Osborne to Hit Insurer Profits Amid Retirees Concerns

Some U.K. pension providers stunned by George Osborne’s budget say he’s putting the elderly at risk. The U.K.’s finance minister has also threatened one of the insurance industry’s key sources of domestic profit growth.

The Chancellor of the Exchequer yesterday scrapped rules requiring retirees to buy insurers’ annuities with their pension funds, making it more likely people will access their savings as a lump sum instead. The move prompted a slide by stocks such as Legal & General Group Plc and Aviva Plc, wiping 3.6 billion pounds ($6 billion) off the industry’s market value.

Osborne has heralded the “death of annuities,” RBC Capital Markets said in a note today. Insurers had turned to providing retirement products as governments looking to limit their spending passed auto-enrollment legislation to encourage people to save. The industry was also keen on pension provision after low interest rates crimped their investment income.

“Annuities were the one area of significant growth in the U.K. life market,” said Phil Smart, U.K. head of insurance at KPMG in London. “The life industry, which for a number of years has been transforming itself,” may need to become more like the wealth-management industry, he said.

In 2013, 353,000 annuities valued at 11.9 billion pounds were sold by members of the Association of British Insurers, which lobbies on behalf of the industry. About three-quarters of retirees buy an annuity, according to government figures cited by Morgan Stanley.

Poverty Concern

“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, chief executive officer of the National Association of Pension Funds, said yesterday. “We fear these reforms, without careful scrutiny, will leave a large swath of people vulnerable to poverty.” The NAPF represents U.K. pension plans with about 900 billion pounds of assets, according to its web site.

Worst-hit yesterday were shares of smaller, U.K.-focused annuity providers. Just Retirement Group Plc and Partnership Assurance Group Plc slumped 42 percent and 55 percent respectively. They fell a further 5.7 percent and 13 percent in London today.

Shrinking Market

Gordon Aitken, an analyst at RBC, cut Legal & General to underperform today and lowered his share price estimates for Aviva and Resolution Ltd. by at least 5 percent. He estimated that the individual annuity market will shrink by 90 percent.

Legal & General, the biggest manager of U.K. pension assets, rose 0.9 percent today, adding to yesterday’s 8.4 percent decline. It gets about 25 percent of its profit from annuities, according to research from JPMorgan Chase & Co.

Prudential Plc, Britain’s biggest insurer, rose 0.7 percent after dropping 2.1 percent yesterday. While generating half its revenue in Asia, Prudential still relies on global annuities sales for 12 percent of its profit, JPMorgan says. Morgan Stanley estimates Prudential got between a quarter and one-third of its U.K. sales from annuities in the years from 2007 through 2012.

At Aviva, annuities as a percentage of U.K. sales almost doubled to 21 percent in 2012 from 11 percent in 2007, Morgan Stanley research shows.

Profit Dependence

“The majority of annuity profits are front-end loaded, meaning lower volumes should translate into lower operating profits,” London-based JPMorgan analyst Ashik Musaddi said in an e-mailed report yesterday.

Osborne abolished 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. One of his main political opponents, Labour party Treasury spokesman Ed Balls, said he agreed with criticisms of the pension market.

“People feel the annuity market isn’t transparent enough,” Balls told reporters yesterday. “We were concerned that people weren’t always getting the best deal. It was hard to shop around.”

Jon Hocking, an insurance analyst at Morgan Stanley in London, yesterday forecast that the number of Britons buying an annuity would “drop materially” and that sales would slow as potential buyers wait and consider their options.

The Association of British Insurers called the changes “a significant challenge.” Legal & General said about two-thirds of its 34.4 billion pounds in annuity assets came from corporate transactions, which are outside the scope of the new regulations.

Some Winners

Prudential CEO Tidjane Thiam said the insurer will work with the government during the measures’ consultation period, and said the company is “well placed” to provide products that look after its customers’ needs. Aviva said annuities, which provide a guaranteed income, will remain an important option for consumers.

Resolution fell 5 percent, even as it reiterated return targets for its U.K. pension business today. The stock has lost 15 percent in three days, the most since 2009.

Both Resolution and Standard Life Plc said that Osborne’s changes made it more attractive for people to contribute to pension plans.

St. James’s Place Group Plc climbed 1.6 percent, bringing its two-day gain to about 6 percent. The wealth manager is expected to be a “clear winner” from client inflows prompted by Osborne’s plan, given it doesn’t write annuities itself, according to Deutsche Bank AG.

Hargreaves Lansdown Plc, the U.K.’s largest retail stockbroker, pared yesterday’s 14 percent surge, slipping about 3 percent today.

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