There are some stories going round that pensioner incomes are at risk due to fears over the safety of annuities. There are growing fears that annuities may not be as safe as many believed. The Financial Services Authority (FSA) is believed to be in urgent talks with insurance companies over fears that annuities may be hit by the economic downturn.
The current the credit crisis has thrown up major concerns over the security of the investments used to back them…corporate bonds. Although they are usually considered a safe, even dull, investment, they are only as good as the companies issuing them.
Nearly half of all the £237bn corporate bonds in the UK are issued by banks, which are no longer the safe institutions they used to be, as witnessed recently.
If some of these corporate bonds defaulted on a widespread scale, it will put a huge strain on insurance companies, which may have to dig into their cash reserves to honour their pension and annuity promises.
Industry insiders are suggesting that the FSA has given insurers six months to boost the amount of cash they hold or switch to safer gilts, which are issued by governments rather than companies.
Phil Naylor, of Legal & General, which looks after £18bn of annuity business, states that they look for top-rated bonds, but they also include the risk of a bond going into default in their pricing.
