Aon Hewitt has said that the announcements on annuities in last week's Budget will certainly have their impact on insurance companies but should not affect opportunities in the bulk annuity market for pension schemes.
Dominic Grimley, principal consultant at Aon Hewitt said:
"The Chancellor may have rocked the pensions world with his Budget Speech announcements but we remain comfortable in recommending bulk annuities to pension schemes in this changed environment. A good - if now reworked - business model should enable insurers to continue to make money in this market and provide a secure home for pension promises.
"Our view is that the changes outlined in the Budget will not have a material impact on the security available to bulk annuity policyholders (current or prospective) given the regulatory protections that exist. Depending on how insurers will presumably alter their business models - in light of a reduced demand for individual annuities - their appetite for bulk annuities may well increase, which would be positive for the competitiveness of this market."
The level of capital held by insurance companies has not changed, even if the tax rules for annuities have. Insurance companies' ring-fenced capital reserves for annuities are significant and tightly governed, and a fall in the scope for new business could even be beneficial to policy-holders in the very short term, as less capital will be needed for allocation to new policies, should individual annuity business reduce.
"It is worth reiterating that even if the owners of an insurance company made the extreme decision to stop offering annuities, policyholders remain subject to the substantial protections of the regulatory regime, and cannot be disadvantaged if the annuity promises are ultimately passed to another insurance company which has a stronger ongoing focus on annuities.
"In our view, these changes will pose more questions for the management and investors in insurance businesses, than for defined benefit pension schemes looking to de-risk into what remains a safe environment for backing pension promises."
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