Those about to retire with defined contribution pension pots no longer need to buy an annuity. Instead they can choose to draw down their investments gradually as and when they need the money, or else keep the whole pot fully invested and draw an income from dividends and coupons. This week's announcement extends that choice to existing pensioners, who can trade their annuity for a more suitable or flexible alternative if they want.
Some financially savvy pensioners will no doubt manage their pots themselves - perhaps with the help of Investors Chronicle. But most that reject the annuity option will presumably turn to life insurers and asset managers for drawdown products or income funds that do the job for them. Either way, it seems likely that from April - when the new rules come into effect - more money will end up in stocks than is the case under the existing system, whereby life insurers back annuities with gilts and high-grade corporate bonds.
Which sectors are likely to benefit? The traditional stalwarts of UK equity income investing are tobacco, big pharma, big oil and utilities. These have formidable records of cash generation supported by strong market positions. It seems plausible they will receive another stock-market boost from the pensions reforms.
The problem is that so many of the old favourites are fighting narratives of decline. Can GlaxoSmithKline (GSK: forward dividend yield of 5.1 per cent) replace the profits it is losing as generics erode the pricing power of its core respiratory franchise? Can British American Tobacco (BATS: 4.1 per cent yield) continue to push up cigarette prices even as people smoke less and less and governments clamp down more and more? (The introduction of plain packaging in the UK next year now looks all but certain.) Even forgetting the current slump in oil and gas prices, does it make sense to buy shares in BP (BP.: 6.5 per cent yield) as electric cars increasingly dominate the headlines.
Of course, these doubts partly explain why the shares make good income investments: if the companies had better stories to spin, their share prices would be higher and their yields lower. And pundits have been predicting the demise of tobacco and oil companies for years. Good stories often make bad investments and vice versa. Britain's income stalwarts will probably continue to shake off predictions of their demise for many years to come - for more, perhaps, than those currently entering retirement are likely to live.
However, I suspect most pensioners will still be uncomfortable taking buy-and-hold stakes in declining companies. The benefit of running your own portfolio is that you can find income in less conventional places.
One example from this week's instalment of results is Secure Income Reit (SIR), which floated last June. The name is somewhat premature, as the company's debt-heavy capital structure won't allow the payment of dividends for a couple of years yet (meanwhile it is a geared capital-gains play). But the income does look, well, secure - based on long, inflation-indexed leases to two big tenants, one of which is Merlin Entertainments (MERL). When the company does start to return cash to shareholders, it seems likely to attract the attention of those who have chosen to stay invested in retirement. We have initiated coverage with a buy recommendation.
Of course, the appeal of bond proxies like Secure Income depends on more than pension reforms. If interest rates rise by a few percentage points, investors will be able to climb back down the risk curve, ditching income shares in the process. But with inflation so low, and much talk of 'secular stagnation' - the idea that ageing populations and tepid innovation will keep a lid on growth for years - the prospect of gilts providing anything close to a liveable income seems very remote. The dovish outcome of yesterday's meeting of the US Federal Reserve only reinforces this point. The hunt for yield in UK stocks won't end any time soon.
