My colleague Jeff Salway deals with the implications of the rule changes to annuities – an insurance contract providing an annual income for life – on pages 46 and 47. As for the companies which have built a multi-billion empire on personal savings, their shares were battered because a large part of their income was put at risk.
A number have decided to suspend applications, giving individuals time to decide what to do. This will be manna from heaven for the advisory community, who see another door opening. Big product providers such as Aviva, Friends Life, LV and Royal London (owner of Scottish Life) will be assessing how the changes impact on their business model. RBC Capital Markets has estimated that the £12 billion individual annuity market will shrink by 90 per cent.
But Osborne’s shake-up was not for the industry’s benefit. His Budget for savers was welcomed for treating consumers as mature individuals able to make their own choices. However, the changes will require robust supervision as it cannot be assumed that enough people know enough about pensions to make the right decisions. The last comparable revolution took place in the 1980s with the introduction of personal pensions. Many who opted out of good workplace schemes were left to rue their decisions as the oasis proved to be a mirage. Added to that, regulation was unsatisfactory. The outcome was the mis-selling scandal which still plagues the sector.
No wonder distrust has been added to a general lack of understanding of how the industry works. A big worry is that the consumer muddles the two, turning ignorance into cynicism. For that reason, there is a danger that many individuals will scrap their planned annuity for an alternative that turns out to be a mistake, purely because they have not understood what they are doing. There was supposed to be a sea-change in the public’s understanding of personal financial matters following former Aegon chief Otto Thoresen’s review six years ago. His inquiry led to the setting up of the Money Advice Service and financial education in schools.
But it would be fair to say the public remains largely confused by how the industry works and therefore at the mercy of those who run it.
By ending compulsion to buy an annuity the Chancellor has not only introduced more choice for consumers, he has signalled the end of the gravy train for the providers. For too long they have got away with high charges and bombarding individuals with jargon-heavy documents and promises that have been taken on trust.
Osborne may well have signalled the death of the annuity, but there are also worries that some people will instead cash in their pension pots and buy a Lamborghini. Some employers may see opportunities to cut their own pensions liabilities.
The pensions industry received a shock last week but will doubtless re-invent itself with new products. When the dust settles, let’s just hope the regulators are up to the job of keeping everyone in check.
Clyde comes in handy for shipbuilders
BATTLE lines are being drawn between Britain’s five biggest defence companies and the 12,500 workers they employ.
This is not about pay, working conditions or any of the usual sources of industrial conflict. This time it’s politics and the independence issue.
I spoke last week to a number of trade union conveners in the Confederation of Shipbuilding and Engineering Unions (CSEU) who wrote to The Scotsman outlining their concerns over future investment in Scotland in the event of a Yes vote.
BAE Systems boss Ian King made a statement on Friday which favoured the Union but the CSEU said it did not go far enough, nor is it happy that most of the big companies in the sector are saying very little.
The workers at these companies – the others are Babcock, Rolls-Royce, Selex and Thales – are feeling particularly nervous following comments from Prime Minister David Cameron and Defence Secretary Philip Hammond that the Ministry of Defence may not place orders in an independent (foreign) country.
But of the potential scare tactics we have heard, this looks like one of the biggest. It is difficult enough to imagine Standard Life upping sticks and moving operations elsewhere. But a warship builder, or the only company making periscopes for the Royal Navy?
Companies are as nervous as their workforces about the potential impact of independence and the listed ones are obliged to make statements on any risk to their business. Expect Glasgow-based Weir Group to issue a statement in the next couple of weeks that I’m told will be quite comprehensive.
Make no mistake, for a global company relocation is an option.
But there are reasons for being in a particular place and it is down to such things as skills, supply chains, culture. And in the case of a shipbuilder, a river also comes in handy.