Sun Life Financial of Canada's decision to only provide products to existing customers means only MetLife and Aegon remain active in the variable annuity market. What do you think the prospects are for the variable annuity market in the UK and how will this affect third-way products as a whole?
Ros Altmann is director-general at Saga Group
In theory, variable annuity products make sense for many consumers. They offer a lifetime guaranteed minimum income or capital amount, as well as the potential for investment returns to improve income if markets do well. The problem, however, is one of cost. The costs of the guarantees have generally detracted from customers’ expected performance.
Some providers have also struggled with the costs of managing assets to back the guarantees. Careful collateralisation of swaps, capital requirements for the guarantees and general concerns about credit risk have added to the challenges of managing the variable annuity portfolios and may have led to some companies pulling out.
I think part of the problem with variable annuities is the name itself. These are not really annuities and not really variable – they are pension funds that offer certain guarantees and can help clients cope with some of the risks inherent in locking into long-term financial products at one particular point in time.
There is a role for guaranteed products, which can help protect against the risks of inflation, or of changing personal circumstances for people in their 50s and 60s who will often have 30 or 40 or more years of life ahead of them. However, if the cost of the guarantees is too high, then advisers may look at capped or flexible drawdown, value-protected annuities, inflation protected annuities or individually underwritten impaired life products instead.
Philip Brown is head of retirement products at Partnership
Variable annuities have a definite place in the annuity market, as do guaranteed investment products in the investment market. One should always remember that retirement choices and retirement products are set against a market environment where, based on Association of British Insurers statistics from quarter 3 2009, 80% of pension funds are less than £40,000.
When you dig a little deeper 70% of those people with pension funds under £40,000 do not shop around for the best product, product shape or rate rates (i.e. make use of the open market option) available to them. Therefore, there is limited customer base for variable annuities to access.
Beyond, the customer base, the main issue, in my view, remains the explicit cost of the guarantee and therefore, the required explanation of risk and the level of additional investment return needed to actually achieve higher returns. All of which needs clearly and comprehensively explaining to customers. When you add the fact that the cost of guarantees for variable annuities is increasing, and more pronounced volatility in markets has been present for several months it makes things more difficult for these products.
Furthermore, Solvency II considerations may lead many offices to question their viability without a ‘provider option’ to convert to a more traditional obligation in severely stressed conditions.
That said, Partnership supports a wide range of options at the point of retirement, and is disappointed by the reduced choice that results from this development.
Peter Carter is head of product marketing at MetLife UK
AXA has recently entered the variable annuity market so they are clearly positive about the opportunities it offers, while Aegon has signalled its ongoing commitment to variable annuities by recently revamping their product range. MetLife has ambitious plans for 2011 and would welcome more entrants to the market as we believe this would be good for IFAs and clients as increased competition drives innovation.
Crucially, the unit-linked guarantee market developed in response to customer demand and its growth will be reliant upon the demand for products linking equity investment with guarantees.
Consumer behaviour in other markets such as the US, Japan and our experience in the UK so far, lead us to believe there will be ongoing demand, but companies have to be financially strong in order to succeed.
In addition the impending change to legislation on compulsory annuitisation at age 75 will boost the market in 2011 as variable annuity products deliver the combination of flexibility and protection that substantial numbers of retirees want.
These so called ‘Third Way’ products developed because annuities and drawdowns are not always the best solution for all customers in all circumstances.
The growing number of products in the market from unit-linked guarantees to the Living Time-style solutions shows innovation is working and is genuinely needed.
Andy Gadd is head of research for Lighthouse Group
Ultimately variable annuities satisfy a market need for certain types of customers for whom the mitigation of various financial risks in retirement such as longevity, inflation, liquidity and withdrawal risks is attractive. Indeed, as people become more risk adverse when approaching or in retirement it is easy to understand why variable annuities might appeal to these individuals.
Charges are however, for some, a major disincentive when considering this type of product. It is hoped that over time competition will bear down on charges but this will really only happen if there are more, not fewer participants in this space.
Brian Please is business development manager – insurance & payroll at Xafinity Paymaster
The biggest message that came out of the Annuities & Drawdown conference held in London in December last year was the expectation of the ‘explosion’ of third-way annuities, not its demise. Drawdown and variable annuities (VA) sales contribute £3bn to the annuities market (over 15% of all annuity business written). To reinforce this we had AXA Wealth positively announcing the launch of variable annuities into the UK and I am sure others will follow.
What is very apparent is that the principles of life-styling which have historically focused on pre-retirement is now more relevant to post-retirement, making clear space for drawdown, VA and lifetime annuities. The strategy for most pensioners should be when, not if, to annuitise and third-way products offer in many cases a transitional stage before full retirement. The SLFoC decision is more about choice, the allocation of limited capital leading to a mix of players entering, remaining or leaving the annuity market space. I don’t see it as an indication of the growth potential for variable annuities in the UK for those who wish to play in it.
Vince Smith-Hughes is head of business development for retirement at Prudential
The concept of the variable annuity remains a good one. It is hard to dispute that guaranteed income combined with potential for growth is attractive. However, it will be interesting to see whether there is growth in the variable annuity market in the short term as providers will need to demonstrate the ‘value’ of the costs these products carry to advisers and their clients.
In all, the future of the third-way market looks bright as more retirees seek solutions beyond conventional annuities. Asset backed annuities, which also offer the combined attractions mentioned above, look set to benefit from advisers analysing the market in more detail. With-profit annuities benefit from the additional advantage that they can smooth returns and therefore income won’t fluctuate in a way that is similar to an investment in a multi-asset fund.
The same benefits can be gained from a with-profit investment in drawdown, which also includes some valuable guarantees. Importantly, the issue of poor timing of withdrawals that can disrupt drawdown strategies is eradicated when using with-profits and though any such withdrawals potentially qualify for terminal bonus, they are not subject to MVRs.
Finally, more and more advisers are looking at bespoke ‘cocktail solutions’ for some clients, where they use more than one product to meet a client’s needs and more creative solutions are coming to the market.
David Thompson is managing director at AXA Wealth UK Distributors
Variable annuities were largely introduced to provide some flexibility in relation to the age 75 rule. Various elements of protection have been offered with the option to access both income and or capital at a future point in time. Continuing low interest rates have meant that the cost of underlying guarantees have increased for many providers and the potential increases in insurance reserving, which is likely as a result of Solvency II, will further add to the cost of providing these products.
This combination of factors, along with the proposed changes to the age 75 rule, mean that future participants in the market will need to be well capitalised and get their pricing right or they could find themselves with an expensive portfolio in what is still a developing market.
The market has arguably become more complex. The revised choices available will create even more demand for review and the value of guarantees offered will be a key competitive area. AXA Wealth is in fact now an active player in this market and with AXA’s financial strength can play a leading role in the UK.
Ian Wilkinson is group practice director at Perspective Financial Group
Sun Life of Canada’s exit from the market certainly came as a surprise, and while the remaining providers claim to be committed to the variable annuity market, those claims are almost even more undermined by SLoC’s whole-hearted commitment to the cause before they withdrew. As an aside, two of our consultants were at one of SLoC’s workshops the day before the announcement came out, and I believe they were still recruiting their sales force at that time.
It is something of a challenge just keeping up with the all the products which are available as they are all slightly different, with each provider giving their product something slightly unique. When there is any doubt about the future of the contract it makes it difficult for the providers to persuade advisers to do the groundwork in getting to know all the products.
Of possibly greater significance is the additional flexibility potentially available in an unsecured pension, and the removal of the requirement to purchase an annuity, confirmed just after SLoC’s announcement. This could make unsecured pensions attractive to more retirees, taking further market share.
This is a shame as the providers need encouragement to be innovative and bring new ideas to the market, and there is no doubt that the products have a place for many people at retirement.
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