(Bloomberg) — Legal & General Group Plc predicts Britain’s 11.9 billion-pound ($19.7 billion) annuity market will shrink by 76 percent because of U.K. Chancellor of the Exchequer George Osborne’s proposed changes to the industry.
The individual annuities market, a key source of domestic profit growth for British insurers, will decline to 2.8 billion pounds of premiums by 2015, Chief Executive Officer Nigel Wilson said in an speech today. He also said demand for British longer-dated government debt, which are bought by insurers to match long-term liabilities, will drop.
“We do expect individual annuity sales to go down,” Wilson said at the Morgan Stanley Investor conference in London. “If you have a short life expectancy, you are more likely to take cash.”
In his 2014 Budget last week, Osborne scrapped rules that pushed retirees to buy an annuity, allowing them to withdraw their pension savings without being hit by a 55 percent tax rate. The move erased about 3.6 billion pounds from the market value of insurers and sent shares of L&G, Britain’s biggest manager of pension assets, tumbling by as much as 14 percent.
Under the proposed new pension system in April 2015, L&G expects the industry will see a three-way split between annuities, a full withdrawal of savings estimated at 4.9 billion pounds, and drawdowns of savings and new products valued at 5.8 billion pounds.
The industry will probably create products that are “lower margin, but also less capital-intensive,” Wilson said. “More flexible products are likely to mean shorter duration, or more liquid investments, which could impact gilt funding at the long end, and corporate bonds.”
Morgan Stanley analysts led by Andrew Sheets, head of European credit research in London, estimates that sellers of annuities hold at least 37 percent of longer-dated securities.
L&G could write “substantially” more business in the bulk-annuity market, which is outside the scope of the new regulations, Wilson said. The company today announced a 3 billion-pound bulk annuity deal with ICI Pension Fund, which runs funds for former employees of Imperial Chemical Industries Plc. About two-thirds of L&G’s 34.4 billion pounds in annuity assets comes from such corporate transactions.
Wilson said L&G’s investment unit, including its Cofunds platform, will benefit most from an estimated 12 percent growth a year in direct contributions. He said the company may also provide pension drawdown and equity release products.
The changes will mean adjustments, “but not as many as some observers might think,” said Wilson. “That’s why we were able to publicly score the Budget at four out of five — pretty good economics, very clever politics and an element of Schumpeterian creative destruction,” he said, referring to Austrian economist Joseph Schumpeter.