EU rules threaten pressure on annuities

Published on 23/06/2012 14:32

Pension incomes could be slashed by up to 20 per cent under proposed European Union funding rules for insurers, a report has claimed.

The rates paid on annuities, used by the bulk of retirers to convert their pension fund into a regular income, have plunged to record lows in recent months.

That decline could accelerate further under EU Solvency II legislation forcing annuity providers to invest a higher proportion of their capital in government bonds, which have lower rates of return than other assets. The lower the interest on those gilts, the lower the annuities paid out by insurers – and gilt yields have already been sent tumbling by the repercussions of the eurozone and banking crises.

Annuity rates have fallen by some 25 per cent over the past four years alone, leaving millions of retirers with less income from their pensions than they would previously have expected.

The EU rules could lead to a further fall in annuity rates of up to 20 per cent, warned professional services firm Deloitte.

That would leave a 65-year old male retiring with a £100,000 pension fund worse off by up to £1,100 a year.

The extent to which annuity rates are hit by Solvency II – coming into force in January 2014 – depends on negotiations between the EU and the UK over the way insurers set reserves and calculate their capital.

Richard Baddon, an insurance partner at Deloitte, said: “Whatever the outcome of these negotiations, it is likely that insurance companies will need to charge more in future for annuities.”

Pension incomes will also be affected by new EU rules coming into force this December banning insurers from using gender in setting prices.

Experts believe the change could send male annuity rates down by 10 per cent or more. Men receive more generous annuity rates than women, as they typically die younger, but such gender-based calculations will be outlawed under the new legislation.

“Men and women will be offered the same rates and although it isn’t yet clear how this will impact insurer pricing, it could mean that annuity rates fall for men and rise for women,” said Baddon.