Sale of Annuities

Simon Kirby Excerpts

Wednesday 19th October 2016 Commons Chamber

[Greg Mulholland (Leeds North West) (LD)]

(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on why the Government have abandoned plans to allow savers to sell their annuities in return for a cash lump sum.

[The Economic Secretary to the Treasury (Simon Kirby)]

This Government have taken a great step forward in giving more and more people freedom to choose how they use their pension savings when they retire. We have already seen more than 300,000 people choosing to access their pension flexibly since the reforms were introduced. Alongside our efforts to do that, we also said that we would look at how we could spread that 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 to facilitate that idea.

Throughout our investigations, one of our very highest priorities was to establish whether people could get a good deal through such a market. 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, and that includes making sure that everyone gets a high level of consumer protection. It has become clear, 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. It is for that reason that we are not prepared to allow such a market to develop, and we will not be taking this policy further.

[Greg Mulholland]

No disrespect to the Minister, whom I like, but the Chancellor should have been here to answer this question, particularly given the disgraceful way in which the announcement was made.

The move towards pension freedoms was the flagship announcement in the Budget just two years ago, in 2014. Originally the brainchild of the former Liberal Democrat Pensions Minister Steve Webb, it was embraced by the former Chancellor and specifically included in the manifesto on which this Government were elected. Yet yesterday afternoon, the Government announced via the press, not via this House, that they were scrapping the whole deal. This is a huge U-turn, which was announced after clear lobbying by an industry that never really subscribed to it, and a failure by the Government to build a reasonable secondary annuity market. Of course it is right that protections are put in place to ensure that people are not exploited on the secondary annuities market, but there are tens of thousands of people trapped in poor-value annuities who are eager to be able to take advantage of the new freedoms. Based on the promises in this Government’s manifesto, many of them will already have been considering how to take advantage of the plans in order to release themselves from their annuity and invest their savings differently. This announcement will leave many people having to make different decisions about their retirement from those to which they were being directed—if, that is, they have even heard of the change, given the way that it was rushed through and the way it was announced by the Government.

Can the Minister say, first, when the decision was made to drop the new pension freedom plans? Secondly, why was this decision not announced to Parliament before it was announced to the media? Thirdly, what are the Government doing to inform those who may wish to cash in their annuity that they will no longer be able to do so? Fourthly, what assessment have the Government made of people’s change of behaviour in response to the freedom, and how will this affect their financial decisions?

The pensions freedom plan was about trusting people with their money. Clearly, this Government have decided that they no longer trust people. They owe an apology to those who have spent time and money examining their options for retirement, and I hope we get one today.

[Simon Kirby]

It is easy to wish to have the cake and eat it, as the Lib Dems regularly do. It is difficult being a Minister. Sometimes we have to make hard decisions, but on balance, the interests of the consumers, often older people and the most vulnerable in our society, have trumped the desire to further increase pensions flexibility. The hon. Gentleman is disingenuous. It was one element of our pension freedoms and, after extensive consultation, it transpired that it would not provide value for money. Which?, which is totally independent of Government, has said that

“it would have been wrong to move forward without assurances that consumers could get value for money and have the necessary protections”—

assurances and necessary protections protecting those most vulnerable people in our society.

[Several hon. Members rose—]

[Sir Desmond Swayne (New Forest West) (Con)]

It is the right decision for the circumstances, but does my hon. Friend think that there is any connection between poor value in the annuities market and the Bank of England’s monetary policy?

[Simon Kirby]

Mr Speaker, I acknowledge your sound advice, as ever, and apologise if I have been anything other than my usually well-behaved self.

My right hon. Friend the Member for New Forest West (Sir Desmond Swayne) raises an interesting point, but this is about people, many of whom are older and more vulnerable, making the right choices, and the Government making sure that the market is there to support them. That is not the case, which is why we have changed tack.

[Peter Dowd (Bootle) (Lab)]

This is the latest of the many U-turns that the Government have made. I thank the hon. Member for Leeds North West (Greg Mulholland) for securing this urgent question. Labour Members want to know why the Government did not do proper market analysis prior to the announcement. They were warned at the time. If they had done that analysis at the outset, they may have realised the chaos and confusion that such an announcement would cause for up to 500,000 pensioners across the country, who are already worried about their long-term future.

This U-turn on pensions comes in the same week as the Government have pushed forward with their proposals for a lifetime ISA, despite widespread cross-party concern about the impact of future public finances on personal retirement plans. In the UK pension market the consumer is unable to make an informed choice because of a lack of cost and performance data. We believe that it should be the role of the Government to provide those data. What will the Government do to assist with that process?

Like the hon. Member for Leeds North West, we would like to know when the Government decided to abandon the policy. Who made the final decision? Was there another interference by the Prime Minister in the previous Chancellor’s decisions? Who was consulted? How extensive was that consultation? The Government were warned. What assessment has been made of the pension market in general and the knock-on effects of this decision? What influence, if any, has the recent vote for Britain to leave the European Union had on this decision?

There is an indication that because of this decision, £900 million may be lost in the first two years in tax that would have come in as a result of people paying tax on the sale of their annuity. Where is that money going to come from? Is that not another black hole in the Government’s finances?

[Simon Kirby]

Let me deal with the points in reverse order. The hon. Gentleman will have to wait for the autumn statement to see what the finances look like, but it became increasingly apparent that not only was it not a good deal for consumers—those vulnerable people who we care about—but it was unlikely to provide the kind of income that had first been expected. We consulted extensively with the industry and consumer groups. I had many conversations with the Department for Work and Pensions, and particularly with the Parliamentary Under-Secretary of State for Pensions. The hon. Gentleman asks where information will be provided. The Government are introducing a new money advice service that will provide such information.

I shall finish with a quote from the Association of British Insurers, in whose interest the hon. Gentleman might suppose it was for us to continue with the policy. The ABI says:

“This is the right decision for the right reasons”

and that there were

“considerable risks for customers, including from unregulated buyers”.

We do not want to see unregulated buyers out there or vulnerable people affected.

[Jeremy Quin (Horsham) (Con)]

Does my hon. Friend agree that for a market to work, buyers as well as sellers are needed? To try to create a market where there are not both is an impossibility, and to have done so would have led to a potential disaster for consumers.

[Simon Kirby]

As ever, my hon. Friend makes an excellent point. There were very few people interested in buying those products, which would have resulted in a very poor deal for customers. The market was not big enough to provide value for money and on that basis we decided not to proceed.

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

On that point, given that we now know that there was an absence of buyers in the market, where was the Government’s consultation before they offered their proposal? We cannot get away from the fact that this was a manifesto commitment from the Government. I welcome the U-turn; they have done the right thing, but why was the matter not brought to the House? Why did we read about it in the media?

Last April the Financial Conduct Authority said that there were concerns about the secondary market in annuities, which would mean

“a significant risk of poor outcomes for consumers”.

The regulator said:

“Annuities are inherently difficult for consumers to value, and consumers who will be able to participate in this market will include a higher proportion of older, more vulnerable consumers.”

We could see that. The FCA came out with that last April. Why has it taken so long for the Government to do the right thing? We recognise some of the concerns for consumers as a result of the pensions freedoms introduced. May we have a full review of the pensions freedom policy?

[Simon Kirby]

I thank the hon. Gentleman for recognising that this is the right thing to do. It is a difficult decision and it is, as ever, a balance between two conflicting viewpoints. My job as a Minister at the Treasury is about making sure that consumers are protected, that industries are regulated sufficiently, and that there is the very best possible deal for customers. Withdrawing this product, which is aimed at many old and vulnerable consumers, is absolutely the right thing to do.

[Stephen McPartland (Stevenage) (Con)]

I know that the Minister has very bravely taken this decision to protect the more vulnerable pensioners who are suffering, but what will he and the Treasury be able to do to ensure that pensioners on very low incomes who are trapped in difficult annuities can escape those punishing regimes?

[Simon Kirby]

We are looking at an economy that works for everyone, including those pensioners on low incomes. The Treasury will be considering this very carefully, but my hon. Friend will have to wait until the autumn statement to hear how we are best placed to deal with this. However, those people are absolutely at the centre of our attention, and we will do all we can to help.

[Chris Leslie (Nottingham East) (Lab/Co-op)]

Of course, guarding against mis-selling is important, but does this announcement not represent two new problems? It is a problem, first, for those hundreds of thousands of pensioners who have been marched up the hill only to be marched back down again, and left uncertain about their financial options, but, secondly, for those other generations of potential savers who are baffled by pensions generally and who will find this mixed message—this chopping and changing—on flexibilities even more of a reason to feel sour towards the attractiveness of pensions? We have a savings crisis in this country, and the Government need far more consistency and a clearer policy.

[Simon Kirby]

None of us wants to see people being baffled, and none of us wants to see uncertainty, but at the end of the day we are surely better off making the right decision, which protects vulnerable consumers, rather than carrying on regardless. The hon. Gentleman is right that we all have a responsibility to educate and inform people throughout their lives about the importance of savings and pensions, and that is something the Government fully intend to continue doing.

[David Rutley (Macclesfield) (Con)]

I know that this is a difficult decision for my hon. Friend, because he feels passionately about pension freedoms. Can he assure the House, though, that every effort is now being made to ensure that pension providers fully co-operate with all other aspects of the Government’s wider pension freedoms, which have been so warmly welcomed around the country?

[Simon Kirby]

I can give my hon. Friend the reassurance that I will do all I can to make sure that providers work closely with the Government to get the best possible deal for older people and indeed savers, including younger people—people who are perhaps not in the habit of saving or contributing to pensions. That is an important thing, and I am happy to pursue it with my full vigour.

[Tom Brake (Carshalton and Wallington) (LD)]

I will ask the Minister a third time why this announcement was not made to Parliament before it was made to the media. Also, what is he going to do to inform people who may have intended to cash in their annuity, but who are now not going to be able to do so?

[Simon Kirby]

It is fair to say that there are often circumstances where information or announcements are market sensitive, and sometimes that drives how things are announced.

[Kevin Foster (Torbay) (Con)]

Given that these retirement annuities can form the bedrock of many people’s financial security, it is right that a decision is taken to secure the interests of those people rather than to press ahead purely because of a manifesto commitment. Will the Minister reassure me, though, about what work the Treasury is doing to ensure that people get a better deal on their annuities in the first place? For many people, looking to cash in their annuity in was about trying to deal with the bad deal they got on that annuity, not necessarily about wanting a lump sum.

--- Later in debate ---

[Simon Kirby]

My hon. Friend is absolutely right: two wrongs, sadly, do not make a right. The Government are committed to giving people pension freedoms so that they can choose what to do with their money, because that is the right choice to make, but, in this particular and individual circumstance, it was not the appropriate way forward.

[Margaret Ferrier (Rutherglen and Hamilton West) (SNP)]

My constituent, Mr Anderson, contacted me and advised me that, despite the risks, he planned to take up the option of selling his annuity. I wrote to the Treasury and was assured only 19 days ago:

“The Government remains committed to delivering these proposals”.

Yesterday’s announcement is a betrayal of people such as Mr Anderson. I notice that the Minister did not answer the question a few minutes ago, so what exactly do the Government suggest that Mr Anderson and others do now?

[Simon Kirby]

Obviously, Mr Anderson is as important as all the other people who, no doubt, will be very interested in this announcement. It transpired through consultation that a very small percentage of people would be better off. We were looking at legislation that would oblige the Government to provide guidance and advice; in the vast—very vast—majority of cases, that advice would be that it would not be appropriate and in the consumer’s best interests to proceed. There is no easy answer, but at the end of the day, I am not going to allow vulnerable older people to take advantage of what may, superficially, seem a good deal, but what, in the long term, is a poor one.

[Mr David Nuttall (Bury North) (Con)]

John Lawson, the head of retirement policy at Aviva, has said that one of the obstacles in the way of the secondary annuities market is the existence of statutory override clauses in annuity contracts. Has that played any part in the Government’s decision, and do they have any plans to at least look at passing legislation to deal with that?

[Simon Kirby]

That is certainly something we will be looking at. At the end of the day, many people got a poor deal on the way in; the last thing I want to do is to give them a doubly poor deal on the way out because the market is not big enough to provide value for money. If that means the option of reducing regulation, I am not a fan of that; regulation exists to support people and to help them make the right decisions.

[Sammy Wilson (East Antrim) (DUP)]

The industry opposed this; millions of pensioners who were locked into low-paying annuities supported it. The Chancellor at the time knew all the problems, yet he claimed to be the champion of choice for the people. What has changed? Do the Government now believe that the nature of people they said would make good choices because they were sensible and had good advice has changed? Given that the Minister has removed choice, but not the problem, what does he intend to do for those who still find themselves locked in annuity arrangements that do not give them a sensible and fair income?

[Simon Kirby]

It is fair to say that the Chancellor of the Exchequer at the time was not in possession of all the information following the consultation. It was our intent, clearly, at the time to listen carefully to not only the industry but consumer groups, which we have done extensively. It is worth saying that we remain absolutely committed to all the other pension freedoms that we are introducing. This is a sensible way forward, and I hope the hon. Gentleman welcomes it.

[Mark Durkan (Foyle) (SDLP)]

This pop-up policy, which has now been popped down again, came from a Government who had a long-term economic plan, yet this policy has not survived very long. As has been indicated, the policy was a response to the bubbling sense of scandal that was there because people were stuck with meagre and marginal annuities, and it was a chance to give them something different. If the Minister is convinced that he is avoiding the new scandal that would have happened, of people ending up mis-selling their annuities, what is he doing about the original scandal of the meagre annuities that people are trapped in, which this policy was designed to respond to?

[Simon Kirby]

The hon. Gentleman is right in as far as that certainly was the intention of the policy. There is a long-term plan, because I am concerned about the long-term financial wellbeing of these older and vulnerable people, and it is important that they get the right deal and make the right decisions. That is why this suggestion, which is only one of many, is not appropriate to carry forward. It is not a pop-up policy; we have listened carefully, and we have made the right decision.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

This U-turn has come about because of concerns about mis-selling and protecting consumers. The same risks and concerns must surely apply to the people who are currently exercising pension freedoms by cashing in their pension policies for lump sums. As my hon. Friend the Member for Ross, Skye and Lochaber (Ian Blackford) said, when are this Government going to have a coherent review of the existing pension freedoms legislation?

[Simon Kirby]

What happens in the secondary annuities market is very different from cashing in existing pensions for lump sums. To be clear to the House, selling an annuity would never have been the same as getting a refund on all the money that was put into the product or the original pension pot minus any payments made. Purchasers would have paid what they thought the income stream was worth. Without a competitive market, that income stream would have represented poor value for money, and people would have got a very poor settlement as a result.