Hybrid annuity launch paused due to 'lack of demand'

Hybrid annuity launch paused due to 'lack of demand'

State Street Global Advisors has paused the launch of its hybrid annuity citing concerns over demand for the product.

State Street said in October last year it was considering to launch a deferred annuity drawdown hybrid product in the UK but was waiting until the “time was right” as it thought Solvency II capital requirements were keeping providers from offering this type of product.

But FTAdviser has learned that one year on State Street is no closer to launching the product as it now believes there is not enough demand due to the number of individuals in the UK still holding a defined benefit scheme.

Alistair Byrne, head of EMEA pensions and retirement strategy at State Street Global Advisors, said: “The UK is not as mature a DC market as in the US so a lot of the people entering retirement at the moment are people who have also had a DB pension scheme for part of their career. 

“In a sense, these people have already got a balance between flexibility from their DC pot and a guaranteed income from their DB scheme. 

“Therefore, they do not need our deferred annuity product at the moment because more by accident than design they already have a secure income.”

A deferred annuity is a type of annuity contract that delays income, instalments or lump-sum payments until the investor elects to receive them.

State Street has been working with the University of California to launch a deferred annuity drawdown hybrid product in the US since last year.

The product would allow retirees to use a proportion of the accumulated assets at age 65 to purchase a deferred annuity to start payments at aged 80.

This means at the point of retirement participants will buy, unless they opt out, this annuity with a portion of their savings and use the rest for their expenditure in the short term.

Mr Bryne said demand for this product in the UK will come when future generations enter retirement and DB schemes decline.

He added: “Future generations and people who came into pensions after DB schemes were closed to new members will mainly have DC savings so will face the challenge of guaranteeing a secure income.

"Therefore one of the issues with launching a deferred annuity product is timing and deciding when there will be enough people in the marketplace who really need this solution.”

Another issue is Solvency II regulations which could drive prices up, he said.

Mr Bryne said: “There has been issues around launching deferred annuities in the UK as they could be more expensive than they are in the US because insurance reserving requirements are tighter. 

“Solvency II is a complication but the driver of the product delay is that people have a mix of DC and DB pots and do not need this solution right now.