Osborne’s pension freedom reforms scrapped for 5m pensioners, now insurers laughing all the way to the bank

Industry arguments against phase two of the former Chancellor’s reforms amounted to saying we’re worried consumers will get a bad deal because our industry will rip them off

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The Independent Online

Bad luck if you have an annuity that pays just about enough to buy a newspaper and a packet of sweets: you’re stuck with it. 

The Government has abandoned phase two of what former Chancellor George Osborne grandiosely described as “pension freedom”. 

It would have allowed up to 5 million people, stuck with annuities they were forced to buy despite the rotten value they provide, to sell them into a secondary market and take the cash.  

The reforms would have levelled the playing field between them and people who are retiring now. The latter group can do what they want with their savings as a result of pension freedom phase one which scrapped the requirement on them to buy annuities with their pension savings.  

Right from the outset the industry hated the idea. Insurance companies, their surrogates, and many financial advisors, warned darkly that it would inevitably lead to “poor outcomes” for pensioners. 

Their stance was not without justification. Selling a “used” annuity would in many ways resemble selling a used car. The seller would inevitably get less than they had paid in. 

But while there is a long established market for used cars, and it’s very easy for sellers to find out how much they ought to get with a couple of clicks of a mouse, the “used annuity” market would have been something new. Critics claimed that there would have been only a limited number of buyers for the things and that consumers would be poorly served as a result.

They also pointed to lots of additional costs that sellers would likely incur, such the need to pay for advice, plus all the fees and commissions that the financial services industry just loves to add on top of any transaction. 

With a large number of the 5 million having annuities that are quite small, there might not have been much left after those fees and commissions had been taken into account. Far better for them to just stay put. 

But hang on a minute. Do some of the industry's arguments look ever so slightly self serving to you? Do they look like insurers saying we’re terribly worried about consumers getting a bad deal because that’s what we’re going to offer them? That’s what it looks like to me. 

Here’s the Association of British Insurers’ head of retirement policy Rob Yuille: “This is the right decision for the right reasons. The industry has consistently supported the Freedom and Choice reforms, but we agree with the Government that the secondary annuity market came with considerable risks for customers, including from unregulated buyers.

“The ABI has highlighted the challenges involved and worked constructively with the Government to try to solve them, but consumer protection has to be the priority.”

Given the past behaviour of its members, it always makes me snigger when the ABI portrays itself as the pensioner’s pal and bangs on about consumer protection. But the people stuck with rotten incomes provided by a rotten product hawked by ABI members don’t have much to laugh about. 

The industry’s chief argument against the reforms amounts to saying we as an industry are terribly worried that people will get ripped off by our industry.

The only virtue of that is that I suppose you could at least argue that it’s being honest for once. Semi honest. What Yuille doesn’t say is that now the Government has bought the ABI’s arguments and scrapped the reform plans, its members will be able to sit back and make years of easy money from those 5 million annuitants. 

It is quite true that Osborne’s reforms came with risks. But that’s true of any reforms and if the Financial Conduct Authority was alive to them, and (more to the point) the industry behaved itself for once, these could have been minimised and a lot of people could have ended up better off. 

Now that the status quo has been allowed to prevail, the 5 million are stuck. Probably permanently because it’s hard to see anyone thinking very hard about alternatives. The Treasury has too many other problems to deal with right now.