Helen Morrissey outlines the results of the latest Retirement Planner Inquiry into third way products to see how advisers perceive this market
The so called ‘third way’ product space has grown rapidly in recent years as providers continue to develop innovative solutions to bridge the gap between the stability of annuities and the flexibility of income drawdown.
The move began in mid-2006 when Living Time launched its fixed term annuity. This was closely followed by Aegon and MetLife’s launch of variable annuity products, a concept well known in the US but previously unheard of in the UK.
While fixed term annuities initially struggled to gain a foothold in the market the entrance of LV= was seen as a positive move. Other providers looked to develop alternative solutions with Prudential and MGM Advantage entering the asset backed annuity space – the market was literally teeming with activity.
However, despite this strong level of activity the third way sector has not been without its problems. Variable annuity providers found themselves having to re-price the guarantees offered in the face of market volatility leading to some choosing to exit the market altogether. Despite significant marketing campaigns designed to highlight awareness of these products, many advisers said complexity and high costs put them off writing business in this area.
In December 2010, Sun Life Financial of Canada became the latest casualty when it closed its UK operation to new business. However, as one door closes another opens as Axa Wealth recently launched its variable annuity product into the market. In this research project we wanted to gauge adviser sentiment towards the third way sector; what challenges does it present to advisers and what is its long-term viability?
This research was carried out via email with 191 Retirement Planner readers taking part in the survey. Of those who took part, 60% said they recommended third way products to their clients while the remaining 40% did not.
Those who do not recommend third way products
There were many reasons why participants said they chose not to recommend third way products to their clients. Almost a quarter (23%) said they didn’t know the products well enough, while a further 19% said they preferred other options.
Complexity and a lack of knowledge proved obstacles for 15% of respondees, while costs proved a deterrent for 6%. Concerns over providers proved problematic for 4% of participants while a further 4% said they had no suitable clients. See question one below:
Please tell us why you do not recommend third way products to your clients?
23% Don’t know them
19% Prefer other options
15% Lack of knowledge
4% No suitable clients
4% Providers concerns
4% We don’t provide
Those who do recommend third way products
We asked those who said they did recommend third way products to tell us which products they recommended so we could see if any were rated particularly well/badly. Fixed term annuities proved most popular with our survey participants with 75% saying they recommended them. Variable annuities were highlighted by 63% while asset backed annuities were recommended by 55% of participants. See question two below:
Which products do you recommend?
75% Fixed term annuities
63% Variable annuities
55% Asset backed annuities
There were numerous reasons why these products are being recommended. Flexibility was cited as an important reason while guarantees were also highlighted as bringing certainty for clients. Others said they felt these products better suited their clients’ circumstances and attitude to risk while others said these products were important in keeping clients’ options open rather than locking into an annuity early on in retirement.
We also asked the survey participants to tell us how much they felt they understood about the different third way options available. Again fixed term annuities came out top with 84% saying they felt they had a good understanding of these products while a further 16% said they felt they had a basic understanding. Next in line were asset backed annuities with 76% of those who provided a response saying they had a good understanding of these products with 24% saying their understanding was more basic. Variable annuities followed close behind with 75% of those who provided a response saying they had a good understanding of the product range with 25% saying they had a basic understanding. See table below:
How much do you understand about how these third way style products work?
|Good understanding||Basic understanding||Neutral||Do not understand||Total|
|Asset backed annuities||76%||24%||0||0||100%|
|Fixed term annuities|| 84%
Overall, 98% of those who provided a response said they had a good idea who these products were aimed at with only 2% saying they didn’t. See question three below:
Do you feel you understand who these products are aimed at?
2% Don’t know
However, despite a high level of understanding there remains a need for more information and education to be provided if awareness is to be increased further. Almost half (45%) of those who provided a response said there was a need for more training to raise awareness with 5% of responses saying it is the providers’ role to do this. Just over a fifth (21%) said more marketing and press coverage was needed in this area.
The complexity of these products has often been highlighted as a major sticking point with these products and this was reflected in the 12% of respondees who called for simpler literature to increase awareness. Interestingly 5% highlighted the need for more providers to operate in this area as one of the bigger players, Sun Life Financial of Canada closed to new business. See question four below:
What can be done to raise understanding of these products?
12% Simpler literature
9% Public awareness
5% More providers
5% Product providers role
3% Don’t know
Despite this, the expectation is that new providers will look to enter the third way market during 2011. Axa has recently launched a variable annuity product while Aviva is looking to go into the asset backed annuity arena.
So despite early teething difficulties it would seem that awareness of third way products and how they should be used is growing. A whopping 67% of those who took part in the survey said they thought they would play some role in mainstream retirement planning with a further 28% saying they would play a large role in the future. See question five below for details. It will be interesting to see how this market grows over the coming years and how it affects the retirement planning market overall.
Do you feel these types of products will ever become part of mainstream retirement planning?
28% Yes to a large extent
67% Yes to some extent
2% No opinion
2% They will not enter mainstream retirement planning
Lack of innovation for solutions
Some 2,000 consumers affected
Achievements, charity work and other happy snippets
Appetite has suffered since Brexit vote
'Failure to pay attention can result in enforcement'