The chancellor George Osborne announced last week that pension savers would be able to take all of their pot when and how they liked at the age of 55, in a serious blow for the providers of annuities, including the large life insurers.
Data from FE Analytics shows that the sector has lost 3.65 per cent since the announcement as the FTSE has been more or less flat.
Performance of sector and market since Budget
Source: FE Analytics
The vast majority of equity income funds have significant positions in the sector, as FE Trustnet revealed last week, meaning that managers have been scrambling to assess the consequences of its unexpected reform.
Gervais Williams (pictured), manager of the Psigma Income fund, says that the share price falls have actually opened up a buying opportunity in at least one of the stocks.
“If anything we think the whole issue is overblown,” he said. “Share prices have moved too far.” “We have a position in Resolution we quite like and we fell the share price has got too low and we have topped up a bit.”
“We think the underlying book of the businesses has question these companies will take advantage in other ways of the changes.”
Resolution was down 10.74 per cent by Monday, although has marginally recovered and is 8.26 per cent down. L&G, which Williams also holds, is 9.08 per cent down. Williams says that although he hasn’t bought more he is also still keen on L&G.
Performance of stocks vs index since Budget
Source: FE Analytics
FE Alpha Manager Alex Wright, manager of the Fidelity Special Situations fund says the case for holding Resolution has increased since the budget.
“Resolution is something that I think has received a real wake-up call from the budget,” Wright said. “However, I think that has improved the buy case for Resolution. It is a stock that I feel better about now than I did before the budget.”
Resolution focuses on buying policies that are no longer being paid into but are mature, Wright explains, which means it is insulated from future diminutions in the annuity market.
“Part of Resolution raison d'être is to consolidate closed books and clearly I think that is a likely to happen more now that the writing of annuities is likely to be dramatically reduced,” he said.
“Resolution do write some annuities in their open-book, but I think they have the ability to replace that business with a more income drawdown solution.”
“I think they are very well placed to do so because of their corporate pension book and the fact they already offer that type of product to people in the accumulation phase.”
“I think that Resolution base business is largely unaffected [by the budget], but their back book consolidation strategy is likely to be somewhat stronger going forward,” he added.
“That is because others in the sector don’t have that sort of strong corporate pension and open architecture platform are likely to be the ones that will want to exit the industry.”
One of the funds betting biggest on the sector prior to the budget was FE Alpha Manager Chris Reid’s Majedie Income fund, which has 15 per cent in the sector and has been tipped by a number of professional fund pickers this year.
Reid (pictured) holds Aviva, Phoenix, Resolution and Standard Life, and says all these businesses are significantly improving their business operations and paying a decent yield while this improvement takes place.
Reid says that he isn’t surprised that the annuities market is being reformed, but the radical nature of the changes was unexpected. He is buying more of his holdings after the reforms. “It has been obvious for some time that in today's low interest rate environment annuities were proving to be a poor product, both for individuals and the industry; the detailed analysis we conducted before initiating these positions had suggested that changes to the market were likely,” he said.
“So although the extent of the change was a surprise to us, the fact that there was some change was not.”
“We used share price weakness last week to top up our holdings, because we believe the stock market reaction overstated the near term 5-12 per cent hit to cash profits.”
“In the long term we believe this move by the government effectively to abolish annuities is positive both for customers and for the industry.”
“There is now much more clarity on the future of retirement provision, giving companies the opportunity to get on the front foot strategically.”
“Previously these companies were effectively bound by law and taxation rules to provide a fundamentally unattractive product as best they could to reluctant customers; going forwards they now have the freedom to develop products for their retirement platforms that work for everybody.”
“As in many other industries, the winners in life insurance must have scale, lowest cost but world class operations and a focus on innovation to deliver what customers need.”
“We look to invest in companies that are already focused on substantially improving their businesses; in our meetings with management we will continue to challenge them to take advantage of this positive change in market structure to accelerate their plans.”
FE Alpha Manager Julian Lewis, manager of the Cavendish UK Balanced Income fund, says that he was surprised by the changes. Lewis holds Aviva and L&G in his top 10, and says although he hasn’t been topping up the investment case remains strong.
“The chancellor surprised everybody, certainly the industry,” he said.
“In terms of the large businesses like Aviva and L&G, there will be some impact but we don’t think it will be major or fatal for them because they will simply revise their business mix,” he added.
“We are sticking with them in terms of impact of annuity reform because we don’t see that is a reason to sell.”
Lewis warns that the reforms could have unforeseen consequences in the future given the perilous nature of managing your own investments.
“There’s a reason that annuities used to be compulsory and that is that it takes the risk out of retirement,” he said.
Lewis warns out that active management is hard, and many investors looking to manage their own retirement pot are likely to struggle.
