When Chancellor George Osborne announced his pension freedom reforms, annuity sales collapsed overnight.
Markets saw that as disastrous news for major FTSE 100-listed life companies such as Aviva (LSE: AV) (NYSE: AV.US), Legal & General Group (LSE: LGEN) and Prudential (LSE: PRU) (NYSE: PUK.US). Their share prices collapsed also.
The prospect of losing large future revenue streams as the over-55s abandoned rigid, traditional annuities was certainly daunting.
So far, they have overcome the threat with ease. And now that the post-pension reform market is shaping up, it may turn into an opportunity instead.
Life In Life
It is surprising to see how well the life companies have performed since the announcement.
Although Aviva has only returned a stolid 8%, L&G is up 33% and Prudential is up 26%.
Part of this, inevitably, is down to the fact that they are heavily-diversified global businesses, with Prudential in particular thriving in higher-growth Asian markets.
That has allowed them shrug off any decline in the UK annuity market. They have found other compensations at home, through lines such as corporate pensions, bulk annuity premiums, and personal and business protection.
Now they are acting to make good their personal annuity revenue losses as well.
Flexible Fun
Mr Osborne’s reforms are inspiring a rash of innovation in the at-retirement income market, as insurers jostle to bring new products to market.
Most people clearly aren’t going to blow their pension pots on Lamborghinis, and will be looking for ways to ensure their retirement income lasts as long as they do, but without locking into a restrictive annuity.
Insurers have responded by launching new flexi-access drawdown plans, a halfway house between an annuity and income drawdown, combining the security of the first with the flexibility of the latter.
Aviva was quick off the mark with its capped and flexible income drawdown products last year, shortly after the reforms were announced.
L&G offers flexi-access income drawdown with full and partial withdrawals, Prudential offers flexi-access drawdown as well.
It is too early to say how well these products are performing. But there is an army of brokers and advisers keen to sell them, and satisfy their clients’ desire for new more flexible retirement income options.
Long Live Annuities
Traditional annuities are out of favour today, but that may not always be the case. There is a strong case for people to use at least half their pension to lock into a guaranteed income for life, then leave the rest invested through income drawdown.
And as the downside of the reforms become apparent, as thousands blow their pension pots, old-fashioned annuities may one day storm back into fashion.
Especially when interest rates start rising, allowing people to lock in at higher income levels.
Pension freedom was originally seen as bad news for Aviva, L&G and Prudential. Ultimately, they could find it quite liberating.