March 19, 2014 5:47 pm

Annuities: shy and retiring

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Life insurers will have to innovate to thrive after Budget changes

Wednesday 7am: results from UK annuity provider Partnership Assurance say “the medium and long-term drivers of growth remain intact”. Wednesday 3pm: its shares are down 57 per cent as the UK government’s Budget announcement removes the requirement for retirees to spend their pension pots on an annuity. Partnership was not the only one affected. Fellow annuity specialist Just Retirement fell 36 per cent while Legal & General, Aviva and Standard Life also suffered. Only Prudential, largely a play on Asian growth, was relatively unscathed.

The worst case scenario for the life insurers is that the annuity market collapses. With freedom to do what they like with their pension pots, retirees invest in cruises and golf equipment rather than long-term savings. And if the money runs out? Well, there’s always the government. Given how lousy annuity rates are these days (a £100,000 pension pot buys only £3,500 of inflation-linked annual income), the fears are well founded.

But it is too soon to write off the annuity. Interest rates will not stay this low forever. When they rise, they will drag annuity rates with them. And by offering a guaranteed income, annuities take some of the risk out of retirement. Anyone declining to buy one will first have to make assumptions about how long they might live. In the US it is not compulsory to buy an annuity but $220bn of them were sold in 2012.

Even if the market shrinks, all is not lost for the life insurers. Yes, they must innovate. Prudential, which can draw on the experience of its US business, looks well placed. And money that is not used for annuities is likely to be left in other savings schemes, benefiting the life companies’ fund management businesses. The real downside for life insurers is the uncertainty that these changes bring. As Partnership found on Wednesday, the sector is no longer so predictable.

Email the Lex team in confidence at lex@ft.com

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