By Carolyn Cohn
LONDON (Reuters) - A shake-up of British pensions, which gives savers more freedom over what they do with pension pots, is expected to hit life insurers' profits when the companies start reporting 2014 results in the next few weeks.
The government last year surprised the industry with plans to allow pensioners to spend their pension savings as they choose, rather than having to buy an annuity, which gives an income for life and is a big source of income for many insurers.
The reform is expected to hit the insurers' sales in what was a 12 billion pound a year market. The changes take effect in April, but some providers said a few months ago sales were down 50 to 60 percent and analysts estimate the drop off could now be more than 80 percent.
Insurers and asset managers say the proposals do provide more choice for pensioners but they have not had much time to develop new products.
The major life insurers are expected to be profitable, but Aviva (L:AV), Friends Life (L:FLG) and Legal & General (L:LGEN), for example, are expected to have similar profits to last year, rather than any rise, according to Thomson Reuters data.
Profits at annuity specialist Partnership Assurance (L:PA) are seen taking a sharp hit, according to the data.
Insurers and fund managers are beginning to come out with replacement products, such as drawdown pensions enabling pensioners to decide how much they withdraw each year. But these are lower-margin products than annuities.
"An annuity is about 10 times as profitable as a pension," Gordon Aitken, analyst at RBC, said. But he also said the reforms could take a few years to have a deep impact on profits.
Credit Suisse analysts said the changes were likely to have a negative impact on the industry's aggregate profit potential.
The annuity specialists such as Partnership Assurance and Just Retirement (L:JRG) are expected to be particularly hard hit. This has prompted speculation that these private equity-backed firms could become acquisition targets.
Partnership reports on March 3. Just Retirement issues half-year results on Feb 24.
Aviva took action to strengthen its position with the $8.8 billion planned acquisition of Friends Life late last year.
These two firms report annual results on March 5.
L&G is increasing its focus on bulk annuities, taking on the risk of defined benefit corporate pension schemes, and this month entered the market for lifetime mortgages.
And Standard Life (L:SL) this month entered the financial advice sector with the purchase of Pearson (LONDON:PSON) Jones.
It reports annual results on Friday, while Prudential (L:PRU), which has a stronger focus on Asia than on Britain, is due to report on March 10.