|
British life assurers, under attack from nimbler rivals, are fighting back. Their weapon: a more flexible retirement savings product that has already taken the US and Japan by storm.
Life assurers hope that selling these products, known as variable annuities (VAs), will take off in the UK too and stem the tide of customers saving for retirement through rival operators, from banks to fund managers.
"This is the natural space of insurance companies," says Mark Laidlaw, finance director of Aegon UK. "It is a reminder of what insurers can do."
After taking off in the US about five years ago, VAs now have about $1.5 trillion (Dh5.51 trillion) in net assets.
Over the past couple of years, US insurers MetLife, Hartford and Lincoln National have begun selling VAs in the UK, while the UK arm of Aegon, the Netherlands-based insurer, introduced a non-pension VA in 2006. But the product has had a low profile until now. With some of Britain's biggest names, including Aegon, Standard Life and Prudential, preparing to launch VAs, the product is set to hit the mainstream.
The UK versions of VAs provide customers with exposure to riskier but higher returning assets, such as equities, but with explicitly priced guarantees, either to protect their capital, or provide a minimum level of income.
VAs are expected to appeal to those in or approaching retirement. Facing perhaps 20-30 years as pensioners, they need their pension pots to continue to expand, but are also worried about outliving their savings, or by them being eroded by market movements.
But the guaranteed income provided by a VA comes at a cost.
Tom McPhail, head of pensions research at Hargreaves Lansdown, the independent financial adviser (IFA) and broker, says the cost of the guarantees, fund management, administration and the services of an IFA, can be up to four per cent. "If you are getting investment growth of seven per cent, that is a pretty big chunk being taken out," he says.
Opportunities
All the same, some analysts are excited about the scope for VAs. Roman Cizdyn, analyst at Oriel Securities, recently likened the development of the market to the introduction of unit-linked policies in the 1960s, which he described as "the greatest transformation of UK life assurance over recent decades".
He said in a note: "We believe we are about to see a major development in the UK that may not be of the same scale as unit linking, but is likely to introduce a fresh approach in the savings market."
If insurers can provide the guarantees for less than they charge the customer for them, and also hold on to clients' money for longer, then the products could prove lucrative.
Most important of all, the development of VAs gives insurers a chance to reassert their role in the long-term savings market.
Life offices tout their ability to provide guarantees, which require complex financial management as well as their core actuarial skills to determine how long people will live.
"This is what insurance companies should do, and do well, which is take risk on behalf of the individual," says Gary Shaughnessy, managing director, retail life and pensions, at Prudential UK. "[We] have been doing this for the last 150 years."
According to Ned Cazalet, the independent life assurance analyst: "Definitely [life assurers] are saying, 'if we do anything at all we should be there to take the sharp edges off of life for people'.
|
