Solvency II rules, designed to align the treatment of insurance across Europe, could force annuity providers to hold significantly more reserves and switch from investing in corporate bonds to lower-yielding assets.
Deloitte estimates that in the best case this could reduce annuity rates by 5%, but might lead to a fall of up to 20%. For a pensioner with a £100,000 pension fund, these changes could reduce their income by between £300 and £1,100 a year.
“There has been a great deal of technical debate and negotiation with the EU about Solvency II," says Richard Baddon, insurance partner at Deloitte. "A focus for the UK has been the treatment of the matching adjustment, which affects annuities and the way insurers set reserves and calculate capital. The amount that annuity rates will fall by depends on whether there is a favourable outcome to negotiations around the matching adjustment. In any event, insurers may need to change the way they invest their assets and may move away from corporate bonds, which give a higher return, to lower-yielding government bonds.
“Whatever the outcome of these negotiations, it is likely that insurance companies will need to charge more in future for annuities. If there is an unfavourable outcome in relation to matching adjustment the impact may be very significant. It is important that insurers, trade bodies, regulators and government continue to lobby hard in Europe to protect pensioners’ interests.
“Annuity rates will also be affected by the EU gender ruling, due to be implemented at the end of the year. 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.
“Although this all appears to be bad news for annuitants our research also shows that there are some current opportunities for consumers. We identified that there is a spread of at least 15% in annuity rates that can be bought today, which shows how important it is for consumers to shop around when buying an annuity.”
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