LONDON Feb 14 Annuities do not meet Britain's
pensions needs and should be replaced with alternatives such as
those used in the Netherlands, pension campaigners and
politicians said in response to a proposed market shake-up on
The Financial Conduct Authority (FCA) said it had found
insurers were maximising profits by selling annuities that
offered customers a poor deal and proposed a shake-up to improve
competition in the industry.
Annuities, which convert a pension pot into a guaranteed
retirement income, are unique among financial products in that
once you have bought one, you are locked in for life. Most
retirees purchase one at a fixed rate.
The industry is worth around 14 billion pounds ($23.4
billion) a year.
"The system itself is geared to suggesting to people that
they need to buy an annuity and that's not the case," said Ros
Altmann, a leading pensions campaigner and former government
A more radical alternative being discussed is the idea of
collective schemes, in which savings are pooled and income is
generated from the pension fund itself, negating the need to buy
an annuity from an insurer. They offer a kind of
half-way-house between final salary and current defined
contribution pension schemes.
"The best pension schemes in the world are in Denmark and
the Netherlands, and it's because it's done on a collective
basis," Shadow Pensions Minister Gregg McClymont told Reuters.
Pensions Minister Steve Webb is expected to propose
legislation in the Queen's Speech in May, as part of his pension
reform programme, that would allow these collective schemes to
be set up.
But such schemes can be unfair, according to the insurance
industry, which says younger members bear the risk of lower
income in the future while supporting payouts of older members.
"(Collective) schemes are no more immune to lower than
expected investment returns than other pension schemes," said
Huw Evans, director of policy at the Association of British
An alternative suggested in a January report by centre-right
think tank Policy Exchange, would be for the government to issue
James Barty, a senior consultant to the think tank, said
this would be a "radical reform". The government would issue
bonds with a minimum duration of 15 years and insurers would
offer annuities that would only start after the bond expired.
"It takes almost all of the interest risk out of the
equation and allows insurers to do what they do best - insure
lives," Barty said.
The FCA said it will publish its findings from an interim
review of the wider retirement income market in the summer.
The need to provide pensioners with a sufficient retirement
income is becoming more pressing.
Low interest rates and longer life expectancy have helped
bring down annuity rates - on an average pot of 36,800 pounds
pensioners get an average annual income of just 1,340 pounds,
according to figures from the ABI.
Final salary, or defined benefit, schemes are being phased
out as more people build up pension pots in defined contribution
schemes which require retirees to make a decision about what to
do with their pension pots.
Pensions Minister Webb said in a newspaper interview in
January that annuities "need a rethink" and were designed for a
world in which people lived for ten years after retiring, not
The insurance industry itself should look for a solution,
according to Richard Graham, Conservative chairman of the
All-Party Parliamentary Group on Pensions.
"It's down to the ingenuity of the financial sector to come
up with creative solutions that meet what people are looking
for...in a way that people can understand," he said.
Britain must move away from the "one-size-fits-all" approach
to pension planning, Altmann added.