Patrick Collinson complains about annuity rates in 2016 (Annuities: a £4bn pension heist or a great opportunity to buy?, 16 March). But over the last five years rates have closely tracked government bond yields, and only fell in the summer of 2016 when bond yields also fell. There is no evidence that annuity rates changed significantly over the period 2015-19 relative to the period before pension freedoms, 2012-14.
The real issue is whether pension companies should have been offering higher annuity rates over the whole period. Our research suggests that annuities sold on the open market are priced appropriately, given the expected value of future payments.
The problem arises in having to make forecasts about life expectancy over a 50-year horizon: in hindsight, the annuity rate will almost certainly appear to have been too high or too low. If the rate is set too high, the company can become insolvent and a liability to the taxpayer. An individual annuitant would obviously be happier with more generous payments if he knew that the taxpayer would bail him out if his cohort of annuitants lived longer than expected. But government revenue paid to bail out pensioners cannot then be spent on schoolchildren or the NHS.
Prof David Blake Cass Business School, Prof Edmund Cannon and Prof Ian Tonks University of Bristol
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