research into taking postcodes into account when setting rates would discriminate against the well-off, according to the annuity bureau
Healthy and wealthy annuitants will suffer if individually priced annuities become the norm across the industry.
The Annuity Bureau, in response to reports that Norwich Union plans to price annuities according to annuitants' postal codes, said those in lower socio-economic groups are likely to benefit from individually priced annuities because these will yield higher annuity rates.
Peter Quinton, managing director of the annuity specialists, said: 'However, wealthier and healthier individuals will suffer financially as their annuity rates will fall as more individually priced annuities are bought. This is because those with shorter life expectancies will be moved out of the cross subsidy pool from which the healthier person has previously benefited.'
Norwich Union's plan to include geographic locations in its pricing of annuities is a few years away, according to the group.
Norwich Union is undergoing internal and external research on the correlation between geographic location and mortality rates. It is collating statistics based on its own annuity data plus that provided by the Office for National Statistics and the Institute of Actuaries. Once completed, it will be integrated into its annuity calculations, expected to be at least three years off.
Further down the road, Norwich Union will also look to include occupational data, although the group believes this will be even more complex to incorporate due to the subjectivity of various occupations.
Quinton said if the pension income retirees receive was determined solely by where they live, it would go against the spirit of innovation in the annuities marketplace to date.
He added: 'Traditionally, annuity innovation has been fair. With annuity rates falling, providers have been looking at ways to help consumers secure a better pension income.
'Using the postcode as the overriding factor for calculating an annuity rate would be wholly unfair as this only takes into consideration one factor in an individual's make-up. After all, what does a snap-shot of where someone lives really tell us about how long they are likely to survive?'
But despite recent press reports that Norwich Union would price based solely on postal codes, the group said it will only use geographic location as one factor among many, including the traditional determinants such as age, pension pot available, sex and medical history.
Closer to implementation is the group's plan to offer enhanced annuities from next year. Last year, Norwich Union entered the impaired annuity market and it believes the enhanced market offers even more opportunities.
Annuities are currently being undermined by historically low interest rates, longer life expectancy and falling share values, according to financial products research company Defaqto.
Defaqto has just added a full suite of products for impaired lives onto its RateTracker database, helping intermediaries to identify the best rates available. According to this, in May, GE Life, through its OMO Short product, offered an impaired annuity rate of £26,310 based on a single life, male aged 65 on a purchase price of £100,000, gross annual annuity payable, no escalation.
The next best rate was £16,610, Short Life OMO, offered by Pension Annuity Friendly Society.
Quinton favours the changes that lead to products such as enhanced annuities. He said: 'I am sure more innovation will be forthcoming but my prediction is that most providers will try to capitalise on the performance of the stock market and will launch investment-linked annuities and share the longevity risk with the retiree.
'My bet is the industry will innovate all the more once the Government has clarified what the new pensions legislation will look like.'
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