Budget 2014: Pensions revolution casts pall on insurers

The profitability of some of Britain’s biggest insurers was thrown into question on Thursday amid predictions of the demise of the £12bn-a-year individual annuity market in the wake of the government’s revolutionary pension reforms.

A day after Chancellor George Osborne announced that pensioners would have the right to take their pension as cash at retirement, removing the requirement to buy an income product, analysts at RBC Capital Markets predicted that the individual annuity market would shrink 90 per cent.

Barclays called it a “game changer” that had “the potential to lead to the demise of the UK individual annuity market”. It forecast that the value of new individual annuity business would shrink from £12bn a year to £4bn by 2015.

As Labour and Liberal Democrat politicians raised the prospect of pensioners turning to the buy-to-let market and fuelling house price inflation, analysts predicted lower earnings for insurers such as Prudential, Legal & General, Standard Life and Aviva.

Share prices of other companies selling mostly annuities plunged. Partnership Assurance – which offers higher paying products to retirees with health conditions – has fallen 61 per cent, to 124p, since Wednesday’s Budget. Similarly, shares in its listed rival, Just Retirement, have suffered a 46 per cent fall, to 140p. Private equity houses still hold majority stakes in each group.

Meanwhile, Steve Webb, pensions minister, provoked controversy last night after saying he was relaxed about people using their pension savings to buy luxury sports cars. “If people get a Lamborghini and end up on the state pension, the state is much less concerned about that,” he told the BBC. “That is their choice.”

Annuities have been among the biggest money-spinners for Britain’s listed life insurers for years. These policies – which turn pension savings into annual retirement income – have been an almost compulsory purchase for savers whose employers do not offer a salary-based pension scheme. Annuity sales to both individuals and pension schemes account for about a fifth of life assurers’ revenues – and two-thirds of their “new business” profits.

Last month, Financial Times research revealed that insurers’ profit margins on annuities ranged from 8.4 per cent to 15.4 per cent.

Mortgage brokers said they expected pensioners to turn to the buy-to-let market, sparking fears at Westminster that the unleashing of billions of pounds from pension pots could force up house prices. These are already predicted by Mr Osborne’s official forecasters to grow 8.5 per cent this year.

Vince Cable, Lib Dem business secretary, is thought to have “serious concerns” about the effect of the pensions changes on the housing market, while one senior Tory MP said the policy would “throw kerosene on the market”.

Ed Balls, shadow chancellor, told MPs that Mr Osborne should rein in government support for homebuyers in the southeast and boost homebuilding, to avoid an overheating housing market and to stop a rise in mortgage rates “earlier than we need in the recovery”.

But figures in the Australian pension market brushed off concerns that Britons would squander their retirement cash once they were given access to it in cash.

For the past two decades Australians have been given the freedom to take their superannuation pot as a lump sum at retirement, and typically do not buy annuities. “There’s nothing to suggest that Poms are any more stupid than Australians,” said Paul Resnik, co-founder of FinaMetrica, a Melbourne-based financial services firm. “I can’t see there being any greater dangers for Poms spending their retirement cash than for us.”

The Treasury is reluctant to give details of its modelling on the likely result of the pensions reforms, but said it estimated that about 100,000 of the 300,000 people affected each year might take more of their pension pot early. Of those, two-thirds might use the money to pay off debts, especially mortgage payments.

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Treasury ministers admit that the taxpayer may have to foot a higher housing benefit bill in future if pensioners cash in their pension pot and then run out of money, but say the problem would be limited.

Meanwhile, Mr Osborne was taking risks with his own deficit reduction programme by using temporary measures to finance permanent tax cuts and spending increases, an influential think-tank warned on Thursday.

The Institute for Fiscal Studies admonished the chancellor for his “bad habits” of finding tax changes that appeared to bring money into the exchequer in the short term but had a long-term permanent cost to the public finances.

But the IFS welcomed the freedom for households from ending forced annuitisation, saying it was likely to increase savings in pensions. But Paul Johnson, IFS director, had few crumbs of comfort to offer either the annuity industry or people who still wanted to buy the security of a known income for the rest of their lives.

The policy “will make annuities even more expensive for those who do want to buy them”, he said. “The market will become much thinner . . . only those expecting to live a long time will want to buy an annuity, thereby driving up the price.”

Mr Osborne was delighted with the headlines that greeted his Budget, although he was fuming over a Twitter “poster” published by Tory chairman Grant Shapps – widely lampooned as patronising – which said a cut in bingo and beer duty helped “hardworking people do more of the things they enjoy”.

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