The 2014 Budget dealt a hard blow to pension providers but recent developments have marked a fight back against the forecasted death of annuities.
On 19 March, chancellor George Osborne announced the abolition of the 55% tax on pension withdrawals at retirement, replacing it with retirees’ marginal rate of income tax from April 2015. He said: ‘Let me be clear, no-one will have to buy an annuity.’
He also announced interim measures: from 27 March 2014 savers only need a guaranteed pension income of £12,000 for flexible drawdown, reduced from £20,000. And the capped drawdown limit was increased from 120% to 150% of the Government Actuary’s Department rate to add more flexibility.
Hit by falling shares
Annuity providers were hit hard by the news, as their shares plummeted. Partnership’s and Just Retirement’s shares fell 56% and 42% respectively on the day of the announcement.
Research published by Barclays the day after the Budget forecasted the demise of the UK individual annuity market.
‘This is particularly painful for the mono-line individual annuity writers, such as Partnership, where the business model is potentially irrevocably damaged,’ it said.
‘However, we would note that the likely demise of the individual annuity market will not impact [on] either the bulk annuity market or the individual annuity back books, which drive the majority of annuity earnings in the medium term for the established UK life names.’
On the day of the Budget, Legal & General’s (L&G) share price fell by 11%, Friends Life’s by 7.6% and Standard Life’s by 4%.
Shrinking annuity market
Immediately after the Budget, providers took turns to estimate the reform’s impact on the individual annuity market, as if to show they understood but could also withstand the effect of the shake-up.
Nigel Wilson (pictured), chief executive of L&G, went the furthest, predicting the individual annuity market would shrink by as much as 75%, but was keen to emphasise that new products would replace this business.
‘In total, we expect the individual annuity market to drop from £11.9 billion to £2.8 billion of premium,’ he said. ‘We expect an increase in drawdown and new products.’
Providers’ figures for the first quarter of 2014 showed a significant fall in sales of individual annuities in the aftermath of the Budget, as pipeline customers took advantage of extended cancellation periods and potential retirees delayed their decisions.
Standard Life suffered a drop in individual annuity demand of 50%, as did Just Retirement and Partnership. L&G suffered a 40% decline and Prudential 35%, while Friends Life predicted a 70% fall in sales in the medium term.
Dramatic knock-on effects
The drop in sales has hit specialist retirement providers the hardest. MGM Advantage and Just Retirement have both announced plans to make significant cuts as a result of the Budget’s impact on demand.
MGM said it would cut 80 jobs out of 250. Andrew Tully (pictured), pensions technical director at MGM Advantage, said: ‘To be honest, it’s directly related [to the Budget]. Sales will be substantially lower this year than we had planned them to be, and from April 2015 we probably expect sales to go up a bit but we don’t expect them to go up as high as we had anticipated [before the Budget].’
Just Retirement announced plans to cut costs amounting to £14 million per year through reorganisation, with plans to cut jobs and reduce directors’ pay by 10%.
Stephen Lowe, Just Retirement group external affairs and customer insight director, said: ‘Because of the impact of close to 50% fall in volume, we’ve had to make some decisions to size our business appropriately to what we consider to be materialising over the near term, and that’s why we’ve announced those cost reductions to the market.
‘We’re also investing money [£5 million] into what we would call generating the stream of business going forward, so that’s new product development and new innovation activity.’
Providers’ optimism survives
Despite the fall in sales and consequent job cuts seeming to support the market’s obituary for annuities, providers are bullish about their futures and argue that sales will recover.
Steve Groves (pictured), chief executive of Partnership, said government plans to offer scheme members financial guidance at the point of retirement would increase shopping around for retirement options, which would help sales.
‘We think some of that [falling annuity sales] will come back. So when the new guidance guarantee goes in place and people get advice to shop around, we think more people will shop around and therefore, while maybe fewer people as a proportion will buy open market annuities, we think the fact that more of them are shopping around will offset the fact that some people are choosing not to buy them,’ he said.
While there has not been enough time for providers to launch truly innovative new retirement products, many have reacted by offering stopgap vehicles, giving customers an option until they can take advantage of the new rules from April 2015.
Just Retirement has launched a one-year fixed-term annuity to allow people to ‘wait and see’ what new options will materialise in April 2015, which follows LV=’s similar product.
Partnership has also launched the Enhanced Choice Annuity, which can be terminated after one year.
Mixed reception for new offerings
However, these products have had a mixed reception. Tom McPhail, head of pensions research at Hargreaves Lansdown, backed the new offerings. But pensions expert Ros Altmann was less positive.
McPhail said: ‘That’s a responsible response to the challenge of the changing pension rules and where we’ll be from 2015 onwards.
‘[Providers] have to take a responsible commercial position, and they have to be mindful of their shareholders’ position. If they weren’t taking a conservative view of their market prospects looking ahead, they would probably be accused of recklessness.’
In contrast, Altmann said: ‘I cannot see what customer benefit there is in these one-year annuities. They do not give them any better options than they would have without buying the product.
‘They could lose 2% of their fund, earn a paltry return on the money and still have to buy another product in a year’s time.’
Tully agreed with Altmann, and said MGM Advantage would not be adopting an interim approach.
‘We don’t see any particular benefit in doing a knee-jerk, short-term, new product, which would just be around for a very short time. We don’t see customer benefit in doing that,’ said Tully.
Arthur Childs (pictured), director of Cranleigh-based Arch Financial Planning, is also advising his clients against short-term options.
He warned they could be expensive, and that clients who wanted to wait and see should ‘park [their savings] on an online wrap’ and review it next April.
The ultimate aim for providers now is to create new longer-term products that offer savers greater flexibility in retirement, or focus on existing areas of their businesses that can benefit from increasing numbers of pensioners remaining invested in retirement.
Jamie Jenkins (pictured), head of workplace strategy at Standard Life, said: ‘I don’t think there’s one single answer or killer product. I don’t think that’s the right way to look at it. It’s more about how we respond to the varying flexible needs people will have.’
Despite Standard Life’s annuity sales falling by 50%, Panmure Gordon analyst Barrie Cornes has backed its dominant position in the drawdown market to offset a negative impact from declining annuity sales.
Partnership is also focusing elsewhere. Groves said the company would look towards the bulk annuity market, a tactic that worked for L&G.
‘The defined benefit pension derisking business we have, which we started for the first time last year, delivered just short of £100 million, so about £85 million of sales in its first month,’ said Groves.
‘And we see that as confirmation that there’s a big nascent opportunity there that we can continue to develop.’
Budget blues: how pension reforms hit providers
Chancellor George Osborne (pictured) announces dramatic changes to the pension regime in the Budget, allowing retirees access to their full pension pot at their marginal rate of tax. He says: ‘No-one will have to buy an annuity’, sparking a massive sell-off of insurers, with £3 billion wiped off their value in a day.
Providers hit back over the impact of the Budget. They argue the changes will boost interest in retirement options and increase advice.
Providers, including Standard Life, Partnership and Just Retirement, extend their annuity cancellation periods.
Legal & General (L&G) predicts the individual annuity market will shrink by 75%.
Specialist retirement provider MGM Advantage reveals it will cut a third of its staff in response to the Budget’s pension reform.
Standard Life announces a 50% drop in its annuity sales following the Budget.
7 May:L&G unveils a 40% fall in individual annuity sales since the Budget, but is boosted by a £3 billion bulk purchase agreement.
12 May: Just Retirement unveils plans to save £14 million per year through a reorganisation following the Budget. Jobs will go and directors will take a pay cut.
14 May: Partnership confirms a 50% fall in individual annuity demand in the weeks after the Budget.