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Report

Part of Bank of England and Financial Services Bill [HL] – in the House of Lords at 7:29 pm on 15th December 2015.

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Photo of Baroness Drake Baroness Drake Labour 7:29 pm, 15th December 2015

My Lords, I refer to my entry in the register of interests, in particular my membership of the board of the Pensions Advisory Service. I am also on the Delegated Powers Committee.

There is no pre-existing secondary annuity market which can inform an assessment of whether it would be a well-functioning market, what the key risks are or what is an appropriate level of consumer protection. I have had little time to digest the Government’s response to the consultation on this market, published today, but up to 5 million people could participate in this market—although interestingly, the Pensions Minister and the Economic Secretary both advise that for the vast majority of customers, selling an annuity will not be the best decision. There is a real tension in the policy on this secondary market. The Government have to ensure a robust consumer protection regime consistent with their asserted view, which I do not disagree with, that the right decision for most people is to retain their annuity. At the same time, an effective market needs a sufficient level of demand from consumers to sell their annuities and a sufficiently wide range of purchasers. These two requirements do not sit easily with each other.

While it is welcome that the Government are taking further steps through their Amendment 25 to protect the consumer, I have real concerns about the sufficiency of those protections. The Government will now also allow the original issuers to buy back annuities. This will be allowed only indirectly when facilitated through a regulated intermediary, such as a broker or financial adviser—presumably to enhance consumer prospects of a better deal—although annuity providers can still buy back low-value annuities directly. That raises several issues. What will be the threshold at which direct buyback of low-value annuities will be allowed? How will this be measured—by income stream, by income stream in relation to the individual’s financial resources or by the annuity’s value on the secondary market? Indirect buyback through an intermediary will mean an extra layer of costs for consumers, paying in effect for their own protection. How will the Government control those costs?

As individuals will be required to take advice, how will the Government ensure that advisers are willing to provide advice at a reasonable charge, particularly to those with modest value annuities? This is a problem under the required advice regime for individuals transferring defined benefit assets to defined contribution arrangements, so similar problems are certain to arise in a secondary annuity market. Will sufficient brokers enter that market to enable a fair price? Allowing buyback, directly or indirectly, must increase the risk of consumer inertia as individuals choose to stay with their original provider, notwithstanding any advice that they receive, heralding a weak demand size which is already so common in the pensions and annuities market. The Government intend to bring forward legislation to create a further regulated activity for buying back an annuity. What is the timetable for that legislation and will we have time to consider it properly?

Companies buying in the secondary annuity market may also be providers of advice. The issuers of annuities may have an inherent interest in keeping pre-existing customers who want to sell their annuities and nudging them in a way that enhances that retention, including selling other products to those with liberated cash. The additional regulatory rules, authorised persons and regulated activities mean that the new secondary annuity market is looking increasingly complex, raising again the problem of an asymmetry of understanding between the consumer and the provider. The consumer will face advice costs, broker costs, underwriting costs, trading costs and complex pricing systems. Selling could be costly and complex: some are speculating that this could take 20% out of the resale value of the annuity.

The different service providers in the market will themselves have commercial relationships. This means that whether considering the broker, the buyer or the adviser, there is significant potential for conflicts between their interests and those of the individual holding the annuity. Indeed, a key reason given by the Government for introducing pensions freedoms was that the annuity market was not working in the consumers’ interests. How much greater is that risk in a secondary annuity market? So I ask the Minister, with serious conviction, just how confident are the Government that they can ensure that those conflicts of interest are controlled and resolved in the interests of consumers?

The amendment refers to,

“an individual … who has a right to payments under a relevant annuity”,

receiving advice, but that does not address the interests of partners of individuals holding a joint life annuity, including any pension-sharing on divorce. The Government have referred this matter to the FCA for consideration but, as a matter of principle, are the Government committed to ensuring that the interests of a potential beneficiary in a joint life annuity will be protected? If this is not satisfactorily resolved, it will disproportionately affect women.

The Government have reversed their previous position in relation to people in receipt of means-tested benefits. From their announcement today, it appears that people in receipt of those benefits or in social care will also be allowed to sell on their annuities, so that an additional estimated 650,000 people will be free to sell. I note that Steven Webb has expressed his concern at this decision, particularly for vulnerable older annuitants, who will need stronger protection. It will be important for people to understand how the income deprivation and capital disregard rules under the benefit system will bite. Why have the Government decided to allow people in receipt of benefits to trade their annuity? Can the Minister also confirm how the benefit rules will apply to individuals selling their annuities, and how will he ensure that such individuals are protected? This issue became quite complicated, rather at the last moment, under the pensions freedoms introduction.

Finally, under their Amendment 25, the Government leave open the if and how of how they would use their powers to set a criterion for exempting certain individuals from taking advice when selling their annuity.

They identified two possible criteria: the proportion of the individual’s financial resources represented by the payments and the value of the annuity. There is a material difference between the two and, consequently, between who could be exempt. The income stream would be on the face of the annuity, but the value of the annuity on the secondary market could be considerably lower than the purchase price required to buy an annuity giving that level of income stream.

The delegated powers to make regulations under proposed new subsection (3), introduced by this amendment, to exempt persons from the need to take advice and the checking arrangement require only the negative procedure. If exempt, individuals will be outside a key consumer protection in a complex market. In those circumstances, I believe the regulations should be carefully scrutinised and attract the affirmative procedure. The 16th report of the Delegated Powers Committee puts the issue more succinctly than I could, so I conclude by quoting from it:

“The proposed secondary annuities market is novel and as yet untested, and brings with it fresh opportunities for mis-selling, so that effective protection for consumers will be extremely important. We believe that the House will wish to give careful scrutiny to regulations that would in effect reduce the available protection afforded to certain individuals by exempting them from the new checking arrangements”.

I hope the Government will be persuaded by the recommendation in the Delegated Powers Committee report.