L&G sees UK individual annuity market shrinking 75 percent

(Rewrites first paragraph, adds detail and background)

By Chris Vellacott

LONDON, March 26 (Reuters) - The UK market for individual annuities will shrink by around three quarters after government measures freeing retirees from having to buy them come into effect next year, one of the biggest annuity providers forecast on Wednesday.

Nigel Wilson, chief executive of life insurance and pensions provider Legal & General Group Plc, said he expects the amount of money going into individual annuities to shrink to around 2.8 billion pounds ($4.6 billion) a year from 11.9 billion, though he did not give forecasts for the group's own future business mix.

Wilson (Oslo: WILS.OL - news) 's comments at an investor conference in London follow a shakeup of the pensions system announced by finance minister George Osborne in his budget last week.

The reforms, due to be implemented in April next year, effectively scrap a system forcing most retirees to swap their pension savings for an annuity that pays out an income for life, giving them instead a choice in how they invest.

Faced with warnings that savers might blow their cash on luxury items such as Lamborghini sports cars, pensions minister Steve Webb said after the budget it should be savers' own choice about how to spend their money.

For annuity providers such as L&G (LSE: LGEN.L - news) , the move threatens a key business line and shares in L&G - as well as others such as Aviva Plc (Other OTC: AIVAF - news) , Standard Life Plc (LSE: SL.L - news) and Prudential Plc (HKSE: 2378.HK - news) - fell after the reforms were announced.

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Wilson acknowledged L&G's business mix would change following the reforms, with more emphasis on its fund management and pension savings businesses.

"The end of, effectively, compulsory annuitisation at retirement for most people in defined contribution pensions will mean adjustments to our ... retirement business, but not as many as some observers might think," he said.

He also said L&G's "bulk" annuity business, aimed at company pensions rather than individuals and which is unaffected by the reforms, would continue to grow, offsetting falling sales of the products to individuals.

Earlier on Wednesday, L&G said it had won a 3 billion pounds bulk annuity contract with the pension fund of chemicals maker ICI (now part of Dutch group Akzo Nobel NV (Other OTC: AKZOF - news) ), adding to its 34.4 billion pounds stock of annuity assets.

"We are extremely confident that we will write more annuity business in 2014 than in 2013 ... possibly substantially more," Wilson said.

L&G sees much of the money that individual savers would have automatically put into annuities under the old system - around 5.8 billion pounds - being invested in alternative products, while close to 5 billion a year will be taken in cash.

New products and services offered to retirees such as fund management could be less profitable for financial services firms like L&G but are also less capital intensive, Wilson said.

He added L&G is planning to develop products offering retirees income in return for equity in their property, known as equity release.

"We certainly expect to see more cash being taken out, either singly for small pots or across several years, and we expect to see more use of the housing asset as pots get depleted more quickly," he said. ($1 = 0.6059 British Pounds) (Editing by Steve Slater and David Holmes)