A number of life companies that are facing the prospect of the new business tap for conventional single annuities being turned off in the wake of the Budget pensions overhaul are said to be looking at launching so-called ‘third way’ unit-linked guarantee products, FTAdviser understands.
Unit-linked guarantees are products written under drawdown rules and positioned in the middle ground between conventional annuities and income drawdown, which offer some guarantee over income or capital values while allowing a fund to remain invested.
Another investment-linked alternative is the with-profits annuity, which similarly provides a base guaranteed income that is augmented annually by returns from the underlying fund.
Despite unit-linked products being immensely popular in other western markets such as Japan and in particular the US, where they have long out-sold conventional annuity alternatives, they represent a small part of the UK at-retirement market with only three active providers.
MetLife’s UK arm is the market leader with the company quoting a 75-80 per cent market share, with Axa and Aegon their only competition.
FTAdviser understands that a number of other life companies are now rapidly seeking to enter the space as their single annuity business suffers in the wake of the bombshell Budget, which removed all drawdown limits and promised “no-one will need to buy an annuity”.
Partnership, the enhanced annuity specialist which has taken a hammering since the announcements in March, confirmed it was looking at the space.
Nigel Barlow, director of product development at Partnership, said it is “looking at third way products” and added that he could not “imagine any provider in the market won’t be looking at them”.
Mr Barlow added that as the new rules, to come in next year, haven’t been finalised, “it is too early to say what the final shape of a product will look like”.
He said: “We fully expect more people will want more flexibility while a certain proportion will still want guarantees and we need to build them in a simple and understandable way.
“Some people will still appreciate a longevity guarantee but others may want to take more risk.”
Dominic Grinstead, managing director of MetLife UK, said “everyone” would be looking at the space and that “all big life companies” were likely to move into the space in the longer term, as they seek new business lines to replace lost revenues.
Simon Smallcombe, managing director of Axa Life Invest in the UK, said he would be “very surprised” if there was not a “thrust” of innovation, in particular a “blurring of the edges between drawdown and annuities”.
He said: “Innovation will be abundance. Look at the US market... vast amounts of money goes into guaranteed products.
“The unit-guaranteed market in the UK is currently £1-£1.5bn and I see this market getting onto £3bn in the next two years. In terms of premium sizes, drawdown will be at the lower end and people will need to stay invested to grow assests to maintain income levels.”
In recent weeks, life insurers have revealed major slides in single annuity sales, with L&G revealing a 40 per cent Q1 drop, Prudential 35 per cent and Aviva 21 per cent. Just Retirement and Partnership said they had seen sales plummet 50 per cent drop in the weeks since the Budget.
Aviva yesterday told FTAdviser it had “sped up” product development since March and that it is set to launch a suite of alternative retirement income options in the “near future”. LV, which provides with-profits annuities, has today announced it has set up a new retirement income product development team.
Mr Grinstead said: “A huge amount of commentary currently suggests that drawdown options will grow in the coming years, and that drawdown with guarantees will grow. Fixed-term annuities will also see growth longer term but they need a better backing of assets than fixed income.”
