Osborne Budget Hits British Insurers’ Market Value

British insurers led by Legal & General Group Plc and Aviva Plc plunged after Chancellor of the Exchequer George Osborne scrapped rules requiring retirees to buy annuities with their pension funds.

Prudential Plc, Resolution Ltd. and Standard Life Plc also declined, helping to erase as 3.6 billion pounds ($6 billion) off the industry’s market value today. Just Retirement Group Plc and Partnership Assurance Group Plc, two smaller annuity providers, slumped 40 percent and 55 percent respectively.

Osborne, in his annual budget statement, ended most constraints on how new retirees can manage their pension savings and ended a 55 percent tax on withdrawals from savings at the start of retirement. The move will allow more retirees to access their pensions as a lump sum rather than buy the annuities insurers had been relying on to boost earnings.

The government “estimates that currently three-quarters of individuals currently buy an annuity, and we expect that proportion to drop materially,” Jon Hocking, an insurance analyst at Morgan Stanley in London, said in an e-mailed report. Annuity providers will also be hurt as potential buyers wait and consider their options, he said.

Insurance Index

The FTSE 350 Insurance Index fell as much as 5 percent in London before finishing the day down 3 percent. Legal & General, the biggest manager of U.K. pension assets, slid 8 percent, the most since 2009.

“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances,” Osborne told lawmakers in Parliament in London. “We will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots.”

Resolution fell 4.6 percent, Edinburgh-based Standard Life dropped 3.1 percent and Aviva, the second-biggest British insurer by market value, slid 5.2 percent. Prudential, the U.K.’s largest insurer, fell 2.1 percent.

“Some providers with a high exposure to annuity business may need to re-think their business models,” Phil Loney, chief executive officer at asset manager Royal London Group, said in an e-mail. “We expect to see very strong demand for flexible draw-down as a result of these far-reaching reforms.”

Poverty Concern

The Association of British Insurers, which lobbies on behalf of the industry, said the changes are “a significant challenge,” while the National Association of Pension Funds called them “perplexing.”

“There appears to be little robust modeling to reassure us the government has understood the risk that a number of people will run through their pension pots far too quickly,” Joanne Segars, CEO of the pension group, said in a statement. “We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty.”

Among other changes to pension rules, Osborne also said he would guarantee that people retiring on defined-contribution pensions will be offered “free, impartial advice” on their retirement choices. With defined-contribution pensions, the annual contribution is specified, while the future benefits aren’t guaranteed.

Shares of Hargreaves Lansdown Plc, Britain’s biggest retail broker, surged more than 15 percent.

“While companies will earn less from annuities, they will see an uplift from the sale of other products,” John Overs, a tax lawyer at Berwin Leighton Paisner in London, said in an e-mail. Osborne’s move will lead “to greater diversity and competition within financial services,” he wrote.

Before it's here, it's on the Bloomberg Terminal.