Annuities: a £4bn pension heist, or a great opportunity to buy?

[Itsallaguess]

Annuities: a £4bn pension heist, or a great opportunity to buy?

Annuities have turned out to be fabulously profitable for Britain’s pension companies – and something of a disaster for many of those forced into them before pensions freedom began in 2015. Only now is it beginning to emerge just how awful those annuity rates were. An annuity is basically an income for life, and once the contract is taken out, you can’t exit it. But the pension companies that sold the elderly a dud are now helping themselves to a multibillion-pound windfall.

The sums are staggering. The pension companies based their annuity rates on projections of how long people at 65 were likely to survive. But they got their projections wrong: it turns out we are not living as long as expected. Just last week the actuaries clipped six months off projected life expectancy, with the projections now 13 months lower than in 2015.

What it means is that the pension companies won’t have to pay out as much annuity money as they originally provided for (and charged people for). Rather than handing it back to these it overcharged, locked-in pensioners, the industry is handing it to shareholders. Last week Aviva “released” £780m of cash that had been set aside to pay annuities. M&G Prudential released another £441m – 27% of its operating profit. Legal & General found £433m, while Phoenix chipped in another £205m.

City analysts say this shareholder bonanza will go on for another seven years, as the pension companies adopt new, lower life-expectancy, mortality tables. Maybe £4bn is a conservative estimate – it could be billions more.

https://www.theguardian.com/money/2019/mar/16/annuities-a-4bn-pension-heist-or-a-great-opportunity-to-buy

I suppose this shouldn't come as too much of a surprise. The 'longer-and-longer-life' bonanza that we're all now currently paying extra for in terms of pension contributions, presumably via our company-pensions too in many cases, looks like it was short-lived....

Except for the extra we were asked to pay in, of course, or the reduced income we were told we could take out, because 'it now has to last longer'..

Read that section above again - "Just last week the actuaries clipped six months off projected life expectancy, with the projections now 13 months lower than in 2015."....

Cheers,

Itsallaguess

[Dod101]

The other side of that coin is of course that the Final Salary pension schemes which may be closed to new entrants but which many companies still hold will be moving a bit closer to break even or maybe a surplus. That should help companies like BT and others who are currently running huge pension scheme deficits.

Meanwhile, life insurance companies like L & G, Phoenix and Chesnara should surely be good buys if the trend continues.

Dod

[Alaric]

I suppose this shouldn't come as too much of a surprise. The 'longer-and-longer-life' bonanza that we're all now currently paying extra for in terms of pension contributions, presumably via our company-pensions too in many cases, looks like it was short-lived....

There's rather a muddy message being broadcast. I think the statistics are still saying that if you are 65 today, you are expected to live to a greater age than if you were 65 five years ago. They are also saying that what they predicted five years ago for someone 65 today hasn't in fact transpired.

The financial effect is that insurers priced and reserved annuities as if people "live forever". They now find out that wasn't the case, so they can take the profits. In earlier years, insurers and pension funds made losses by under estimating or ignoring mortality improvements. That would still be the case if the present reduced projections of longevity prove too pessimistic.

[Dod101]

The fact of the matter is that pension fund actuaries have to make assumptions about a whole raft of parameters, mortality, aka 'life expectancy' , being only one of them. None of these parameters is likely to be accurate in itself, some higher some lower. It seems for the moment at least that increased life expectancy, as though that improvement will go on indefinitely, has maybe failed to materialise, resulting in a modest surplus in the funds set aside for this purpose. I do not think for a moment that actuaries priced in the assumption that people were going to 'live forever'. Actuaries are usually conservative and cautious practitioners.

The heading of this thread is a typical headline from the press and it has a question mark. In answer I do not think that either proposition is necessarily correct. It is certainly not a pension heist, nor do I think it is a great opportunity to buy life insurers, at least no better than it always has been.

Dod

[DrBunsenHoneydew]

I expect this "reduced life expectancy" will prove to be just a blip in the long-term improvement trend. Medical advances continue.

Nobody's life expectancy has really been reduced. It's only a reduction in the expected increase in life expectancy.

[gryffron]

I don't think anyone is suggesting that life expectancy has been reduced. Just hasn't continued to increase quite as fast as actuaries predicted.

£4bn sounds a huge amount of money, but is really a tiny drop in the ocean of pension funds.

Gryff

[UncleEbenezer]

I expect this "reduced life expectancy" will prove to be just a blip in the long-term improvement trend. Medical advances continue.

Nobody's life expectancy has really been reduced. It's only a reduction in the expected increase in life expectancy.

On the contrary. Life expectancy reflects the health of our environment and lifestyle. While there's obviously huge individual variation, there are macro trends that feed into statistics.

I believe the dominant such influence is the air we breathe. Trends through most of our lives (and, more to the point, the lives of our oldest generations) have been positive: clean air acts in the 1950s, a long-term reduction in smoking, improvements in workplaces, and cleanup of industrial standards.

But this century we've seen the rise of wood burners in homes, reversing the good work of the 1950s. In areas affected we're now breathing the worst air seen since the 1950s (setting aside brief, transient events). It's no wonder the trend towards longer lives has been smothered.

[Fluke]

I believe the dominant such influence is the air we breathe. Trends through most of our lives (and, more to the point, the lives of our oldest generations) have been positive: clean air acts in the 1950s, a long-term reduction in smoking, improvements in workplaces, and cleanup of industrial standards.

But this century we've seen the rise of wood burners in homes, reversing the good work of the 1950s. In areas affected we're now breathing the worst air seen since the 1950s (setting aside brief, transient events). It's no wonder the trend towards longer lives has been smothered.

Veering dangerously off topic I know but I give you Cambridge, everyone cycles and new developments don't even have gas boilers never mind wood burners. All very 21st century.

[Dod101]

I suspect that advances in medicine and our understanding thereof has done much more for life expectancy in a positive sense than woodburners have in a negative one. I appreciate that we cannot see the particles released in burning wood as opposed to the smoke from coal but looking at family history I see a huge number of early deaths through TB for instance and of course infant mortality.

Improvements to life expectancy presumably cannot go on for ever but although I have not seen the numbers I would imagine that we are seeing a slow down in the improvements rather than a reversal of life expectancy.

Anyway, if insurers have over provided then it is good for companies like Chesnara, Phoenix Holdings and Legal & General. SLA might have got it wrong by concentrating on fund management just as things have got more competitive in that business at least for the active managers.

Dod