Fitch: UK Annuity Resale Plan May Fail, But Won’t Hurt Insurers

(The following statement was released by the rating agency) LONDON, December 16 (Fitch) The UK government’s plan to allow pensioners to sell their annuities will not affect the credit profile of insurers, but the complexity of pricing and managing transactions suggests any secondary market is likely to remain small, Fitch Ratings says. The government announced on Tuesday that it will let pensioners sell the income stream from their annuity for a cash lump sum. But although insurers will be allowed to buy back annuities from their own customers, they will not be forced to. This means that when an annuity is sold the original provider will not have to unwind the product, and the only change would be to whom it makes the payments. In principle, some insurers may be interested in offering to buy individual annuities from pensioners because in the current low-yield environment they are keen to take on a little more risk to boost returns. This can be seen, for example, in the growth of the bulk annuities market, where insurers write annuities to cover all or part of large pension schemes. But individual annuity purchases are likely to be complex, difficult to price and often involve relatively small sums, so it will be hard for insurers to offer a price that sellers are likely to find attractive. For example, the buyer will only continue to receive the annuity for as long as the seller is alive, so the buyer will have to be confident it has a full picture of the seller’s health to come up with an accurate price. Because selling an annuity would be entirely voluntary, annuity holders who decided to go ahead with a sale could on average have a lower life expectancy, further reducing the price insurers would be willing to pay. Complications would also arise regarding how a buyer could keep track of the original annuity holder, or how to handle joint-life annuities, which continue to make payments to a surviving partner. Contact: David Prowse Senior Director Insurance +44 20 3530 1250 Fitch Ratings Limited 30 North Colonnade London E14 5GN Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.