Scottish Widows is exploring the development of a drawdown product aimed at the mass market.
The product, which could enter the market as early as this year, is expected to give clients the flexibility of drawdown as well as some form of guarantee, although it may not be classed as a ‘hybrid product’.
In a new online magazine for advisers, the provider discussed the income drawdown market and latest criticism from the regulator about the lack of innovation in the space.
The firm's head of fund proposition, Iain McGowan, said the government’s expectations that the pension freedom reforms would drive innovation in the market "has not yet been fully realised".
"In the drawdown market in particular, pressure is growing on the industry to support sustainability of income in retirement," he wrote.
He pointed to the Financial Conduct Authority’s (FCA) retirement outcomes review interim paper, which last July flagged concerns around the level of innovation it had seen since the pension freedoms took effect in 2015.
In particular, the FCA had criticised a lack of products for the mass market which would combine flexibility with an element of guaranteed income.
Mr McGowan wrote: "The preference for both investors and advisers has been to enter drawdown, rather than buy an annuity.
"However products that provide investors with sustainability of income, potential for capital growth and, ultimately, peace of mind, remain conspicuous by their absence.
"This is where the main innovation challenge lies, as there are competing needs to be met."
Earlier this month AJ Bell FTAdviser excessive workload stemming from regulation made it difficult for providers to devote resources to any form of innovation.
Mr McGowan pointed to providers who had managed to bring products to market but later failed, such as Metlife, which launched a low-cost guaranteed drawdown proposition in 2015, but it later closed it to new business.
Rival provider Partnership also binned its hybrid drawdown-annuity product following the firm’s merger with Just Retirement in April 2016.
Axa Life Invest pulled its suite of hybrid drawdown-annuity products in October 2016, five months after its latest version, Secure Advantage+, was launched.
Meanwhile Aegon UK’s chief executive has admitted the sale of guaranteed drawdown products has disappointed.
Mr McGowan wrote: "Simple, off-the-shelf solutions designed specifically for sustainability of retirement income, while also providing access and flexibility, remain thin on the ground."
He said advisers were navigating this area by helping clients manage a phased strategy, initially with drawdown followed at a later stage by annuitisation, which offered a combination of short-term flexibility and long-term certainty and longevity hedging.
"What it doesn't do, however, is blend the two in a way that ensures the drawdown investment stage doesn't undermine the ability to provide certainty later in life," he wrote.
"This is why the focus now is on drawdown investment strategies that counter the various risks faced by investors in drawdown, not least sequence risk, pound-cost ravaging and inflation."