The pension freedoms announced in the Budget last year may have sent a shock to the industry, but those that felt it most acutely were companies specialising in annuities.
On the day of the announcement, Partnership Assurance and Just Retirement, both recently-floated specialists in enhanced annuities, saw their respective share prices plummet, and questions were immediately raised over whether they could survive.
Both soldiered on for a year. But earlier this month, they succumbed to the inevitable and decided to merge with each other to form JRP Group, worth £1.6bn, which will be headed by Just Retirement chief executive Rodney Cook.
According to the companies, the deal will create a business that is better able to tackle the headwinds of the pension industry and the dramatically changed landscape.
The joint statement to the London Stock Exchange, said: “While the board believes that Partnership Asurance is well positioned to succeed as an independent business, it also recognises that the benefits of greater scale, enhanced intellectual property, a broader product proposition and a more efficient distribution platform will only improve its potential to succeed in its chosen markets in the future.”
One of those chosen markets is de-risking defined benefit schemes, developing strategies to help businesses with big pension liabilities find a way of sharing the burden.
De-risking has become an important diversifier for both businesses, although the success has been mixed.
Partnership last year saw DB new business sales fluctuate from £210m in the three months to December 2014, to £44m in the three months to June this year. Just Retirement fared better, with new business for DB solutions sales of £448m for the nine months to March 2015, up from £42.4m in 2014.
The merger statement said: “The Just Retirement board sees a clear opportunity for the combined group in the provision of de-risking solutions for small to mid-sized defined benefit schemes.”
Certainly, if the company wants to make its way in the de-risking market, then scale is an important factor.
Billy Burrows, director of Retirement Intelligence, said: “The two companies combined can compete in the bulk annuity market with the established players such as L&G and Aviva, and if you’re in bulk buyouts, then you need scale.”
But all the optimistic talk about the de-risking market does not get away from the fact that the real reason for the change in the companies’ fortunes was the challenge to the individual annuities market.
At a stroke last year, George Osborne torpedoed the business models of both companies by no longer making it compulsory to buy an annuity. Both had specialised in enhanced annuities, a growing market, especially with the development of the Open Market Option, which persuaded people to shop around. Enhanced annuities made it a virtue to smoke or have limited life expectancy. Both Just Retirement and Partnership saw these annuities as the future.
Just Retirement was born in 2004 out of Britannic Retirement Solutions, which was closed in 2003. Run initially by former Britannic staff, and bought by Permira in 2009, it floated on the LSE in 2013.
Partnership emerged out of the Pension Annuity Friendly Society, and underwent a private equity- backed management buy-out in 2005. It was then bought by Cinven in 2008, and also floated in 2013.
Steve Groves, the chief executive of Partnership, who will not have a role in the new business, has been quoted as saying that if he knew at the time of the float what he knew on Budget day last year, he would not have gone ahead with it.
Now both companies have been left to pick up the pieces and work out a new strategy. They have been planning to develop and launch new products for the retirement sector, but believe annuities themselves still have a future.
Mr Burrows said: “There’s a strong case for annuities, but they need to be used in a more sophisticated way. There’s a future for them, providing they can provide a way for using them which is part of a retirement solution. It is not a single solution.”
None the less, for the time being the figures tell their own story. New business sales for individual annuities for Partnership in the first half of this year are just over a third of the amount for the same period last year – £128m to the end of June 2015 against £334m for the same time frame in 2014. In addition there was a loss of £2m on new business.
Just Retirement’s most recent figures show a 59 per cent drop in individual annuities sales for the nine months to end of March 2015, to £380.3m from £933.3m for the same period last year.
The companies are putting a gloss on this business too. While acknowledging that the Budget reforms “represented the most fundamental reforms to the retirement income market since the 1920s”, with a 42 per cent fall in annuity sales in 2014, compared with 2013, the companies claim that there is very strong intellectual property in both businesses.
The key, the merger statement said, is “extensive experience in individual underwriting based on medical and lifestyle factors, built up through hundreds of thousands of person years of actuarial experience”.
It added: “Individual underwriting on the basis of medical and/or lifestyle data is increasingly important, both for the defined benefit de-risking segment and individual customers.”
Those observing the companies agree. Ned Cazalet, chief executive of Cazalet Consulting, said: “Partnership has a lot of intellectual capital. If you have a lot of data on health and lifestyle and longevity, that’s a value.
“We’re not short of people aged 60 plus, and we’re not short of people with a reasonable amount of money – there’s a big market.
“But it’s very challenging for these organisations. Both Just Retirement and Partnership – Just Retirement especially – have a big chunk of their assets backed on equity release. The Bank of England is making it very clear it’s not going to make it work under the Solvency II Directive.”
Equity release mortgages have been used as an asset to back annuities because the age profile of the customers of both is similar. However, according to Mr Cazalet, the structure of the funding of equity release products is complicated, entailing ‘no negative equity guarantees’, for example.
The immediate question for advisers, however, is what the merger – Just Retirement is the dominant player, being the larger of the two businesses – will mean for products available in the market.
David Trenner, technical director of Intelligent Pensions, said: “I would be worried if suddenly the only impaired life rates were offered by JRP Group. They’re not. I don’t see it as a problem. It’s a positive thing in that you’ve got a strong company that’s stronger than the two individual companies were.”
Clearly the management, and private equity backers Cinven and Permira – who owned more than 50 per cent of their respective businesses – think that coming together is the solution.
In the short term, the combined group will create cost savings of £40m a year after one-off integration costs of £60m. Mr Cazalet reckoned that the savings would probably come through in about two or three years.
However, he added: “The main thing is to hope this is going to get enough traction to pull itself out of all of this. It will be interesting to see in three years if JRP is a standalone.”
Melanie Tringham is features editor at Financial Adviser
Key points
Partnership and Just Retirement announced a merger last month.
The combined group is pinning its hopes on bulk annuities.
Annuity sales have fallen dramatically since the Budget last year.
