* Annuity market worth an estimated 15 bln stg a year
* UK to scrap requirement for retirees to buy annuity
* Other products seen unlikely to make up for lost business
(Adds comment by Just Retirement's CEO)
By Chris Vellacott and Jemima Kelly
LONDON, March 20 Britain's insurers will lose
control of a market worth 15 billion pounds ($25 billion) a year
under a surprise pension reform announced by the government, and
will struggle to make up the hit to profits any time soon,
according to analysts.
Finance minister George Osborne unveiled a far-reaching
shake-up of the pensions system in his annual budget on
Wednesday aimed at boosting choice and returns for pensioners
who have seen their incomes hit by record low interest rates.
For the first time, all retirees will be free to do what
they want with their pension pots, scrapping a system that made
it compulsory for most of them to buy an annuity, where they
exchange pension savings for a regular income.
This dismantles a captive market for annuity providers such
as Legal & General and Resolution, which will
now have to compete for pensions business against other
investment products. Their shares dropped sharply on Wednesday,
and analysts see little prospect of a rapid recovery.
"This radical piece of legislation will destroy
profitability in the highly lucrative annuity market, in our
view," said RBC Capital Markets insurance analyst Gordon Aitken.
According to Bernstein Research, about 75 percent of
retirees purchase an annuity, with current rules obliging them
to do so if their retirement savings are between 18,000 pounds
and 310,000 pounds.
After the reforms, the annuity market for individuals could
shrink by up to half, the firm forecast.
"There is a negative implication for new business flows in
the individual annuity market, as some people utilise the
increased flexibility provided by the ... (government's)
proposals," Resolution said in a statement on Thursday.
RBC analysts said Legal & General (L&G) was the most exposed
to annuities of the British insurers it covers, with its
retirement division providing 29 percent of group cash in 2013.
L&G generated a net 1 billion pounds of cash in 2013.
QUICKER THAN EXPECTED
Many large annuity providers said they could benefit from
the changes in the pension rules, pointing out that the
government's budget was designed overall to offer incentives to
savers, and more saving would boost the fund management and
investment businesses run by the same companies.
Big life insurance groups Aviva, L&G, Prudential
and Standard Life all run large asset management
arms, which will also be likely to take in much of the pension
cash that would have gone automatically into their annuities.
But analysts at credit rating agency Fitch, which estimates
the annuity market is worth 15 billion pounds a year, said less
new annuities business could mean lower profits.
"Companies offering alternative products for pensioners to
manage and access their pensions would benefit. But we believe
these products would typically generate lower profits than
annuities," they said in a research note.
Most exposed are likely to be specialist insurers such as
Just Retirement and Partnership Assurance, both
of which offer so-called enhanced annuities to people with lower
"These two companies have grown fast, taking a large share
of the rapidly developing market for enhanced annuities. The
proposed reforms could seriously threaten their growth prospects
and potentially lead to a significant reduction in their
business," the Fitch analysts said.
The enhanced annuities market represented 28 percent of all
annuity purchases in the last three months of 2013, up from 2
percent in 2003, the Association of British Insurers said.
Partnership Assurance shares halved in value on Wednesday
and were down a further 9 percent on Thursday. Just Retirement
stock was down a similar amount, having also plunged on
"A lot more people may not take annuities, I have to accept
there's a reasonable likelihood of that," said Rodney Cook,
Chief Executive of Just Retirement, in an interview with Reuters
Cook said the company was exploring new strategies and
products to compensate for the expected drop in business from
annuities and would update shareholders when Just Retirement
publishes a trading update in May.
Insurers had been expecting some reform to annuities. With
about half of retirees last year buying an annuity with a
pension pot of less than 20,000 pounds, and annuity rates having
fallen by a half over the last 15 years, they currently offer a
very low income for most people.
"In theory, this is a logical step," said one industry
insider at a large insurer of the reforms, speaking on condition
"But is it quicker than anyone expected? Well definitely. Is
it what people forecast would happen straight away? No."
($1 = 0.6014 British Pounds)
(Editing by Mark Potter and Elaine Hardcastle)