It is now six days since British annuities professionals were dealt a fearsome blow in the British budget. One moment they worked in an industry bolstered by a regulatory requirement stating that anyone who had a defined contribution pension must buy an annuity or face a hefty penalty. The next they didn't. Around 420,000 individual annuities were sold in the UK each year prior to the budget. Now, Legal and General boss Nigel Wilson predicts sales will now drop by 75%. If your job is related to the individual annuities market, you have reason to feel more than concerned.
It may not be that bad, however. Upon reflection, insurance industry experts insist the annuities market will not die. It will just mutate.
Andrew Kail, head of the insurance group at PWC, tells us that the budget has done nothing to alleviate Britons' need for pensions and savings products. Yes, individual annuity sales will to fall, says Kail, but other products will take their place. "Insurance companies and annuity providers will just redeploy the people who've been working on annuities to work on alternative types of products and services," he predicts. "The average pension pot in the UK is only £25k-£30k - people aren't going to be spending that on a Lamborghini. They will still need a way of spreading their pensions over time."
Kail predicts that drawdown arrangements, which allow individuals to take money from a pension while it remains invested, will take the place of individual annuities, and will continue to provide work for actuaries and product specialists. Bulk annuities sold to companies will also thrive, says Kail. Yesterday, Legal & General announced the UK's biggest ever bulk annuity contract sale to ICI, worth £3bn, suggesting that the bulk market is going from strength to strength.
Richard Phillips at Altus, a financial services consultancy firm working with insurance companies, predicts that the budget will simply encourage annuity providers to innovate. He predicts that standard individual annuities are dead, but variable rate annuities linked to investment performance or hybrid annuities in which individuals can maintain control of some of their assets are likely to emerge in their place. Actuaries and product specialists will be required to design these new products. Salespeople will be required to distribute them.
Reassuringly, Kail says few - if any - redundancies are likely. "There's still a huge amount of assets and liabilities in the UK pension system. There will be a need for increased staffing on corporate and bulk annuity schemes. People who have been working on individual annuities are just likely to be redeployed."