Is failure imminent for the United Kingdom's annuity market?

Abstract

This article is based on Dr Harrison's February 2012 report, ‘Treating DC members fairly in retirement?’, published jointly by the National Association of Pensions Funds and the Pensions Institute at Cass Business School. The report addresses concerns about the sub-optimal outcomes members of defined contribution (DC) schemes in the United Kingdom's private sector suffer when they buy their annuities. It suggests that although the market has the capacity to deliver better outcomes, currently it fails thousands of members, especially those with smaller funds. The report's conclusion is that unless corporate advisers, providers and regulators take action, the government will be forced to intervene. An explicit market failure will become evident when the auto-enrolment system for the private sector is phased in from October 2012, which will bring 6–8 million additional savers into the DC pensions market, most of whom will be lower earners and ‘serial default members’.