Budget 2014: Pension firms stablise after £5 billion sell off

The Chancellor's decision to scrap the compulsion to buy an annuity sent shares in the big insurers reeling on Wednesday, wiping an estimated £5 billion off the value of the top five FTSE 100 (UKX) pension companies.

They have stabilised this morning as investors digested statements from the providers, but little can be said to change the fact that they are set to lose massive, and wonderfully predictable, revenue streams.

Annuities, the subject of an ongoing government investigation, have been a dreadful deal for consumers. Rising longevity, low interest rates and insurance company greed have conspired to reduce rates to around 6%, compared with 15% twelve years ago. Although annuity rates have improved by 10% this year, it is hard to see who would buy one, unless forced to, as they do not return the policyholder's initial outlay until they are well in their mid-80s.

When Australia - a country with a population of 21 million - abolished the compulsion to buy an annuity a few years ago, its annuity market plunged to just 20 cases in 2009, despite offering more attractive rates than the UK, according to The Actuary.

In one fell swoop, the Chancellor has won over a great swathe of the public in an Election year, boosted the Treasury's tax receipts by £1.2 billion (estimated for 2018/19), pumped billions back into the economy, and averted the biggest mis-selling scandal the UK finance industry would have ever seen.

Previous Chancellors have refused to do this on moral hazard grounds, fearing the country's citizens would spend the cash on cars and holidays and be forced to fall back on to the State in later years. This time however we will soon have the new single-tier pension, which has been engineered to provide a safety net for the least wealthy.

The captive market had surely lulled the insurance companies into a false sense of security about this income stream. Steve Webb, Pensions Minister, has freely talked about "murky practices" in the industry and an opaque fee structure. The DWP's report into the annuities market last month highlighted the products' poor value and the providers unwillingness to quote for small pots. Any future annuity market will be forced to be much more competitive.

There is a sense of disbelief around the insurance markets at a move it perceives to be in direct conflict with the spirit and purpose of pensions to provide the individual with an income throughout their retirement. But who cares about pensioners 20 years down the line when an election looms and borrowing in 2014/15 is expected to be £96 billion against the £37 billion predicted in the first Coalition Budget in June 2010.

The Chancellor's decision to ensure that, from April 2015, all individuals with defined contribution pension pots will be offered free and impartial face-to-face guidance at the point of retirement will send some of these funds back into the insurance companies' coffers by way of traditional investment plans.

Currently, according to BlackRock, only 20% of 65-74 year olds currently receive professional financial advice and many underestimate how long they will live. The government said £20 million would be spent within two years working with consumer groups and industry on the advice structure.

Share-price carnage

Most of the carnage happened yesterday when around £5 billion was wiped off the value of the top five UK pension companies. This morning, the shares were relatively stable. Legal & General, one of the very biggest annuity providers, which saw £1.8 billion wiped from its market value yesterday, recovered 0.23% to 210.7p. Aviva shares recovered 0.69% to 493p. Standard Life fell 0.03% to 353.85p, Resolution fell 2.23% to 327.50p and Prudential was flat at 1,340p.

The shares of Partnership Assurance, a specialist annuity provider for people with health difficulties, continued their cliff fall, plummeting a further 9% to 128.5p, to lose some 75% of their value in less than 24 hours, having started yesterday at 540p.

IFA Hargreaves Lansdown fell back 2% to 1,471p after somewhat inexplicably rising 7% yesterday on the news about the free advice at point of retirement. Their clients will simply choose a different product - there is no net gain.