THE changes in UK pension legislation that came into force this month will likely benefit Variable Annuity business according to Barry Cudmore of Aegon Ireland. Speaking to the Society of Actuaries recently he said that the end of compulsory annuitisation of pension benefits could lead to a fall in the conventional annuity market of up to 75%. In turn this should boost VA business as retirees seek the flexibility the product offers while retaining the promise of a lifelong income. It is estimated that the UK VA market, which was around £1 billion in 2014, could grow to £3 to £5 billion by 2017.
Even without the change in legislation, Variable Annuities seem to be making a comeback. Cudmore showed how sales flattened out in the US after the peak in 2007 but are beginning to build again. In Japan the business, which only began in the early 2000s and then collapsed in 2009/10, is also showing signs of recovery. This is happening despite the continuance of low interest rates which put up the cost of the guarantees and led to the decline of the business in the first place. Cudmore argues that more innovative methods have reduced the cost of providing guarantees and made hedging better. He also believes that competing products that provide guarantees on a non-economically priced basis (e.g. With Profit) are on the retreat.
VA business is nevertheless not a simple business and Cudmore emphasises the importance of scale. In the UK there are only three main players, and the European markets are also dominated by a few companies such as Met Life, Axa, Aegon and Allianz. However even those companies have focussed only on the largest markets such as France and Germany as well as the UK. The good news for us is that most of them are providing the product through specialist companies located here and Cudmore estimates that 90% of European business is regulated in Ireland. This has allowed Ireland to build up an expertise in running and regulating the business not easily replicated elsewhere. There are about 120 actuaries and actuarial students working on VA business in Ireland, and the Central Bank is regarded as the expert in the business among European regulators.
Ironically there are no VA products currently available in the domestic market. Canada Life did provide one for a time but later withdrew it. It will be interesting to see if the product will also make a comeback in Ireland.