Proposals announced in yesterday's UK Budget to allow pension savings to be taken as cash are negative for annuity providers, Fitch Ratings says. But they would probably not lead to rating downgrades, as the annuity providers we rate are large groups with a diverse product mix, rather than specialist annuity providers.
If implemented, we believe this change would significantly reduce the GBP15bn-a-year UK annuity market, as many savers would choose to access their pensions as cash or via drawdown products in preference to an annuity, particularly while annuity rates remain low. Annuities are a large and relatively profitable business for many life insurance companies, so any significant shrinking of the annuity market would be negative for their operating scale and earnings.
Although some insurers would stand to lose future annuity business, 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, which can generate relatively high profits as compensation for the uncertainty about how long pensioners receiving the annuity will live. The proposed changes would therefore be negative for the profitability of the UK life sector as a whole, although there would be individual winners and losers.
Some of the main annuity providers are large insurance groups with diverse businesses, and could therefore absorb the negative effects of the proposed reforms. Prudential, for example, is a global group with large operations in Asia and the US, and large with-profits and asset-management businesses in addition to its UK annuity business. Aviva has a wide range of life and non-life insurance products in the UK and several European markets, and Legal & General has a broad range of insurance and investment products in the UK in addition to its annuity business.
The insurers most exposed are those with a concentrated focus on annuity business. These include Just Retirement and Partnership, which specialise in medically underwritten ("enhanced") annuities for pensioners in ill health or with lifestyle factors associated with reduced life expectancy. 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.
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