28 August 2012 last updated

UK pension annuities future uncertain due to Eurozone crisis

September will see some major hurdles for the ECB to protect the euro from collapse which would see annuity rates tumble and UK pensioners with less income in retirement. The Eurozone is entering a difficult period that could endanger the euro and see investors move funds to safe havens forcing gilt yields in the UK lower and reduced annuity rates. Greece is being reviewed to determine if it will receive the next portion of the 32.2 billion euro bailout fund with the German stance critical over Greece's ability to meet austerity measures. Spain and Italy still have serious sovereign debt problems and the European Central Bank (ECB) has not yet established a permanent rescue fund to prevent contagion with the German courts yet to determine if the European Stability Mechanism (ESM) breaches the Maastrict Treaty regarding the bailout of members.

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ECB central to annuity rates future direction

The immediate future for annuity rates depends on how the European Central Bank can manage investor expectations of it's ability to do 'whatever it takes' as pledged by president Marion Draghi, to save the euro and this means controlling sovereign bond yields for Spain and Italy.

If the ECB fails to deliver and yields for Spain's 10-year bond rise to beyond 7% as investor confidence evaporates it will make a bailout more likely. However, currently the rescue fund does not exist to support a full bailout and this would fuel ever increasing bond yields as investor funds seek safe havens such as UK government bonds and gilts, US Treasury Notes and German Bunds. For UK pension annuities more demand for 15-year gilt yields, for which annuity rates are based, would result in higher prices and lower yields forcing income from annuities lower.

There are still challenges for the ECB as there is fear that Germany will not allow the ECB to buy bonds of Spain and Italy to keep the yields at lower levels. The expectation is that the Securities Market Programme (SMP) will allow the ECB to buy government bonds from financial institutions reducing the cost of sovereign countries issuing bonds. The ECB governing council is meeting in September to announce their bond buying programme and if this does not materialise it would undermine confidence in the markets.

UK pension annuities are vulnerable to major developments in the Eurozone and due to the security offered by UK government gilts to investors could see volatility in the next few months with the potential for further decreases in annuity rates.