L&G and Hargreaves Lansdown pioneer postcode rated annuities

Legal & General is running a pilot study with Hargreaves Lansdown who specialise in providing annuity services to their customers, to establish the benefits of using a customer’s postcode as an additional risk factor in determining the annuity income that may be provided.

Conventional non profit pension annuities are normally determined by using age and sex to assess life expectancy but a wealth of evidence suggests that where a customer lives can also influence how long they are likely to live. Already postcodes are used widely in the pricing of other financial risks such as house and car insurance and Legal & General believes the application to pension annuities is a logical step forward. The pilot, which utilises Legal & General’s extensive longevity experience, including annuitant data from across the UK, will help to establish the extent to which potential customers would benefit from the additional risk rating provided by their postcode.

Simon Gadd, Managing Director, Legal & General’s annuities business said, “Using other indicators of life expectancy, rather than just sex and age, is a natural evolution for the pension annuity market. A customer’s medical history and lifestyle factors such as smoking, obesity and high cholesterol are now readily accepted in the pricing of enhanced annuities. Through our extensive experience data we believe that postcodes are a reliable rating factor and will mean we are able to more accurately assess and so price the longevity risk for each customer. With the continuing improvements in UK life expectancy, we believe providers should be more sophisticated in the way we assess risk and use all the relevant information and tools available to us.

Working with Hargreaves Lansdown on this pilot will provide valuable customer information and feedback. Using the expertise both companies have in this market, we aim to ensure we offer annuity customers ‘true’ value for money in the future.”

Tom McPhail, Head of Pensions Research at Hargreaves Lansdown commented; “It is important that the annuity market continues to look for new ways to give investors better value for money. Unfortunately, many people’s pension funds at retirement can be quite small - the average is currently around £25,000, so people really need every penny of that pension fund money to buy them the best annuity income they can for the future.

Tom Mc Phail continued: “The annuity market has been very traditional in its approach to the pricing of the risks involved. Postcodes are already accepted for risk profiling in other areas of insurance, such as motor and household. Using just age and sex is a blunt instrument for annuity pricing and it’s a well established fact that where you live can determine how long you may live. We are very pleased to be able to work with Legal & General on this pioneering project.”