31 March 2012 last updated

Annuity Rates - March 2012 review

Annuity rates lack direction despite significant increase in gilt yields Annuities were pushed lower in many areas despite a significant rise in gilt yields. Some 32% of annuity rates in the market reduce with 48% remaining unchanged and only 20% increasing. The 15-year gilt yields increased from a low of 2.59% at the beginning of the month to 2.95% by the middle and despite this gain annuity rates were generally subdued with little collective upward movement, perhaps with the expectation from the providers that they would return to lower levels shortly. The reason for the rise was the Federal Reserve discounting the prospect of Quantitative Easing 3 in the US and this resulted with investors moving funds from US and UK government bonds and gilts, thereby reducing the price and increasing yields.

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Annuity Rates March Changes Increase No change Decrease   20%   48%   32% Increases of: 0.2 - 1.2%   Decreases of: 0.5% - 2.8%

Fig 1: Annuity rate changes for the whole market ending March 2012

Annuity Rate Changes - Standard   Male * Female * 50% Joint Level   0.21%   0.63%   0.22% Level + 10 yr 100% joint **   0.20%   0.60%   0.23% 3% escalation   0.26%   0.55%   0.29% Annuity Rate Changes - Smoker   Male * Female * 50% Joint Level   1.14%   0.87%   0.99% Level + 10 yr 100% joint **   1.09%   0.87%   0.62% 3% escalation   1.15%   0.82%   1.19%

Fig 2: Annuity rate changes for 1 month ending 31 Jan 2012

* Male and female on a single life basis only

** Joint life option is level, 100% spouse benefit and no guarantee

Standard annuity increases were small for each sector and the highest was 1.2% for females aged 70, single life with 3% escalation and for smoker annuitants all the sectors decreased on average although not for those aged 55 to 60. The largest decrease was for 50% joint life annuitants aged 70, level that decreased by 2.2% and the 3% escalation which decreased by 2.84%. The majority of the decreases were between 1.0% and 1.6% which indicates a more aggressive reduction in rates as a whole but particularly for smokers.

Annuity rates are heavily influenced by the 15-year gilt yields as these are used to fund the income payments to annuitants. Over a month gilt yields have increased by 13 basis points and this would suggest that annuity rates should increase by 1.3%. In fact standard annuities have increased by 0.35% and smoker annuities have decreased by 0.97%. This means at the end of March standard pension annuities had the potential to increase by a further 0.95% and smoker annuities by 2.27%.

Looking at the comparison over a longer period of time of three months, standard annuity rates have increased by 0.89% and smoker pension annuities have decreased by 1.16%. This means at the end of March standard annuities had the potential to increase by a further 1.71% and smoker annuity rates by 3.76%. For the latest updates see Annuity Rates 2012. This implies the providers are being cautious with increasing rates expecting gilt yields to fall and in the mean time improving their profitability with greater margins.

Impaired annuities are experiences a volatile period and although they have increased this month there have also been some significant decreases in March. This has occurred as providers have optimised their pricing of annuity rates so resulting in some annuities for certain medical conditions decreasing by 3% and in some cases as much as 15% from Partnership Assurance.

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