International Longevity Centre - UK

The Government’s plan to end compulsory annuitisation at 75 (1) seems a fair one on the surface. How can it be fair that someone is forced to buy a product by a specific age. It is particularly of concern if at the time of your 75^th birthday, the stock markets are relatively low and you may get less money than your neighbour with similar pension savings who retired two years earlier. (That said, nobody is of course forced to annuitise on their 75^th birthday and everyone does have 20 years before that to choose an appropriate time to annuities.)

But ending compulsory annuitisation reinforces the message that annuities are a bad choice: “Pension savers will no longer be forced to spend their retirement funds on poor-value annuities at 75” argued The Times last week (2). For a long time the media has criticised annuities while the insurance industry has failed to communicate the benefits of these products.

Annuities are fundamentally a good product. And the 75 limit is an important nudge to force people to make decisions about their financial future.

And contrary to popular belief, they are not inherently bad value for money. Returns are based on several factors including the returns available from bonds and how long the industry thinks people will live for. The reality is that returns on all types of savings and investments are currently low and, moreover, we are living longer. We should therefore have to expect a smaller annual return for our pension pot. 

Of course, people worry that they will die before they get the benefit of the annuity (and of course some people will – that is how insurance works after all). But is that worse than running out of money in one’s 80s? Meanwhile, allowing people to duck out of annuitisation could actually reduce the benefit of mortality cross subsidy within the annuity pool.

Last October ILC-UK published a think piece by our Fellow, Jackie Wells, who argued that for these very reasons the insurance industry was missing a trick and not just be selling pension annuities but should be more actively promoting Purchased Life Annuities. (3)

While an end to compulsory annuitisation may sound uncontroversial and indeed popular, the Government could do worse than focus on some of the other issues facing annuitants. The impact of Solvency II (4), the problems facing the poorest pensioners with small or multiple pots, how we can much better promote the open market option to ensure people shop around to get a better deal, and how we can ensure that people have access to financial advice to support difficult financial decisions?. Perhaps we should look to behavioural economics to identify nudges which make shopping around easier.

Age UK have identified recommendations to improve the annuity market, recommendations which ILC-UK have supported in our own position statement on pensions (5). It is clear that the annuity policy environment needs reform.

But annuities also need supporters. We need a much more positive campaign on the benefits of annuities. We also need much higher awareness (alongside more research) on the risks of the alternatives.

With a growth in the number of DC pension pots over the next few years, these issues are of pressing concern. Individuals have to make complicated decisions about their long term finances and unless they are aware of the long term risks of those decisions, there is a risk that we see many more people running out of money before their death.

David Sinclair

(1)  http://www.ifaonline.co.uk/ifaonline/news/1636176/govt-scrap-compulsory-annuitisation-75-retirement-age-review
(2)  http://www.timesonline.co.uk/tol/money/pensions/article7127394.ece
(3)  http://www.ilcuk.org.uk/files/pdf_pdf_99.pdf
(4)  http://blog.ilcuk.org.uk/2010/05/04/solvency-ii-may-endanger-retirement-outcomes-for-future-pensioners/
(5)  http://www.ilcuk.org.uk/files/pdf_pdf_128.pdf

This week Westminster Council opened its very first “pensioner’s playground” in Hyde Park, central London named “Hyde Park Senior Playground”. The playground is equipped with exercise machines including a cross trainer and a stationary bike, which according to the Council will provide older residents with gentle exercise [1+ 2].

The proposal for the playground came from local residents group the Knightsbridge Association, which said that despite there being more pensioners than children these days, there were not enough facilities for older people. The project received a grant from Westminster Council under a scheme whereby local residents can choose neighbourhood improvement projects.

Older people’s playgrounds are not a new idea; they have long existed and been popular in Asian countries like China and Japan. In fact in Japan, with its falling birth rate and high life expectancy, you are more likely to find a pensioner exercising with friends in a park than young children playing [3]. Berlin was the first major European city to open an older people’s playground in 2008 shortly followed by Manchester. The Hyde Park Senior Playground is the first of its kind in London, but not the first in the UK.

When BBC radio 4 went to the visit Hyde Park, the Westminster Council official interviewed insisted that the playground was not a gym because it does not require special shoes or clothes. However, the Knightsbridge Association refers to the playground as a “fun outside gym”. Perhaps the Council feared that the word “gym” with its connotations of young lycra clad fitness fanatics, would put senior citizens off using the Hyde Park exercise equipment.

In a very unscientific study (i.e. my observations) of the popular local authority gym I frequent, I have noticed that while the over 60s are underrepresented, they are not absent. It may also be worth noting that 50-60 year olds are a greater feature, so if they carry on with their gym habits in later life, perhaps in the future there will be more over 60s in the gym.

Outdoor gyms are nothing new in London, with several boroughs installing exercise equipment in parks, for example Camden has eight [4]. However the Hyde Park Senior Playground is the first one targeted specifically at older people. Existing outdoor gyms are generally not targeted at any particular age group and anecdotally (several ILC-UK staff live near outdoor gyms!) seem to be used by many different ages.

The under 60s will not be banned from using the Senior Playground, which is a relief as the thought of the local authority somehow policing entrance to the playground, would surely put people off! But whilst targeting physical activity initiatives at an older population is a positive development, segmenting or ghettoising the population cannot be the best way forward.

Yes to encouraging certain groups (particularly older people) to undertake physical activity, but no to segregating opportunities by age group. In addition, there is the line of reasoning that calling something “senior” can put people off using it, as many older people do not consider themselves as old, and do not want to be labelled as such.

But a more important point is that whilst the (relatively cheap) provision of more and better facilities in our parks is a good thing for encouraging physical activity, authorities should not fall into the trap of thinking the job is done. If there are no local toilets, no drinking water available, if lighting is a problem, if access to the park is not easy, then people, particularly the older population will find it difficult to use the facilities.

A key question is whether the senior playground succeeds in encouraging older people to take exercise? ILC-UK reported last year [5] that despite more local authorities offering free swimming to the over 60s than the under 16s, a far higher number of children took up the offer.
Will the over 60s of Knightsbridge stake their claim or will we see, as with the free swimming, far more younger people taking advantage of its facilities? Or will it simply be underused because both younger and older people are put off by something called a “senior” playground? It would be interesting in the future to compare usage of the existing outdoor gyms with use of the Senior Playground in Hyde Park, to see levels of usage and the age profile of users.

If this senior playground does indeed succeed in attracting increasing numbers of older people to stop by and undertake a bit of exercise, perhaps with a friend or two, will the senior playground concept become more widely adopted? Perhaps one day, across the UK we will see our parks taken over by groups of exercising pensioners, just like Japan?
Rebecca Taylor
[1] http://news.bbc.co.uk/1/hi/england/london/8690389.stm
[2] http://www.timesonline.co.uk/tol/news/uk/health/article7130182.ece
[3] http://www.guardian.co.uk/world/2010/jan/07/japan-ageing-fitness-fans
[4] http://www.camden.gov.uk/ccm/content/leisure/sports-and-activities/outdoor-gyms.en
[5] http://blog.ilcuk.org.uk/2009/09/29/towards-2012-an-opportunity-for-physical-exercise-for-all-ages/

The European Commission is today hosting a public forum on its Level 2 implementing measures for Solvency II, the new Europe-wide regulatory regime for insurance companies. The details were compiled following advice from the Committee on European Insurance and Occupational Pensions Supervisors (CEIOPS) [1] and in consultation with industry and professional stakeholders. Whilst aimed at insurers rather than pension funds, the regulations could have a significant impact on the annuities market, a key component of the UK pensions system. 

The regulations have been designed to avoid a future Equitable Life, though undoubtedly have been given impetus by the recent financial crisis. The single market had already led to the emergence of a cross-border market in some insurance products in Europe – for example variable annuity products.  Solvency II is aimed at developing a common regulatory standard for this fully-fledged single European market for insurance. In fact, many EEA countries had already started moving towards convergence with something similar to Solvency II – not least the UK. 

However since the 2008 global financial crisis, capital requirements proposed by Solvency II have become a good deal more onerous. This is despite the fact that the insurance industry has not been affected in the same way as banks by the financial crisis, and claim not to represent a systemic risk threat to the same extent [2]. 

The main pillar of Solvency II is a new standard capital requirement, based on a value-at-risk measure calibrated to a 99.5 confidence level at a 1 year time horizon. In other words, insurers will essentially be required to hold enough capital so that they could meet their liabilities even if they experience a financial calamity which has only a 1 in 200 chance of occurring, in any given year.   

Although large insurers often aim to hold capital at or above this level in seeking the approval of credit rating agencies, the Association of British Insurers has criticised CEIOPS’ proposals, arguing that they undermine the social and economic value of insurance products [3]. Solvency II is supposed to protect insurance policy holders against risks taken by insurance companies. Yet more conservative approaches to risk can, on a system-wide basis, easily make insurance products like annuities more expensive [4]. Lower annuity rates will lead to lower incomes in retirement for future retirees, or could lead to more people taking risks with their retirement income by rejecting the insurance cover inherent in annuity contracts. In the longer term, a regulatory-driven fall in annuity rates could further inhibit saving for retirement. Although the full implications of Solvency II are unclear, Axa has already withdrawn from the enhanced annuities market as a result [5].

There have been some signs of a lack of consensus between EEA member states. During the final negotiations over the Solvency II directive 12 months ago, the French government successfully introduced a lower ‘equity stress test’ (around 22% rather than the 40% preferred by many other countries). France faced accusations of protectionism as a result, but it is important to keep in mind that the pensions industries in different EU counties often diverge significantly – for instance, equity based savings products are becoming more popular as retirement savings vehicles in France, and would have been more affected by the stress test. Similarly, the UK has belatedly sought to rescue ‘liquidity premiums’ whereby (under current FSA rules) firms can hold lower levels of reserves if investing in more illiquid assets such as corporate bonds. This is important to the annuity sector in the UK, but opposed by many other EEA countries who saw this as a UK issue, perhaps because those countries do not have private sector annuity markets as we do in the UK. 

Overall, there are significant questions still to be answered in the design and implementation of Solvency II, and from this summer an EEA wide Quantitative Impact Study (QIS-5) is taking place to assess the solvency implication on the EEA insurance industry. This will be the first QIS since the global financial crisis and the strengthening of the Solvency II capital requirement so the results (due in 12 months) will be eagerly awaited. 

While governments are surely right to seek to maintain financial stability, if in doing so they make annuities and other long term savings products more expensive, it will leave future pensioners worse off. This is a crucial issue given that NEST and the shift to defined contribution pensions more generally will expose more and more people to the annuity market (also, it means today’s savers would in practice be subsidising current annuitants who have already fixed their annuity rates). 

While stronger capital requirements mean that Governments won’t have to bail out firms over-exposed to risk, they may be left bailing out future generations of retirees who run out of money in retirement or whose annuity simply doesn’t provide an adequate income. 

Craig Berry   References   

 1. See www.ceiops.org.  
2. See http://www.commercialriskeurope.com/cre/93/67/AIRMIC-warns-Commission-Solvency-II-out-of-all-proportion.
3. See http://www.citywire.co.uk/adviser/-/news/regulation-training-and-competence/content.aspx?ID=389073.
4. E Cannon and I Tonks (2009) Money’s Worth of Pension Annuities, available at http://research.dwp.gov.uk/asd/asd5/rports2009-2010/rrep563.pdf.
5. See http://www.citywire.co.uk/adviser/-/news/pensions/content.aspx?ID=377868.