Annuity expert Billy Burrows, this week looked at the outlook for the annuity market in the UK.
The annuity industry has gone through some seismic changes in the past 12 months. Firstly there was the abolition of the rule which meant retirees had to buy an annuity by the time they reached age 75. Next there was the recent ruling from the ECJ that outlawed using gender when pricing annuities from December of this year. And hanging all of this is the likely impact of Solvency II laws which come into effect in 2012. Under Solvency II, insurers must maintain a higher level of capital on their balance sheets. Of Solvency II, Bob Bullivant from Annuity Direct says that…”…from 2012 life companies will be obliged to value their annuity liabilities using government gilt rates, rather than the current preferred option of corporate bonds, which give a higher yield.”
All of these factors would point to more downward pressure on rates for annuities. However, Mr Burrows does offer a glimmer of hope when he argues that rates could increase in the future, on the back on inflationary pressures which could see an increase in long-term interest rates. This could then in turn mean that yields from government bonds increase, and thus providers will be able to offer better rates. He did caution this point by noting that many insurers also invest in corporate bonds as well as government bonds, and that insurers do not always pass on the rise in the yield to protect themselves against the risk of default. He concludes that any increase in rates will be slight, and cites the example of a £240 a year increase based on a male £100k fund or ‘two meals in a posh restaurant”. Rates have been falling steadily since the early 1990′s (down 45%) and there is not a shred of evidence to support the claim they will return to those levels anytime soon.