2014年-FCA英国金融行为监管局_occasional_paper_5_97页_4mb

Summary of Occasional Paper No.5: The Value for Money of Annuities and Other Retirement Income Strategies in the UK

Core Content

This paper, authored by Matteo Aquilina, Robert Baker, and Tommaso Majer, evaluates the value for money of annuities and alternative retirement income strategies in the UK, particularly in the context of the annuities market's performance since the financial crisis. It contributes to the Financial Conduct Authority's (FCA) ongoing investigation into the effectiveness of the annuities market and provides insights into whether retirees are being well-served by current annuity products or if alternative strategies might offer better value.

The paper introduces the concept of Money's Worth (MW), which is a metric used to assess the value of an annuity by comparing the expected present value of annuity income to the annuity premium paid. This metric takes into account annuity rates, discount rates (linked to gilt yields), and expected future mortality rates.

Main Findings

1. Annuity Value for Money

• Average MW for a £50,000 pension pot: The MW of a level standard annuity for a 65-year-old male annuitant is 94% between January 2006 and June 2014.
• Stability of MW: The MW has remained reasonably stable over the period, suggesting that competition in the annuities market has not changed significantly.
• Impact of pension pot size: Smaller pension pots (e.g., £10,000) result in lower MW, with an average of 87% over the same period.
• Internal vs. Open Market Annuities: Annuities bought internally from pension accumulation providers have lower MW compared to those bought on the open market.
• Gender Discrimination Ban: The European Court of Justice's decision to ban gender-based discrimination in insurance pricing led to equal annuity rates for men and women. This resulted in a worsening MW for males and an improvement for females due to differences in life expectancy.

2. Impact of Interest Rates and Mortality Assumptions

• Interest Rates: A 7% increase in income per year could be achieved if interest rates in June 2014 were the same as in January 2006.
• Life Expectancy: An increase in life expectancy has also contributed to lower annuity rates, but the impact of interest rates has been more significant.
• Comparison with 2000: If we compare with interest rates in January 2000 (higher than 2006), the impact of low interest rates on MW is even more pronounced.

3. Alternative Retirement Income Strategies

The paper compares several alternative strategies to annuities, including:

• Self-annuitise: Draws the same income as an average annuity, using risk-free assets.
• Amortise to 85: Provides a higher income but with a significant risk of exhausting the pension pot.
• Amortise to 100: Offers lower income but with a smaller risk of exhausting the pot.
• 1/LE (1/Life Expectancy): Draws a fraction of the pot based on life expectancy, which results in a very low risk of exhausting the pot but also lower income levels.

4. Risk and Investment Considerations

• Risk-Free Investment: If retirees do not take on investment risk (i.e., invest in government bonds), annuities provide higher income than most alternative strategies, except for the 'amortise to 85' strategy, which comes with a 65% chance of exhausting the pension pot.
• Investment Risk: Taking on investment risk (e.g., investing in FTSE 100) may allow retirees to achieve similar income levels to annuities but with a higher risk of exhausting their pension pot.
• Fees Impact: Investment management and administration fees significantly increase the risk of exhausting the pension pot, even in strategies that otherwise appear better.

Key Insights

• Annuities are generally good value for money when purchased on the open market, especially for retirees who do not wish to take on investment risk.
• Alternative strategies can offer better income but come with greater risks of exhausting the pension pot, particularly for those with shorter life expectancies.
• Shopping around and using the Open Market Option is crucial for retirees to maximize the value they receive from annuities.
• Low interest rates and increased life expectancy have had a significant impact on annuity rates, contributing to the perception that annuities have declined in value.
• Guaranteed annuities may offer better MW for older retirees due to their lower risk and more predictable income.

Conclusion

The paper concludes that annuities, when purchased on the open market, represent good value for money for retirees who do not wish to bear investment risk. However, the introduction of alternative drawdown strategies, which allow for greater flexibility, presents both opportunities and risks. The FCA should continue to monitor the market and encourage retirees to explore all available options, especially when the open market is accessible. The analysis reinforces the importance of transparency, competition, and consumer education in the annuities market.