Pension annuities fall as Federal Reserve hold rates until 2022

15-year gilt yields chart - Based on figures for June 2020

June 2020 Review

The 15-year gilt yields made strong gains earlier in the month rising 16 basis points from 0.40% to to 0.56% as investors send equity markets to the highest level since the lockdown.

However, after the Federal Reserve suggested it would hold rates at a record zero percent and maintain bond buying until 2022 yields reduced eliminating the gains sending standard pension annuities lower by an average -1.63% and enhanced annuity rates down -0.80%.

Yields continued to reduce in the second half of the month following a sell off in equities after markets increased with the FTSE-100 reaching high as 6,472 or 29.6% above the March low of 4,993.

With the rise in Coronavirus cases in the US investors had concerns about the ability of the economy to recover quickly resulting in a return to safe havens and a fall in gilt yields.

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The 15-year gilt yields rise by 3 basis points to 0.40% during June 2020 after a strong rise earlier in the month.

Providers of standard annuities reduced annuity rates by an average of -1.63% for this month and we would expect rates to fall by -2.03% in the short term if yields remain at current levels.

For smoker and enhanced annuity providers have decreased their rates by an average of -0.80% and rates and we would expect rates to increase 1.20% in the short term if yields do not fall.

Fig 1 below shows the annuity rates changes for the whole market and the proportion that have either increased, decreased or or did not change. It also shows the range of the changes of the annuity rates over the last month:

Annuity Rates Changes Increase No change Decrease   1%   4%   94% Increases of: max 0.5%   Decreases of: max -2.5%

Fig 1: Annuity rate changes for the whole market

Fig 2: Change in standard rates last month compared to gilt yields

Fig 3: Change in enhanced rates last month compared to gilt yields