The individual annuity market is showing “green shoots of recovery” according to an analysts’ note by RBC Capital Markets.
After falling 90 per cent by volume and 70 per cent in value since former Chancellor George Osborne announced the pension freedoms, RBC believes that the annuity market has now bottomed out, and open market insurers are set to cash in on growth.
RBC is forecasting 5 per cent annual increases in annuity market sales as a greater number of people retire with defined contribution pots and look to annuities.
New annuity customers have also seen incomes grow thanks to an uplift in bond yields, RBC notes, which should drive “slightly greater demand” as annuities become more attractive.
The RBC analysts sound a word of caution for firms caught up in the FCA’s recent review of annuity sales practices, arguing that they will lose market share to open market insurers such as Legal & General and newly-merged Just Retirement Partnership.
The note reads: “It is almost three years since the then UK Chancellor, in one breath, dealt the individual annuity market a hammer blow. While we do not expect volumes to recover to pre-2014 levels, we do see the green shoots of recovery.
“The UK regulator has, in our view, already pushed the insurers who mostly sold their maturing pensions customers profitable annuities (namely Standard Life and Prudential) to compensate those customers for amounts they should have received. That business model is dead and we expect the open market insurers L&G and JRP Group will gain share.”
“Only insurers with pensions customers can be caught in this review. JRP has no pensions business so it cannot have any future liability; L&G did not have a large pensions book historically and it sold the majority of annuities on the open market, so we expect no significant impact.”