Osborne hurts insurer profits amid concern retirees at risk

Some UK pension providers stunned by George Osborne’s budget say he’s putting the elderly at risk.

By Sarah Jones (Bloomberg)

Published: Fri 21 Mar 2014, 10:47 PM

Last updated: Fri 3 Apr 2015, 5:56 PM

The UK’s finance minister has also threatened one of the insurance industry’s key sources of domestic profit growth.

The Chancellor of the Exchequer on Wednesday scrapped rules requiring retirees to buy insurers’ annuities with their pension funds, making it more likely people will access their savings as a lump sum instead. The move prompted a slide by stocks such as Legal & General Group and Aviva, wiping £3.6 billion ($6 billion) off the industry’s market value.

Osborne has heralded the “death of annuities,” RBC Capital Markets said in a note on Thursday. Insurers had turned to providing retirement products as governments looking to limit their spending passed auto-enrollment legislation to encourage people to save. The industry was also keen on pension provision after low interest rates crimped their investment income.

“Annuities were the one area of significant growth in the UK life market,” said Phil Smart, UK head of insurance at KPMG in London. “The life industry, which for a number of years has been transforming itself,” may need to become more like the wealth-management industry, he said.

In 2013, 353,000 annuities valued at £11.9 billion were sold by members of the Association of British Insurers, which lobbies on behalf of the industry. About three-quarters of retirees buy an annuity, according to government figures cited by Morgan Stanley.

“There appears to be little robust modeling to reassure us the government has understood the risk that a number of people will run through their pension pots far too quickly,” Joanne Segars, chief executive officer of the National Association of Pension Funds, said on Wednesday.

“We fear these reforms, without careful scrutiny, will leave a large swath of people vulnerable to poverty.” The NAPF represents UK pension plans with about £900 billion of assets, according to its website.

Worst-hit on Wednesday were shares of smaller, UK-focused annuity providers. Just Retirement Group and Partnership Assurance Group slumped 40 per cent and 55 per cent respectively. They fell a further three per cent and 10 per cent as of 10.00am on Thursay in London trading.

Gordon Aitken, an analyst at RBC, cut Legal & General to underperform on Thursday and lowered his share price estimates for Aviva and Resolution Ltd. by at least five per cent. He estimated that the individual annuity market will shrink by 90 per cent.

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