As I said in an earlier post this is what comes in having financial ignorami in a position to take decisions they don’t understand but which have enormous far-reaching implications.
If this goes through and L&G are right then everyone buying an annuity for their old age will find its rate - their income for the resty of their lives - will be cut by 10-20%. Thanks a lot EU!
Christina
FINANCIAL TIMES 5.8.09
L&G fears for pension savings in EU reforms
By Paul J Davies, Insurance Correspondent
The value of UK pension savings is threatened with a sharp cut of 10-20 per cent under the European Union's new capital rules for insurers unless they are changed, according to Legal & General, one of the UK's biggest annuity suppliers.
Tim Breedon, chief executive, said that if the Solvency II rules, which were voted into law by the European parliament in April, were introduced in their current form it would represent a "betrayal of savers".
He added that regulators and politicians, including Alistair Darling, the chancellor, saw the issue in the same way.
The pain will be felt by people with defined contribution pension schemes, whose savings are used to buy an annuity on retirement. This then pays out a fixed income until death.
The proposed EU Solvency II rules, which are intended to be introduced in 2012, oblige assurers to be more aggressive in marking annuity liabilities to market, increasing the volatility of their balance sheets and forcing them to raise capital levels.
L&G, Prudential and Aviva are among the biggest operators in annuities, which are far more prevalent in the UK than any other European country. Other big suppliers of annuities in the UK are Canada Life, Aegon of the Netherlands and Axa of France.
All Europe-based companies will face substantially higher costs in running UK annuity businesses and are likely to pass on such costs to pensioners in the form of lower incomes, or simply invest in less risky assets, also leading to lower incomes.
"There is still time for common sense to prevail, but a sudden devaluation of 10-20 per cent is a threat," Mr Breedon said. "Allowing Solvency II to go through in its current form would be a betrayal of savers. We have got basically to the end of this year to get this right."
Mr Breedon's message came as L&G reported a string of such differing numbers for its interim results yesterday that analysts were left scratching their heads.
The complexity of the charges taken because of changes in assumptions saw the company lead a sell-off in the life assurance sector.
The stock dropped as much as 9.5 per cent as L&G reported interim operating profits down 92 per cent to £31m on the IFRS basis - but up 12 per cent to £657m on the embedded value basis, which estimates the future profitability of business already written. It closed down 5.37 per cent at 61.88p.
The company cut its interim dividend to 1.11p (2.01p), while losses per share widened from 0.23p to 1.22p .
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