A probe by Britain’s Financial Services Authority (FSA) into whether pensioners are getting a fair deal when they purchase annuities could be a credit negative for some U.K. annuity writers, says a Moody’s analyst.
Last week, the FSA announced the review, which will run through the second half of this year. The purpose, according to a statement from the FSA, is to explore “the risk of detriment that consumers may face as a result of not shopping around when purchasing an annuity.”
In the U.K., most pensioners obtain their annuity from their “host” pension provider, even though there is what is called an “open market option” (OMO) that permits them to shop around for the best rate when buying an annuity, writes Moody’s senior vice president Antonello Aquino.
Aquino says there is up to a 20 percent difference between the best and worst annuity rates. Therefore, the probe “will be pressure on the margins of U.K. annuity writers, particularly those insurers that are the least competitive in terms of pricing,” Aquino states. If the FSA review makes consumers more aware of better rates, insurers with lower rates may see volume fall as consumers shift to other annuity options. Or, Aquino predicts, some insurers may see profit margins fall as they are forced to raise rates to stay competitive. “In addition, those insurers currently relying mostly on the rollover of existing customers’ pension funds into annuities are more at risk since their customers will be more likely to buy annuities elsewhere in the future,” the Moody’s analyst says.
Among the U.K.’s largest life business underwriters (which include annuities) are Prudential (No. 2) and Aviva PLC (No. 4).