"This is probably the most important pensions news ever," remarked Peter Hargreaves - founder of financial adviser Hargreaves Lansdown - when commenting on chancellor George Osborne's Budget day pension reforms. Significantly, these reforms included a decision to effectively scrap the compulsory purchase of annuities by those with a defined contribution pension. That shock move led shares in the life assurers to tumble, as investors contemplated the implications for those that make money selling precisely such individual annuity products.
But opinion is divided over just how severe the long-term impact on this market will be. Among the more bearish, for example, analysts at Barclays think that "given the unattractive annuity rates on offer", the individual annuity market "could decline by two-thirds from £12bn to £4bn per annum within the next 18 months". But Mark Wood, chief executive of insurance broker Jardine Lloyd Thompson's employee benefits arm, believes that such "doom-mongering" is "hugely premature". He believes that annuities "will remain extremely valuable as part of a person's retirement planning". Steve Groves, chief executive of Partnership Assurance, thinks the doomsayers have been wrongly focused on knee-jerk comparisons with overseas markets where compulsory annuity purchase has never existed. He prefers the Swiss example - a market, he points out, where compulsory annuity purchases were also axed, but where "80 per cent of people continued buying annuities".
But even after assuming the worst, not all of the life assurers are equally at risk. Predictably, mono-line individual annuity players such as Partnership Assurance (PA.) and Just Retirement (JRG) do look the most significantly exposed in the event that the market shrinks dramatically. Insurance analyst Oliver Steel of Deutsche, for instance, estimates that the two companies generate 70 per cent and 75 per cent, respectively, of their profits from individual annuity new business sales. "The chancellor's Budget has potentially destroyed their new business franchises," believes Barclays. It was no accident, therefore, that their shares were the hardest hit in the life sector - Partnership's slumped 55 per cent on Budget day, while Just Retirement's dropped 43 per cent. Indeed, as an example of the potential impact on such purer play annuity players, Barclays cut is earnings estimate for Partnership by nearly a third for 2014.
Other life assurers, however, have less to worry about. To begin with, the changes don't affect the bulk annuities market or life assurers' individual annuity back books. Those areas, points out Barclays, drive "the majority of annuity earnings in the medium term for the established UK life names". Legal & General (LGEN), for example, boasts a significant presence in the bulk annuity market and its prospects there could offset declining individual annuity sales. For that reason, Barclays dismissed its 8 per cent share price fall on Budget day as an "overreaction". Sentiment towards Prudential (PRU), meanwhile, is significantly driven by overseas growth in Asia and the US, while Aviva (AV.) generates just 1 per cent of operating profit from individual new annuity business sales - so their shares didn't budge much on the news. Phoenix (PHNX) operates largely a closed book and has little exposure to lower future sales. While Resolution (RSL)'s near-term prospects aren't likely to be affected much either, although its capacity to compensate for its maturing back book, longer term, could suffer in a diminished annuity market.
The chancellor's changes could also mean big opportunities. Significantly, a big proportion of those who previously had little choice but to buy an annuity upon retirement will now probably need financial advice - potentially great news for those life players with significant advisory functions such as St James's Place Capital (STJ) and Old Mutual (OML). And, while Standard Life (SL.) does presently generate a fairly high 9 per cent of profits from new annuity sales, it's also big in both the Sipp and drawdown product markets. Barclays believes "the estimated £8bn" of funds that would have usually gone into annuities each year will instead go into products such as these. Moreover, financial advisers have a greater incentive to sell such products. That's because the Retail Distribution Review, which banned commissions from selling annuities, does allow advisers to levy an annual management charge for drawdown-type products.
