The introduction of Solvency II could see annuity rates, currently at record lows, drop a further 20%, Deloitte has warned.
The firm explained Solvency II rules, designed to align the treatment of insurance across Europe, would force annuity providers to hold significantly more reserves and move from investing in corporate bonds to lower-yielding assets.
It said the best case scenario would see annuity rates fall by 5%, however, it warned they could fall by up to 20%. For a pensioner with a £100,000 pension fund, these changes could reduce their income by between £300 and £1,100 a year.
Richard Baddon, insurance partner at Deloitte, said: "There has been a great deal of technical debate and negotiation with the EU about Solvency II. A focus for the UK has been the treatment of the ‘matching adjustment', which affects annuities and the way insurers set reserves and calculate capital.
"The amount that annuity rates will fall by depends on whether there is a favourable outcome to negotiations around the matching adjustment. In any event, insurers may need to change the way they invest their assets and may move away from corporate bonds, which give a higher return, to lower-yielding government bonds."
Baddon added whatever the outcome of the negotiations, insurance companies will need to charge more for annuities in the future.
"If there is an unfavourable outcome in relation to matching adjustment the impact may be very significant. It is important that insurers, trade bodies, regulators and government continue to lobby hard in Europe to protect pensioners' interests," he said.
Annuity rates will also be affected by the EU gender ruling, set to come into force at the end of this year.
Men and women will be offered the same rates and although it is not yet clear how this will affect insurer pricing, it could mean that annuity rates fall for men and rise for women.
"Although this all appears to be bad news for annuitants our research also shows that there are some current opportunities for consumers. We identified that there is a spread of at least 15% in annuity rates that can be bought today, which shows how important it is for consumers to shop around when buying an annuity," Baddon said.
Went into administration April 2018
Threat of legal action looms over Woodford IM
View from the front row
Retirement Planner Forum 2019