A L i f e & Pe n s i o n s I n d u s t r y N e w s l e t t e r. December 2012
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Annuities - A Poor Harvest // Tom Murray - Head of Product Strategy - Exaxe This article was first published in the Investment Life &
general. The issue has brought annuity returns to the
Pensions Moneyfacts, Issue 193.
forefront of the public’s mind in a way that few
Keat’s season of mist and mellow fruitfulness is upon
pension or life assurance issues ever have been able. However there has been no sign of any of this
us and this is relevant for more than the agricultural
affecting the thinking of the monetary policy
community. Those who have arrived at their
committee (MPC) of the BoE. There is still a huge push
retirement age are about to discover precisely what
both inside the committee, and from former
the fruits of their labour add up to when the total
committee member on the outside, to continue with
value of their pension pots are revealed to them.
the QE policy in order to try to stimulate lending in the wider economy. It is as if this is the only economic
Then, like the farmers, the soon to be ex-workers will
issue in the UK that needs to be addressed.
have to see just how much money they can get for their particular harvest. Unlike the farmers though,
Meanwhile, aspiring pensioners are left dangling like a
those about to retire don’t have an opportunity to
Mayor of London on a zipwire, stranded by the lack of
plant for a new harvest, so getting the best possible
low-risk alternatives to an annuity that, at current
value for their savings is absolutely essential. This is
rates, are a very bad return for years of saving. It is
where the current batch of new pensioners are very
also hard to see how any adviser could be regarded as
unlucky as annuity rates are at an all-time low.
giving good advice to a pensioner if he recommends that they buy annuities at the current rates available.
Effects of QE on annuity rates
At current rates, conventional annuities no longer
up but most of them have significant downsides for
the amount that can be achieved by the remaining
The current global crisis has led to a massive increase
provide any value to those who need to secure an
the average annuitant. The options are primarily
healthy pensioners, as that particular pool will now
in the printing of money in the majority of OECD
income.
scheme pensions, income drawdown products,
live for longer and therefore will have to have their
variable annuities, and enhanced annuities. The
rates reduced to cope with the lengthened average
countries, including the United Kingdom. The Bank of England (BoE), under its quantitative easing (QE)
No cavalry in sight
difficulty with the first three is that the income
longevity. Thus increased use of enhanced annuities,
program, has released an extra £354 billion into the
It is clear that there will be no change in BoE policy
remains invested leaving the retiree exposed to two
while benefiting some pensioners, will ultimately
economy and has used that money to buy up
without a major change in the global economic
major risks – longevity and investment risk. This level
drive down the value of conventional annuities even
government bonds (Gilts), thus raising the price of the
situation, which is not looking likely in the medium
of risk is too much for the majority of pensioners
further, making them even more unattractive for the
bonds and driving down their yields.
term. In fact, the majority of commentators are
whose pension pot is far too small to risk any
average pensioner.
expecting a major increase in the QE programme in
reduction by poor investment performance.
Whatever effect this might have on the UK’s economy,
Where do we go from here?
November.
and the jury is still out on whether it is beneficial or
While the GAD rate rules prevent depletion of the
What can we do to provide a suitable pension vehicle
not, the lowering of Gilt yields has had a profound
This means that annuities are poor value for
drawdown pot too quickly, there is not a lot of benefit
for the future? In order to work out what’s required,
effect on the annuity market by causing annuity rates
pensioners and are likely to remain so for the
for the pensioner in stretching a small amount of
we need to understand what is required by pension-
to drop precipitously thereby reducing the pension
foreseeable future. So what should advisers and the
money over an even longer period as the longer the
ers. Most of them have relatively small pension pots –
amount that retirees are getting from their pension
industry in general be encouraging those retiring
pensioner lives, the lower the income will drop at each
the average pension pot held by a retiring British
pot.
currently to buy in order to get a decent return on a
review unless the investment returns start reaching
worker is a little over £30,000 according to the ABI
lifetime of saving?
extraordinary high levels.
(Association of British Insurers).
There has been a huge outcry about this in the
Alternatives to conventional annuities
Enhanced annuities can give higher amounts to those
Continued on Page 2...
pensions’ media in particular and the wider media in
There are a number of alternatives that keep cropping
with poor health but only by ultimately decreasing
End of the line for conventional annuities?
Making molehills out of a mountain // Ralph Tucker - UK Sales Director - Exaxe
IN THIS ISSUE
Distribution Review) the service delivered by the insurance providers will be a paramount decision in provider selection. Relying on systems that are in many cases over 20 years old will not do in this fast paced, informa-
Annuities - A Poor Harvest Making molehills out of a mountain
tion on demand, 24/7 industry we are becoming. So what is the answer? Gone are the days of
FCA should listen to wise words of Confucius
complete system replacement costing many millions of pounds. What we are seeing now is a
Income drawdown rule changes must be reversed
demand for point solutions designed to solve specific industry problems whilst addressing the
Stewart Reeder promoted to Client Director
discreet areas of each providers’ business operations, be that agency and commission, or the at retirement market. Many existing IT solutions will not be able to cope with the fluid
The unprecedented amount of legislation and regulatory change taking place over recent years has put a disproportionate amount of strain on the systems and operational capabilities of insurance companies. This strain has led to many short term “mend and make do” IT solutions to solve the problems of the businesses they support. This short term view has built up a bow wave of sticky
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requirements of the industry driven by consumer tape solutions that has created a problem of their own
demand for greater levels of transparency, simpler
and will still need to be addressed in the near future.
products and a need to react to industry trends at
No one is blaming the beleaguered overworked IT
a faster pace than coastal erosion!
departments of the insurance industry, for taking this stance. How else could they cope with the additional
Breaking down the problem into bite sized
strain of the legislative requirements on top of
chunks is the only way to address 30 years of
business as usual? However, it cannot be ignored that
systems’ neglect and deliver the service and
as we race toward the bright future of the new world
products that the modern consumer will demand.
The FSA needs to be wary of quick fix solutions Good news at last on longevity Pension reform - The gentleman is for turning Why are we afraid of compulsory pensions? Transform your operational risk
adviser and client empowerment post-RDR (Retail
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