These are retail trends, institutional and regulatory drivers, pricing issues, as well as supply and demand.
After a period in which annuities have been expensive due to low interest rates and challenging investment conditions, we are starting to see a resurgence in annuity values and consumer interest.
We put this down to higher interest rates, an enhanced focus on security in the wake of the Covid-19 pandemic, and heightened recognition of later-life care needs.
For example, our benchmark for the annual value of a single life, level and no guarantee period annuity for a 65-year-old man with a £100,000 fund stood at £6,283 in August 2022. This compared to £4,696 in August 2016 – an increase of about 15 per cent after allowing for inflation.
A lingering issue across all parts of the market is data quality.
Will such increases be enough to stimulate annuity sales after a period in the doldrums?
Possibly, but there are also things that insurers, to some extent backed by governments that want to encourage higher levels of retirement saving, can do to make them more attractive.
One, already common in the UK, is offering the flexibility to allow drawdown in earlier retirement years but, importantly and less commonly, in combination with a facility to allow undrawn funds to continue to attract investment income.
Another change in practice that could be beneficial is including inflation protection in quotes as standard, with an explanation of how this benefits the annuitant to counter the historically low take-up.
Longevity pooling
Another potential market stimulant is longevity pooling, already well established in the US and Australia, which is now starting to gain traction in the UK as a potential retail decumulation option that appeals to some pensioners.
Of course, pooling of risk is hardly new to insurers. The difference here is that members pool their retirement funds and, for insurers, it can offer a way to spread longevity risk.
Although there is no guaranteed income, each year the pool members receive payments based on their probability of surviving.
Potential deterrents historically have been the regulatory regime, the high market entry barriers, the limited credit asset universe and time.
Further benefits of pooling are that members enjoy investment returns and, in effect, they gain mortality credits from members who die.
After 10 to 15 years surviving members also receive a regular annuity based on accumulated funds to avoid the tontine effect, where a large windfall would go to the last survivor.
Institutional and regulatory drivers
Turning to pension risk transfer, or bulk annuities as they are known in the UK, 2022 was another strong year.
In late August, Legal & General’s pension risk transfer monitor reported an estimated £12bn worth of transactions took place in the first half of the year – an increase of around 50 per cent on the same period in 2021.
At the time, it forecast the overall volume in 2022 would be between £30-£35bn, which would be the second largest ever in a year in the UK.
