Take it from me there were dodgy practices at the time. On one hand this did benefit annuitants who obtained higher income from their annuities, on the other hand this set in motion the sequence of events that resulted in the infamous phrase from George Osborne in his March 2014 Budget speech in which he declared that "no one will have to buy an annuity”. The rest is history.
So, what went wrong with the annuity market, and why have some high-profile companies been hauled over the coals for not offering enhanced annuities?
The picture is probably more complex than it may seem because there were many different forces at work, but two things in particular are unique to the annuity market.
The commoditisation of annuities
Increased sophistication in underwriting
The commoditisation of annuities
The catch-all phrase captures the move away from thinking of annuities as being part of a retirement planning process to thinking about annuities as a product in which only price is important.
To keep this simple, most people should think about three key things before they convert their pension pot into income: when is the right time, what type of product and who is offering the best terms.
As annuities were increasingly promoted as a commodity, a lot of people, including annuity brokers, missed out steps one and two and went straight to step three. I often felt like a lone wolf saying: “Before you go shopping you need to know what you are shopping for and when is the right time to buy.” Put another way, someone could get the highest possible annuity income, but that would be little use if it was the wrong solution in the first place.
Therefore, it was hardly surprising that sales and distribution practices fell into line with this move towards product commoditisation as evidenced by moves to sell direct to customer. In hindsight, it was the increase in direct to customer propositions by product providers that led to the problems they faced later on. Whereas annuity brokers could go direct to customers with an open market service, providers only had their own product to sell, and this was rarely the best deal.
According to ABI statistics, the market for annuities was about £7.4bn with few enhanced annuities in 2004, but by 2012 the market had increased to about £12bn with about £4bn of enhanced annuities.
