From the blog: Insurance giant Prudential is leaving the UK annuity market, but analysis of ‘at retirement’ product offerings show that guaranteed income still has a significant role in the post-freedom and choice savings world.
As the UK’s largest insurer by market capitalisation, it is tempting to read the company’s exit as a sign of the death of annuities, brought about by a trifecta of low interest rates, poor value for money and consumers flocking to take advantage of new freedoms.
Indeed investment consultants will often recommend retaining equity exposure in default funds for older savers, in recognition of the fact that many leave some money invested after first drawing a pension.
As the UK’s largest insurer by market capitalisation, it is tempting to read the company’s exit as a sign of the death of annuities, brought about by a trifecta of low interest rates, poor value for money and consumers flocking to take advantage of new freedoms.
If there’s still a period of time where money is invested, having some equity exposure makes sense
Paul Leandro, Barnett Waddingham
Indeed investment consultants will often recommend retaining equity exposure in default funds for older savers, in recognition of the fact that many leave some money invested after first drawing a pension.
Analysis by financial services consultancy Altus shows a sales volume drop-off of almost two-thirds in the immediate aftermath of the pension freedoms being introduced, followed by a further 40 per cent decline to the present day.
That Prudential and other insurers have pulled out of the market is not entirely surprising. The Pru had previously announced its intentions to withdraw from new business, and will now be directing existing customers towards a panel of other providers.
Many insurance firms are also well poised to redirect business efforts towards bulk annuities, drawdown products and platforms.
Resilient despite rates
But ABI data show that annuities, while now lagging behind drawdown sales and cash, still play a significant role in the at retirement market, suggesting low rates are not enough to overcome saver risk aversion.
Source: Association of British Insurers
And while traditional annuities have undoubtedly taken a hit since freedom and choice, annuities and annuity-like features continue to crop up in retirement solutions.
“I think they do still have a role to play, but a very different role,” said William Watling, principal consultant at Altus. “Many more advisers are working out what the guaranteed income is that a client needs [...] and then topping that up.”
As such, flexible annuities and fixed term annuities will continue to prove popular, and tend to provide better interest rates than traditional products.
Trustees more than anyone will be wary of trying to time rises in yields, but Watling noted that a post-Brexit relaxation of Solvency II regulations could ease the demand for fixed income and boost annuity rates.
Equity still key for DC provision
So what does this all mean for DC trustees trying to optimise member outcomes? Schemes have offered separate funds that reallocate assets towards either cash, drawdown or annuities for some time.
Annuity v drawdown: Dispelling myths
From the blog: The lead-up to the launch of the pension reforms in April last year created pent-up demand in the market, resulting in many opting to take advantage of the new freedoms and draw down a lump sum.
However, this requires engagement from the member, meaning such funds often attract relatively small amounts of investment.
“Focus has to be on the default investment arrangement, and that’s trying to predict how the majority of members will draw benefits,” said Paul Leandro, head of Barnett Waddingham’s north and Scotland team.
Savers increasingly see their pension as providing income, cash, and even debt relief.
Leandro doubted that traditional annuity use would continue to be widespread, and said equity exposure remains appropriate for pensioners taking cash, as most do not access their entire fund at once. “If there’s still a period of time where money is invested, having some equity exposure makes sense,” he said.
