In my three years as editor of FTAdviser, during which time I had covered three budgets and three Autumn Statements, I had yet to experience an occasion where the frenetic nature of the day was matched in genuine “game changing” announcements from the ballot box.
In my live blog preamble I openly derided what I have come to perceive as an overly-portentous piece of the political landscape. Boy, was I about to eat my words.
At around 1.20pm yesterday (19 March), chancellor George Osborne shook the pension industry to its complacent foundations. In the words of some commentators, in a few short minutes he “killed the annuities market”.
In what was to be the climax of his speech he announced a package of immediate changes to the drawdown regime to increase income limits under capped drawdown to 150 per cent of equivalent annuity rates, and offer the unlimited ‘flexible drawdown’ option to anyone that can prove a less onerous guaranteed annual income minimum of £12,000.
He also boosted the trivial commutation limit to allow people with up to £30,000 to cash in their pension, and the amount an individual can take as as a one-off cash payment from £2,000 to £10,000.
Moreover, from next year - subject to consultation - savers will be able to access all of their pension with only a marginal tax charge above the already tax-free amount, reducing the cost for many from 55 per cent to 20 per cent.
He said boldly: “No caps. No drawdown limits. Let me be clear: no one will have to buy an annuity.”
George Osborne shook the pension industry to its complacent foundations. In a few minutes he “killed the annuities market”Contrary to the ‘leaks’ that dominate the lead up to the Budget and mean we know most of what will be announced, this had been kept watertight. The reaction was one of sheer shock; on the opposition benches, in this newsroom, and most importantly on public markets.
In one hour, six companies listed on the London Stock Exchange that are big in the annuities market had lost £3.2bn in value. The sell-off continued to the end of the day as providers shed some £4bn overall.
Those firms that only sell annuities were worst hit, with enhanced annuities specialist Partnership hit by panic-selling that saw its share price plummet 55 per cent and its value drop £700m. It’s rival Just Retirement lost a third of its value in a £529m sell-off.
Larger life firms were hit too: Legal and General lost a staggering £1.1bn, Prudential £700m, Aviva £550m, Standard Life £260m and Friends Life-owner Resolution £230m.
As at 11.30am today, only one of the above was properly showing an increase: Legal and General was up 1 per cent. Partnership and Just Retirement were down a further 10 per cent and 6 per cent respectively.
The big question is: was this annihilation of annuities shares justified?
At first glance, it would appear it was. But I think there is some credence to suggestions from within the sector that markets have overreacted to the budget bombshell.
The truth is this is going to hit the smaller annuities sales more than the biggest. It is those with smaller amounts in their pot that effectively had to annuitise at poor rates that will gladly abandon the market.
This will hit conventional annuity firms in volume sales: according to the FCA’s recent review the average annuity is bought with a pot of just £17,700.
But there will always be those that want to secure guaranteed income, and those with larger pots that take advice might still opt for enhanced annuities where rates are favourable. Moreover, some form of ‘advice’ or ‘guidance’ must be offered to everyone on their retirement choices - and many will be told, rightly, that an annuity remains their best option.
The biggest hit will probably be taken by the mass-market purveyors of conventional annuities - LV and Resolution both admitted as much - but most of these industry stalwarts also offer drawdown amid a plethora of pre- and post-retirement options that may benefit from the changes. Surely the sell-off undervalues the wider business proposition with these firms?
For the record, I’m pleased Mr Osborne is finally tackling this area of the market. A languid series of studies by the Financial Conduct Authority is no way to shake-up a sector that has grown fat and lazy on the back of a product whose rising profitability is correlated to the decreasing value offered to hard-pressed savers.
But I do not think we have witnessed the ‘death’ of an industry. Once the uncertainty that is still the key driver of markets subsides, I suspect investors will come around to that view as well.
