UK - Trustees should take into account recent changes in the annuity market when providing AVC annuities in-house, Watson Wyatt warned.
The consultants said that trustees of AVC schemes, that do not offer the option to purchase an annuity on the open market, need to take care to ensure that their practice in relation to the provision of in-house annuities remains in the best interests of members.
Andy Parker, a senior consultant at Watson Wyatt said: “The Finance Bill 2004 suggests that all occupational money purchase schemes should offer the 'open market option' and although this does not appear to apply directly to AVCs, it would seem inappropriate for this option not be offered.
“Moreover, the annuity market has developed quickly in recent years - with the emergence of impaired life or enhanced annuities - and the in-house choice is likely to be far more restrictive than that available on the open market.
Watson Wyatt said that when setting in-house rates for AVCs, trustees typically offer a fairly restricted range of choice - often to mirror the basis of the main scheme benefits - when there should be a degree of more freedom for AVC investors. This is particularly the case when setting the conversion terms where trustees tend not to take into account the state of health of the individuals purchasing an AVC annuity.
Parker added: A knock-on effect of the new market in enhanced annuities is that, as it is only available to those annuitants who are statistically likely to live shorter lives, it follows that the remainder of annuitants taking standard rate annuities will on average be healthier and their annuity rates will worsen. The difference between standard and enhanced rates will widen.
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