Annuity market shrinks further but expects little impact on rates

The open market for annuities has now halved from 12 providers in 2013. The Financial Conduct Authority’s latest Retirement Outcomes Review paper, published in July, cited provider concerns over “lower demand for annuities, the impact of [EU directive] Solvency II and the low interest rate environment”.

In the same paper, the FCA ruled out intervening in the open annuity market, as concerns grow over the impact of an uncompetitive market upon consumer interests. The FCA has yet to comment on the acquisition.

I think the fact that we’ve gone from seven to six will have very little impact upon the rates offered in the market

Stephen Lowe, Just

Fiona Tait, technical director at retirement planning advisory Intelligent Pensions, said: “I’m not sure it’s the FCA’s job to intervene.”

She added: “They can raise their concerns that maybe the competition isn’t as wide as it was. However, market conditions and global gilt rates mean that [lack of competition] is not at all surprising.”

Tait echoed negative provider sentiment towards Solvency II, which requires insurers to hold sufficient capital to have “99.5 per cent confidence” in their ability to cope with their worst foreseeable losses over a year.

“It obviously has had an impact, because the capital requirements became stricter. It just makes it harder for the provider to offer that sort of product on competitive terms,” she said.

She added that provider specialisation in the form of enhanced annuities were growing in prominence.

Annuity rates 'are good value'

Annuity providers have faced stiff competition since pension freedoms came into force in 2015, as consumers decide between cashing out of their pension plans, remaining invested, or purchasing a secure but often low income in the form of an annuity.

Nathan Long, senior pensions analyst at investment platform Hargreaves Lansdown, pointed to low interest rates and consumer misconceptions over comparisons between annuity rates and bank interest rates.

“A low interest rate environment is really quite a big deal at this point in time. That’s why annuity rates are not very competitive, because the cost of providing secure income for the insurers has rocketed,” he said.

“Part of the problem here is the perception of that rate. We see that clients who come into retirement often compare the income they can get from their annuity with the kind of interest rate that they would expect from a bank,” Long argued.

“Lots of people still anchor to historic bank interest rates of about 5 per cent. If you’ve got that in the back of your mind… then all of a sudden, interest rates don’t look very good.”

While annuity rates have declined by approximately 5 per cent since the advent of pension freedoms, they remain a sensible option for retirees, according to Long.

“Annuity rates are good value when you compare them to bank account interest rates that are currently available,” he said.

Competitive tension could grow

The acquisition stands to “create significant competitive tension” in the annuities market, according to Stephen Lowe, group communications director at retirement advisory Just.

Lowe anticipates that the deal will provide strength and longevity to Canada Life and Retirement Advantage, opening up greater market access to the buyer.

“They were fairly niche and narrow before. I think that they will now be able to participate in lifetime mortgages, and some of the high bid products is probably a strength for Canada Life.”

Lowe dismissed the prospect of meaningful change for consumers and independent financial advisers.

“I think the fact that we’ve gone from seven to six [providers] will have very little impact upon the rates offered in the market because the organisations are already competing like cat and dog to try and win business anyway,” he said.