UK life and pensions specialist Legal & General has teamed up with Hargreaves Lansdown, a provider of annuity services to Legal & General's customers, to run a pilot study to establish the benefits of using a customer's postcode as an additional risk factor in determining the annuity income that may be provided.
The Financial Times reported that, under the pilot scheme, Legal & General will offer different rates for its annuity pension plans depending on location and revealed that it is expected that pensioners living in poorer places are likely to die sooner, and will therefore benefit from higher payouts.
People in Glasgow on average don’t live as long as they do in Chelsea, said Tom McPhail, head of pensions research at Hargreaves Lansdown, as cited in the Financial Times. People in poorer areas will get more money as they will be given a better rate when they take out an annuity than those in better-off places.
According to Legal & General, this is based on a wealth of evidence which suggests that where a customer lives can influence their life expectancy. Conventional non-profit pension annuities are normally determined by using age and sex to assess life expectancy. Postcodes are already being used 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.
Simon Gadd, managing director of 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.