UK Annuity competition has never been weaker
Personal_Finance / Pensions & Retirement Jul 26, 2016 - 01:35 PM GMTBy: MoneyFacts
The latest analysis of the annuity market by Moneyfacts has highlighted the challenging pricing conditions facing the sector and suggests that competition in the annuity market has never been weaker.
The analysis conducted for the Moneyfacts Personal Pension and Annuity Trends Treasury Report shows a seeming lack of appetite among providers to compete for annuity business, a factor which is contributing to record low annuity rates.
The report shows that the average annual income from a level without guarantee standard fell by 3.4% (based on a £10K purchase price) during Q2 2016. However, rates have fallen even quicker since, with average annual annuity income falling by 6.3% in the month following the outcome of the EU referendum. As a result, annuity rates are now at record lows and have declined by as much as 12% since the start of the year.
Richard Eagling, Head of Pensions at Moneyfacts, said: “The heavy gilt yield falls sparked by the EU referendum result and the more onerous capital requirement of the new Solvency II rules are having a dramatic and devastating impact on annuity pricing. Faltering competition within the annuity market has compounded the situation. The severe fall in annuity rates in Q2 2016 and in July have left many retirees facing a conundrum: they still want a secure sustainable lifetime income but are reluctant to annuitise at a time of record low rates.”
Table 1: % change in average annual annuity income
Weaker competition
Competition in the annuity sector has generally been on the wane since the Government announced its plans for pension freedoms in March 2014. The resulting decline in annuity sales has made aggressive pricing difficult, if not impossible.
A useful indication of the lack of competition afflicting the annuity market is the narrowing gap between the highest and lowest annuity rates on offer. In Q2 2016 this gap fell from 16.1% to just 10.7%. It has now fallen to just 9.2%, the lowest level we have ever recorded. The last time that the gap was below 10% was in the aftermath of the switch to gender neutral pricing in Q1 2013 when annuity providers adopted an ultra cautious approach to pricing until the market had settled down.
The reason that the gap between the most and least competitive annuities has closed significantly in recent months is that the market-leading rates have been cut more heavily than those at the bottom.
Richard Eagling said: “This reflects the fact that some annuity providers currently do not want annuity business, so are effectively pricing themselves out of the market. A trend that is not conducive to encouraging competition within the annuity market is the significant number of retirees who are still not shopping around for the best rate. With the majority of annuitants remaining with their existing pension provider and not seeking expert financial help, the motivation for annuity providers to compete on price has been reduced.”
A further sign of weaker annuity competition is the fact that the number of annuity providers active in the open market has started to contract again. The completion of the merger between Just Retirement and Partnership to create the JRP Group in Q2 2016 means the number of providers competing for pension annuity business on the open market has fallen to a new low of just 11, and has more than halved since 1994. Prudential’s decision to withdraw from selling annuities on the open market through financial advisers will further weaken competition.
Richard Eagling added: “The reduced volume of annuity business and pricing challenges has meant that some annuity providers have been evaluating whether it is viable or attractive to play an active role in the market or whether they should concentrate on other product areas such as drawdown instead. Competition in the annuity market has never been weaker.”
The Q2 2016 Moneyfacts Personal Pension and Annuity Trends Treasury Report was published on 25 July 2016.
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