary market would not be able to offer this. Rather than being to the benefit of British pensioners, it would instead be to their detriment, and for this reason, we are not prepared to allow such a market to develop and we will not be taking this policy forward”.

My Lords, I thank the Minister for repeating the Statement, but this is the second government U-turn on pension-related matters that we have seen in the space of just a few weeks—another example of a flawed approach to pension policy characterised by fanfare announcement, a period of rethink and then a retraction by press release. In this case, there has been an abandonment of plans for a secondary annuities market, as we have heard, which was never credible without consumer detriment.

At a time when we need to build confidence and sustainability in our pension system, what sort of message does this chaotic approach send to those we should be encouraging to save more for their retirement? How do the Government propose to address the £960 million additional black hole in their finances that now arises from the reduction in their projected tax revenues?

I am grateful to the noble Lord for his measured response. On the first question, I do not think confidence in pensions would be enhanced if we went ahead with the scheme without adequate consumer protection. Against a background over the past 20 or 30 years of financial products being sold incorrectly, it would have been quite wrong to go ahead with this scheme. As I said, it was unlikely that a vibrant and competitive market would emerge and we could not get the market to work without undermining consumer protections.

On the figure pencilled into the Government’s accounts, had the policy gone ahead, it would have brought forward a certain number of tax receipts into the early years at the expense of getting those receipts in the later years. Overall, I think it will be neutral. It will be up to the Chancellor in his Autumn Statement to explain how the books will be balanced.

Well, well, well, my Lords, what has happened to the party of freedom and freedom of choice? The Government promised us stability in the general election. That was lost by the referendum result. They promised us an economic plan, which is now in shreds. Page 3 of their manifesto said that the Conservatives would,

“give you the freedom to use your pension savings as you want”.

No. Now they will not.

There was a flagship announcement by George Osborne in March 2015 of another government initiative. It had a good headline, and a total lack of follow-through once Steve Webb, the Pensions Minister, was no longer in government. Therefore, inevitably, the Government are left abandoning it. People are locked into poor-performing annuities and they deserve an escape route. I have four questions for the Minister.

How are people being informed of this change, particularly those who would like to get out of their locked-in annuity policies? What help will the Government give to people locked into these poor performing annuities? Is this reversal due to the low interest rates following Brexit totally destroying the returns on lump-sum annuities? Finally, by making this announcement outside Parliament, is this another example of the Government not being in control of what they are doing and economic and pension policy being dictated by the markets?

I am grateful to the noble Lord. On the timing of the announcement, sometimes the market-sensitive nature of an announcement means it has to take place at a specific time, quite often when the Stock Exchange is not open. So far as those who are disappointed are concerned, the information available to the Government is that only 5% of those with annuities would be likely to have taken up this offer had it gone ahead, so roughly 95% will not be affected by the announcement. It is independent of any level of interest rates; it is not a function of quantitative easing or anything like that. I see that Steve Webb, to whom the noble Lord referred, has said that the decision is “disappointing” but “understandable”, implying that he goes along with it.

The final point about information is a good one and I will see what we can do to let people know. I suspect that many will have read the newspapers and are aware that this option will no longer be available.

Is not the problem that the Government have failed all along to provide a properly regulated, publicly controlled vehicle to satisfy the needs of those with very small annuities—often, by the way, ones that do not provide protection either for spouses or against inflation—who want to exchange them for a cash sum that they can repay debts with or provide for their partners? Now we have the worst of both worlds, being stuck in this policy impasse.

I think the noble Lord is suggesting that, rather than the private sector providing an option for these annuitants, the Government should have provided it. That was never the proposal and he will know that, along with the other pension freedoms, they are operated by the private sector. Those who opt out of their pension to use the other options do so without resorting to a government scheme.

My Lords, I congratulate the Government on reversing a bad policy, on doing so both quickly and courageously, and on the clarity with which the Minister has justified it. The points he has made demonstrate clearly that the decision that has now been taken is the right one and that it is always better to learn from experience, so Governments should be congratulated when they do so.

I am enormously grateful to my noble friend, who has good knowledge of the workings of the City. As he implied, it has become increasingly clear that creating the conditions that will allow a vibrant and competitive market to emerge, with multiple buyers and multiple sellers of annuities, could not be balanced or achieved without sufficient consumer protection. After having drilled down and consulted regulators, consumer organisations and other stakeholders, the Government have come to the conclusion that it would not be in consumers’ interests to continue with this policy.

I agree with the Government’s decision and I believe that the Chancellor has called time on a bad policy. I feel it now and I certainly believed it when it was put. The risk to annuity holders of trading in a secondary annuity market are extremely high and the complicated regulatory requirements to protect them in such a market would undoubtedly mean that the costs would have been transferred to the consumer. It was also evident that there would be insufficient purchasing in that market. All these issues were raised by my noble friend Lord McKenzie, other noble Lords and me when this enabling legislation was debated. It was clear what the problems were but the Government were determined to push ahead. Why did the Government put enabling legislation in place before they had satisfied themselves that the creation of a secondary annuity market was a viable policy, when it was absolutely evident that all the problems which have now been deployed for not proceeding with a secondary annuity market existed then and people articulated them very clearly? That is the problem. It was clear that the secondary annuity market would not work, so why was enabling legislation rushed through?

In all seriousness, I commend the noble Baroness on her foresight in being able to see in March 2015 that this was not a runner. That was not the view of many financial commentators at the time. It was seen to be consistent with those who had not yet reached retirement age and therefore had the freedom not to have an annuity. It was seen to be right to extend that freedom to those who had already purchased an annuity. In principle, it was the right thing to explore but, as I said in response to my noble friend, as we drilled down it became clear that there was not the secondary market that was necessary. Moreover, those who were going to sell their annuities would have had to have a medical examination, they would have had to pay brokerage charges and they would probably have faced administrative costs. It would have reached only a relatively small percentage. For all the reasons she has given, we have come to the same conclusion as the noble Baroness, albeit a little after her.

My Lords, I declare an interest as a trustee of the Parliamentary Contributory Pension Fund; I should make it clear that you cannot have an annuity through that fund. Nevertheless, is not the core of the issue that a number of commentators have rubbished current annuities but that, in any case, no one knows exactly how long anyone will live, and that at some point your annuity will pay back quite handsomely regardless of what its level may be? Against that background, it seems to have been absolutely right for Her Majesty’s Government to do another analysis now, in a changing situation, and to decide that what was said more than a year ago is not correct today. Given that, I would have hoped that Her Majesty’s Government would think again and I congratulate them on doing so.

I am grateful to my noble friend for his robust support for the decision that has just been taken. Of course, even had we gone ahead with the policy, a huge number of those with annuities would have been better off sticking with them rather than trading them in, for the reasons that we have heard.