New solvency standards for insurers could cut annuity rates by as much as 20%

The analysts said that the rules, known as Solvency II, could force annuity providers to hold significantly more reserves and switch to less risky, but lower-yielding forms of investment. It estimated that this could reduce annuity rates by 5% in the "best case", but could lead to a significantly higher fall.

The predicted fall in annuity rates would reduce the income of a pensioner with a fund worth £100,000 by between £300 and £1,100 a year, Deloitte said. Annuity rates are used by insurance companies to calculate how much annual pension to pay to an individual for their lifetime in return for a sum of money.

The Solvency II rules contain stronger risk management requirements for European insurers and dictate how much capital firms must hold in relation to their liabilities. Once finalised, implementation is expected to happen on a phased basis from 2013 to 2014.

Richard Baddon, insurance partner with Deloitte, explained that the amount that annuity rates would fall by depended on the outcome of negotiations surrounding the treatment of the 'Matching Adjustment', which affects annuities and the way insurers set reserves and calculate capital. Matching premiums allow insurers to hold less capital against annuities in recognition of the fact that, since annuity holders cannot cash in their policies, losses on the bonds insurers buy to fund annuity payments need never be crystallised.

"Whatever the outcome of these negotiations, it is likely that insurance companies will need to charge more in future for annuities," Baddon said. "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."

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that it was "frustrating" that European legislation was exacerbating the ongoing annuity rate "downward spiral".

"Annuity rates have been getting worse for some time," he said. "A non-smoking male aged 65 retiring now with a pension fund of £100,000 could buy an annuity giving an annual, flat-rate income of around £5,800. In 1979, the same pension fund could have bought an income of £17,000."

"European legislators should be encouraging and improving pensions savings," he said. "Is additional insolvency protection really what pension savers want right now, given the potential impact on their incomes? Excessive regulation comes at a cost and, in this case, this cost will be borne by future pensioners."

The European Commission recently announced that the date by which the new Solvency II requirements for insurers must be integrated into national legal systems would be delayed until June 2013, with the rules due to take effect from January 2014. The European Parliament's Economic and Monetary Affairs Committee (ECON) approved further compromise measures on the draft of the new rules in March, which will require a new version of the text to be produced. A plenary vote on this draft is due to take place at the European Parliament in September.

Baddon said that annuity rates would also likely be affected by implementation of the European Court of Justice's decision in the Test-Achats case, which banned the use of gender to determine risk when calculating insurance premiums. The ruling will apply to all contracts issued on or after 21 December 2012. Baddon said that it "wasn't yet clear" how the change would impact insurer pricing, but "it could mean that annuity rates fall for men and rise for women".