Auto-enrolment will dominate the pensions market in 2013, but for the 550,000 people reaching what we used to call ‘normal’ retirement dates, the future looks bleak.
There may be some easement in interest rates as the impact of quantitative easing wears off, but annuity rates are likely to remain at historic lows, not least because of the costs to the insurers of reserving against guarantees resulting from pressure from Solvency II, the new European capital adequacy regime set to be implemented on 1 January 2014.
The European Court of Justice ruling on unisex insurance premiums (which came into effect from 21 December 2012) appears to be a general deterioration in male rates without much improvement in female rates.
We don’t expect to see any short-term reversal to improved longevity and the long-term forecast for guaranteed annuities remains poor.
For those enjoying drawdown, the Chancellor’s announcement to allow individuals to draw up to 120% of their retirement savings may give a short-term cash-flow fillip, but it is a Sellotape measure without an improvement in underlying investment returns.
The broader picture for pensions is likely to see more defined benefit (DB) schemes close for future accrual. The good news is that defined contribution (DC) charges are likely to continue to fall as commission payments become prohibited under the Retail Distribution Review (RDR) regime, resulting in employers opting for more cost-effective, multi-employer arrangements.
– Henry Tapper is director at First Actuarial