May 8, 2014 / 10:07 AM / in 4 years

RPT-Fitch: Low Rates Largely Behind UK Annuity Sales Drop - for Now

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May 8 (Reuters) - (The following statement was released by the rating agency)

A sharp drop in annuity sales reported by UK insurance companies is largely due to low interest rates rather than the recent budget reforms, whose full effect will take longer to be felt, Fitch Ratings says. Prudential today reported a 35% fall in sales of individual annuities and Legal & General yesterday reported a fall of 40%. Aviva and Partnership will announce their results next week.

The drop-off largely pre-dates the budget in March, which ended the requirement for customers to use their pension pots to buy an annuity. Most of the decline has resulted from increasing numbers of customers delaying their annuity purchases at retirement to avoid locking into historically low annuity rates.

The budget has simply exacerbated this deferral effect, with many pipeline annuity sales on hold while customers reconsider their options.

We expect the GBP12bn-a-year UK annuity market to shrink by at least a third over the next one to two years, with many savers choosing to access their pensions as cash or via drawdown products instead. But we believe the market will survive, as many customers will still see a need for the secure retirement income annuities provide when financial markets are volatile or when pensioners exceed their expected lifespans. And annuities will become more attractive again when interest rates rise.

Insurers are racing to update their products and distribution for the retirement markets. Around half a million people retire each year in the UK, and until the budget most people retiring with a defined-contribution pension had to buy an annuity. In future, they will have complex financial decisions to make, with important implications for their exposure to - or protection from - investment and longevity risk. We believe most people will choose with only limited guidance, as it will be uneconomical for advisers to provide detailed advice to the majority of customers because a typical pension pot is only around GBP20,000. We expect customers to choose relatively simple drawdown products, annuities, cash or a mix of these.

Legal & General, Prudential and Aviva have the capacity to take on more bulk-annuity business to fill the gap from reduced individual annuity sales. The insurers most exposed to a severe decline in annuity business are those with a concentrated individual annuity focus, such as Just Retirement and Partnership.

The end of compulsory annuitisation will be negative for the profitability of the UK life sector as a whole but will vary from one insurer to another, according to business mix. But there are unlikely to be material rating implications in the near term as rated insurers with diverse businesses and strong capital positions will be able to absorb the negative effects.

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