Effect of Reforms to Compulsion on Annuity Demand
Edmund Cannon (University of Bristol) Ian Tonks (University of Bath)
and Rob Yuille (ABI)
Presentation at NIESR Conference on Future of Pensions, 11th December 2015
The big picture: removal of CA• Policy objective “supporting savers”
– “With the right consumer guidance, advice and support, people should be able to make their own choices about how to finance their retirement. Everybody’s circumstances are unique and it should not be for the State to dictate how someone should have to spend their savings” (Para. 1.7, HM Treasury March 2014)
• Pros and cons of compulsory annuitisation:• Protects state against moral hazard & individuals against myopia• Reduces (adverse) selection problems: ensures efficient large market• Reflects tax advantages given to pensions
– BUT• Redistributes wealth away from poor (short-livers) to rich (long-livers)• Inflexible:
– eg. prevents individuals bequeathing pension wealth
Regulatory time-line
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
A-day:AprilNormalMin.PensionAge=50
RelaxCompAnn AnnounceJune
RelaxCompAnn AnnounceJune
AbolishCompAnn AnnounceMarch
RelaxCompAnn Implement March
AbolishCompAnn ImplementMarch
RDR:Jan
Abolish Contracting OutApril
Gender neutralDec
NormalMin.PensionAge=55April
Relaxation (2010) and Removal (2014) of compulsory annuitisation
• Prior to reforms: compulsory annuitisation at age 75• Relaxation in 15th July 2010 Consultation
• Implemented April 2011– Three choices at retirement:
• Annuity; • Capped drawdown (max withdrawal: 100% annuity rate); and • Flexible drawdown: subject to MIR (£20,000)
• Removal announced 19th March 2014• Implemented after 6th April 2015
– Three choices (+ free guidance):• Annuity• Drawdown (?)• Cash withdrawals subject to marginal tax rates from age 55
– Transitional regime for 2014/15• More flexible drawdown; small pots/trivial commutation
Research questionsWhat has been the effect of both the 2011 and 2014 reforms on: • Sales of annuities & drawdown products?• Size distribution of annuity sales
– Predict: increased limits on trivial commutation affected the lower end of the annuity market more
• Age distribution of annuity sales– Predict: More sensitivity to reforms at younger ages
• Different types of annuity product?• Financial advice/guidance
– Predict: Effect of the RDR to cause financial advice to be concentrated on larger pension pots
Data 2007:Q1-2015:Q3
• Data provided by ABI from quarterly survey of ABI data providers
• Quarterly annuity and income drawdown sales aggregated across providers, by
• Product type• Internal/external • Age of recipient • Size of purchase• Financial advice
Quarterly Sales of Annuities/Drawdown0
5010
015
0N
umbe
r of p
urch
ases
(tho
u)
2010June
Budget
2011Change
2014Budget
2015Change
Annuities Drawdown0
1000
2000
3000
4000
Tota
l pre
miu
ms
?'m
2010June
Budget
2011Change
2014Budget
2015Change
Annuities Drawdown
Panel A: # Contracts (000s) Panel B: Value of sales (£m)
Average Size of Annity/Drawdown Contracts
2040
6080
100
Mea
n si
ze o
f pur
chas
e ?'
000
2010June
Budget
2011Change
2014Budget
2015Change
Annuities Drawdown
• Increase in size of annuity purchase
• Decline in size of drawdown purchase
Estimates (1) (2) (3) (4) (5) (6) Annuities: no
of contracts (thou)
Drawdown: no of contracts
(thou)
Annuities: total
premiums £m
Drawdown: total premiums
£m
Annuities: average
premium £'000
Drawdown: average
premium £'000
Constant 111*** 7.11*** 2,770*** 576*** 25*** 80.4***
(2.41) (.638) (74.3) (43.8) (.875) (2.08)Policy change 2011q2
-14.9*** -2.22* 308* -213** 7.06*** -7*
(3.75) (.992) (116) (68) (1.36) (3.24)
Policy announce 2014q2
-66.9*** 9.87*** -1,808*** 651*** 13.4*** -3.06
(4.98) (1.32) (153) (90.2) (1.8) (4.3)N 35 35 35 35 35 35r2 .904 .643 .822 .62 .818 .202
Standard errors in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001
Distribution of Annuity Sales by Size of Annuity Purchase
• Fall in annuity sales
• Particularly for small pots
050
,000
1000
0015
0000
2009 2010 2011 2012 2013 2014 2015
< £5,000 £5,000-£49,999£50,000-£99,999 £100,000-£249,999£250,000 and above
Estimates of ln(# annuity sales) by size
(1) (2) (3) (4) (5) < £5,000 £5,000 to
£39,999£40,000 to
£99,999£100,000 to
£249,999£250,000 and
aboveConstant 10.6*** 10.8*** 9.62*** 8.28*** 11.6***
(.103) (.0699) (.0518) (.0543) (.0675)Policy change 2011q2
-.382* -.147 .201** .237** -.152
(.137) (.0925) (.0685) (.0718) (.0893) -32% -14% 22% 27% -14%Policy announce 2014q2
-1.66*** -1.28*** -.928*** -.716*** -1.22***
(.155) (.105) (.0776) (.0814) (.101) -81% -72% -60% -51% -70%N 27 27 27 27 27r2 .876 .89 .859 .763 .889
Dependent variable is the log of the number of policies purchased. Standard errors in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001
Figures in red approximately convert the regression coefficients to percentage falls (= exp(betahat) - 1).
Percentage Distribution of Annuity Sales by Age
• Peaks in annuity purchases at 60 & 65• Relative decline in annuitising at younger ages
010
2030
No.
of p
urch
ases
(tho
u)
2010June
Budget
2011Change
2014Budget
2015Change
Age 55 Age 60Age 65 Age 70
05
1015
2025
No.
of p
urch
ases
(tho
u)
55 60 65 70 75age
2010q1: before changes2012q1: after 2010/11 policy change2014q1: just before 2014 Budget2015q3: after 2014/15 policy change
Panel A: Panel B:
Estimates of ln(# annuity sales) by age
(1) (2) (3) (4) Age 55 Age 60 Age 65 Age 70Constant 1.43*** 2.9*** 3.06*** .161
(.108) (.0688) (.0636) (.108)Policy change 2011q2
.308* -.282** .114 .283
(.143) (.0911) (.0842) (.143) 36% -25% 12% 33%Policy announce 2014q2
-1.17*** -1.33*** -1.04*** -1.06***
(.162) (.103) (.0954) (.163) -69% -74% -65% -65%N 27 27 27 27r2 .686 .909 .843 .642
Standard errors in parentheses* p < 0.05, ** p < 0.01, *** p < 0.001Dependent variable is logarithm number of policies purchased.
Dependent variable is logarithm number of policies purchased. Standard errors in parentheses. * p < 0.05, ** p < 0.01, *** p < 0.001
Figures in red approximately convert the regression coefficients to percentage falls (= exp(betahat) - 1).
Effect of Min. Age Rules on Annuitisation
05
1015
No.
of p
urch
ases
(tho
u)
2010June
Budget
2011Change
2014Budget
2015Change
Age 50 Age 51Age 52 Age 53Age 54 Age 55Under 50 Under 55
Proportions of annuitants & drawdown recipients using financial advice
0.2
.4.6
.81
Type
of a
dvic
e (s
hare
of m
arke
t)
2010June
Budget
2011Change
2014Budget
2015Change
Annuities: Independent Annuities: RestrictedAnnuities: Non-advised Drawdown: IndependentDrawdown: Restricted Drawdown: Non-advised
• Decline in purchases via IFAs of both annuities & drawdown
Summary impact of abolishing CA on annuity market
• Large fall in purchase of annuities from peak of (annualised) nearly £16 billion in 2012 to nearly £5 billion
• Increased use of drawdown– Increase in size of annuity purchase– Decline in size of drawdown purchase
• Larger annuity pot sizes: – small amounts taken as cash
• # annuities purchased <£5,000 fell by – 32 per cent after the 2011 change and – further 81 per cent after the 2014 announcement
• Peaks in annuity purchases at 60 & 65– Relative decline in annuitising at younger ages
• Decline in purchases via IFAs of both annuities & drawdown
If no annuitisation: Optimal decumulation strategy?
• Highly complex, depends on eg – Anticipated investment returns & longevity prognosis – Drivers e.g. bequests, long-term care provisions– Attitude to risk, behavioural finance & costs
• Defer annuitisation; but optimal to annuitise around age 80 for males:– Drawdown may be best if risk aversion low or desire to bequeath– But growth asset exposure needed to offset mortality drag
• Cognitive problems of elderly:– FSA (2006) survey of financial capability found over-70s performed worst of all
age groups– Dementia risk doubles every five years after age 60
• Need for Financial Advice
Conclusions
• Reforms have led to a significant decline in sales of annuities
• Drawdown sales have increased• Future trends uncertain as the market settles• Main effects at small-pots end of market
– Increase in size of average annuity purchase increase– Decrease in size of drawdown purchase
• What is appropriate decumulation strategy for pension wealth?
• For many annuitisation remains best alternative– Nudge policies?