Third way annuities could prove costly

Alastair Buchanan, head of corporate communications at Royal London, said that many providers looking to enter the market "would definitely not want to launch at the current time, as they would be taking on a lot more risk than expected," warning that the variable annuity market has the potential for large capital losses.

Buchanan said that many of the product providers in the US, such as AIG, had run into trouble because they had leveraged income to meet guarantees by investing in corporate bonds, which suffered such a drop in value that life insurers had to be bailed out by the US Treasury. Buchanan fears that some insurers with business in the UK may be next in line to ask for cash.

However, Peter Carter at Met Life, which has a bond bracketed in the third way annuities market, said: "We have a sophisticated hedging system in place to meet them [guarantees], buying futures and options contracts from over 20 counterparties - it's not something that we consider an issue."

In October 2008, Aegon, which has almost 60% of its funds under management in the US, received a E3bn cash injection from the Dutch government but denies that this was taken to cover the guarantees on its 5 for Life variable annuity.

"This capital addition is completely unrelated to our third way annuities," said Lesley McPherson at Aegon UK.

"E20bn was made available by the government in Holland, and we felt it would be prudent to take a portion."

McPherson stated that the injection was merely to sustain capability and that it was not needed or required by the company.

gareth.shaw@ft.com