UK – Individual pension annuity premiums could rise by up to 10.6% a year over the next 10 years, according to the Association of British Insurers.

“The pension market is about to enter a period of significant change as demand increases due to an upward trend in past pension sales, demographic changes and a shift from defined benefit to defined contribution pension provision,” according to new research by the ABI.

“The modelling undertaken during this research project indicates a growth in premiums for individual annuities of 8.7%, 9.7% and 10.6% per annum over the next 10 years for each of the scenarios used,” says the report’s author Julie Stark.

The report found that there was unlikely to be a sufficient supply of bonds and UK government bonds (gilts) of adequate duration to back annuities. And the expected demand for price-indexed annuities could “overwhelm” the supply of suitable financial instruments to back annuities.

The research calls for the supply of longer dated bonds and gilts, as well as priced-index instruments to be encouraged.

And capital requirements could be “prudently reduced” if products with less comprehensive guarantees than conventional annuities were available to more people in the early stages of retirement. Later in retirement, people could buy conventional annuities.

“Some of these solutions can be taken forward by industry through further innovation and creative solutions for financing annuities,” the report concludes. But the government would also have to play a role in changing the rules on private pension provision. And the report called for “concentrated efforts to encourage new markets” such as secondary markets in longevity risk.

“The important thing is for the government and the industry to work together to create a market which is sustainable and serves the needs of everyone - consumers, government and the industry.”