The Hartford broke new ground when they introduced their Hartford Platinum product to the UK earlier this year. Chris Dickinson and Mark Stopard tell Helen Morrissey how it has been going so far
Increasing longevity, falling annuity rates and a general mistrust of pension products are all major issues within the UK retirement market. Despite the growing popularity of income drawdown, the lifetime annuity market still accounts for the vast majority of at-retirement business. While such annuities do provide the stability of a guaranteed income for life the lack of death benefits and the fact that the fund is no longer invested in the market acts as a disincentive to those who wish to have more control over their pension pot. At the other end of the scale income drawdown is seen as overly risky and not suitable to those with small funds.
There has, for some time been space in the market for a product to fill the middle ground between these products and in February 2007 Hartford Life entered the UK market with Hartford Platinum.
"In the UK we have to let people know that annuities are not the only way forward, people should have options and flexibility," says Chris Dickinson, director, product development. "People should look at annuities as just one component of their retirement plan and look to use annuities and drawdown together. There's a tax impact here as well - you might get more benefit if you wait a bit longer before you annuitise."
Hartford Platinum is only available through advisers and aims to give investors the best of both annuities and drawdown. Those investors who may for instance have bought an annuity at retirement because they thought drawdown too risky are able to remain invested in the markets for longer and benefit from any gains.
Meanwhile for those who would like to take advantage of market appreciation but were wary of diminishing their pension pot a guarantee is available in the form of the Guaranteed Retirement Income Plan (GRIP) which allows the investor to lock in market gains. This gives the investor peace of mind and the knowledge that while they stand every chance of increasing their fund value, it certainly won't decrease below the original level. Hartford Platinum also has the added benefit of allowing the investor to pass on the value of the fund - minus any withdrawals to loved ones on death.
Hartford Platinum gives investors and their advisers the choice of up to 85 different funds to invest in while those who prefer a ready made solution can choose from five custom built portfolios aligned to the investor's requirements. The Hartford is working with specialist investment research company OBSR and asset allocation specialist Ibbotson to ensure that investors have access to the best funds available.
"OBSR and Ibbotson are the experts in doing qualitative and quantitative screens of funds, their managers and their strategies," says Dickinson. "They screen the funds and come up with a panel of funds that IFAs can choose in any combination. Additionally we offer five portfolios - fund of funds structures. Ibbotson and OBSR work together and do the asset allocation and come back with risk graded portfolios. They are all name brand funds and are reviewed on a quarterly basis.
"However, we do realise that some IFAs pride themselves on picking their own investments and some like to do the risk assessments themselves. We provide questionnaires to help them do this. It's all about providing choice. If the client wants to use the guarantee they can pick any funds on two conditions - the maximum allocation to equities is 75% and the maximum allocation to properties is 20%. We feel this gives people enough scope to get real diversity into their funds."
The product has generated real comment since its launch, not least because of the provider. While The Hartford is a brand name well known in the US and Japan it is not a household name in the UK. So in a market where brand awareness is all important how will The Hartford fare against the more traditional UK life insurers who currently dominate the UK?
"We are not interested in emulating the traditional British life insurance model of service and that resonates well with advisers and their customers," says Mark Stopard, director of pension products. "Once people hear about us and look at our product they see the value in it and I am extremely confident that we can compete with any insurer in the UK in terms of flexibility, expertise and cost."
Researching the product
According to Dickinson and Stopard, the decision to develop Hartford Platinum for the UK was not taken lightly and was the result of a thorough research process.
"The international group is always looking at new markets and as well as looking at the demographics we also looked at places where there was regulatory change going on," says Dickinson. "The UK was identified as early as 2002 with the pre A-Day legislation. It is also the third biggest insurance market in the world so it was a logical next step for us."
According to Stopard, the changing A-Day environment provided The Hartford with a fertile ground to develop the new product.
"A-Day had a huge impact on us and I don't think we could have been as innovative as we have been if we'd tried to do this beforehand," he says. "Before this we would have had to contend with the various regimes that were in place so while simplification is not as simple as many hoped it is still easier to navigate than the number of separate tax regimes that were in place previously."
Research into the product was extensive with IFA and customer focus groups being held to determine what the consumer need was as well as where advisers felt there was a gap in the market.
"We made a decision that we would create a product that could become a SIPP but we also felt that the core mass market needed a solid investment solution with a level of guarantees both in terms of death protection and income," says Dickinson.
"We focused around the customer proposition and the need to incorporate a flexible drawdown product around a guaranteed income stream and how that would work," he says. "One thing we discovered very early on is the level of scepticism in the market around guarantees. The guarantee had to be a very simple message - you invest in this plan and you have a guaranteed income for the rest of your life," he says. "The guaranteed death benefits were also a very important component we looked at."
The research also highlighted key differences between the retirement markets in the UK and The Hartford's key markets of the US and Japan.
"Both the US and Japan have the baby boomer phenomenon as well as the UK while the US also echoes the UK experience of the decline of the DB scheme," says Dickinson. "There is a lot more emphasis on saving in the US and everybody expects their employer to offer them a DC scheme now and there's fairly active participation. The UK is moving this way now.
"Another key difference is that in the US less than 5% of consumers buy an annuity whereas in the UK it's over 90%," says Dickinson. "In the States we are trying to get people to see annuities as a valuable component to a retirement planning scheme whereas in the UK we are trying to tell people that annuities are not the only way. We advocate people looking at annuities as a component of a retirement plan."
Who is the product aimed at and where does the flexibility lie?
The relatively low pricing structure of Hartford Platinum also means it is extremely affordable and can be used by a wide array of different people.
"We typically target the mass affluent, those with pension pots ranging from £50,000 to £250,000," says Stopard. "However, it can also be used by high net worth people who want to guarantee a level of income as one component of their portfolio. If you had £1million you might want to put £200,000 of that into a guaranteed income vehicle. In the past the only real option was to buy an annuity but what if you still want some market appreciation?"
According to Stopard the plan works best when it is bought in the run up to retirement, maybe even 15 years in advance as the guarantee enables the investor to remain invested in equities for longer.
"Using Hartford Platinum allows investors to invest a bit more aggressively than they might otherwise have done as the guarantee protects their income from market forces," says Stopard. "You get the death benefit and the guarantee is very cost effective in the accumulation phase as we only charge 35 basis points for it."
The Hartford has highlighted three key stages within retirement where Hartford Platinum can bring real benefits.
- Consolidation - This is usually the point where the individual starts to plan seriously for their retirement. Rather than putting money aside here and there the investor is looking to consolidate their funds so they can see where adjustments might need to be made.
"This is the point where the investor may find they have £150,000 in a money purchase pot; they think to themselves that they haven't done too badly until their adviser tells them exactly how much income that will buy them on a regular basis," says Dickinson. "It's at this point they realise that they need to plan more seriously. The product is designed to offer a range of investment options that enables the adviser to put together the right portfolio package to suit the client's needs. We have the Ibbotson asset allocation piece, which means the IFA can get the appropriate risk blended portfolio for their client's needs. As soon as they come into the product they have protected their starting position even though they hopefully have some way to go until retirement - they have a baseline established."
- Accumulation - This is very similar to the consolidation phase and centres around the client making the contributions they need to get to where they need to be in retirement. This can involve paying top ups for instance.
- At-retirement - Hartford Platinum is designed to offer the key features of an annuity and a drawdown. The first benefit is the guaranteed income with the potential to benefit from the upside of an equity based investment.
"In the normal course of events you would expect equities to outperform a fixed interest based vehicle like an annuity by 3-4.5pc per annum typically," says Stopard.
Communication between adviser and client is all important with statements being delivered on a quarterly basis. As well as showing the fund's asset allocation, the statement also shows policy value and the level of income that gives you. The main aim being to ensure that investors fully understand their situation and can have informed conversations with their adviser about how best to proceed.
"We send a copy to the adviser as well as the customer and they are designed to facilitate an annual check up," says Dickinson. "When advisers don't talk to customers there are missed expectations and you can't wait five years to make the changes you need."
If the client decides that Hartford Platinum is no longer the right product for them, or decide to buy an annuity at a later date then they can exit the product with no penalty charge.
"This is under the new A-Day legislation - it's a personal pension for accumulation and consolidation that can transition to a USP plan and then into an ASP plan," says Stopard. "It's all in the charging structure so its not that you buy plan A and then pay a transfer fee to get into plan B. We move seamlessly across these. If you want to take advantage of the open market option or transfer to another provider then the only penalty the client may pay will be the advice cost. We have a commission feature which if the IFA and client so elect increases the annual management charge over the six years as we recoup the payment to the adviser. Most people just expect transfer fees as well as drawdown commencement fees and we think that gets too complicated."
Another major benefit of Hartford Platinum is that it gives investors more time to plan their at-retirement strategy. For those planning on buying an annuity there are a lot of decisions to be made within a short space of time. Not only do people have to choose which annuity provider they wish to go with they also need to determine whether they need a single or joint annuity, what about leaving money to beneficiaries and what type of annuity should be chosen?
By giving investors the means to delay this decision until the age of 75, people can make more informed decisions about their income requirements as they have a better idea of their whole options.
As well as giving investors the flexibility as to when to take their income, Hartford Platinum also gives people choices as to how to take it.
"People today aren't retiring the way they used to particularly in the mass affluent bracket we are looking at - they could decide to work part time for instance," says Stopard. "They could work in consultancy and in the months they don't do that work then they would want to draw income from their pension but in the months they do work then they don't need to. People need that flexibility. People might want to go traveling for a few years and decide to keep working. You don't have to take the income - it stays in the fund and has the opportunity to grow. More IFAs have seen this issue but up until now there hasn't been a solution."
So Hartford Platinum has certainly introduced something different to the UK retirement planning market but what are its prospects?
"Things have gone very well so far," says Stopard. "I would never have expected to have run out of marketing literature or even have business on our books at this stage but we do. We recognize we are the first company to bring living benefits to the UK but it's a good sized market with sizeable growth prospects. We just need to keep educating and working with advisers to position the product with their clients."
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