Today’s unexpected Budget announcement on annuities has triggered some major share price carnage.
Shares in Partnership Assurance (LSE: PA.) have slumped 55% to 138p, while Just Retirement (LSE:JRG) has tumbled 42% to 154p.
Both companies are specialist annuity providers, and so their business is threatened by George Osborne’s planned reforms. However, I think these share price falls are overdone.
That’s because Parternership and Just Retirement are both ‘good guys’ in the annuity world.
The real scandal with annuities has been that too many retirees were given a poor deal when they bought an annuity. They didn’t realise they could shop around between annuity providers and get the best deal. Instead they took the annuity they were offered by their pension pot provider.
If these pensioners had shopped around and declared all their health problems, they might have been able to boost their pension income by 40%.
Partnership and Just Retirement are specialist annuity companies, they don’t provide pension saving products. So if you end up with an annuity from either company, either you or your adviser has shopped around.
Under the chancellor’s new plan, everyone will be offered free financial advice when they retire, so that should mean more people will shop around at retirement.
Granted, many folk will decide not to bother with an annuity. Instead they’ll either go into drawdown or just take all the money from their pot after paying some income tax.
But some people will still want an annuity, and I believe a higher percentage of annuity buyers will end up at Partnership or Just Retirement.
So yes, I can see both companies’ share prices have fallen. I just think the falls are too large.
The real losers will be the big pension providers
The real losers from today’s reforms will be the large traditional pension providers. With free financial advice, few people will take an uncompetitive annuity offered by their pension provider.
It’s interesting to note that shares in Legal & General (LSE: LGEN) are down 25.5p this afternoon to 205p. Prudential (LSE: PRU) is down 37p to £13.31 while Standard Life (LSE: SL) is down 11p at 354p.
And the winner is…
The big winner today is Hargreaves Lansdown (LSE:HL). Its shares are up £1.86 at £15.
I can understand the rationale for that. If people take out large lump sums from pension pots, they may want to invest them, and Hargreaves Lansdown offers the largest investment platform for private investors in the UK. The company also offers advice for anyone who wants to shop around for an annuity.
I’m in no doubt that Hargreaves will get more business as a result of today’s news. My struggle with Hargreaves is its valuation. Even before today’s share price rise, the company was trading on a historic price/earnings ratio of 40, and today’s news won’t deliver a big enough boost to earnings to justify a £15 share price.
It’s also worth noting that the margins at Hargreaves Lansdown are very high. That’s obviously great news for current shareholders, but at some point, competitive pressures may force Hargreaves to cut its prices.