The Big Question

Each month we ask leading industry figures to answer one big question

LV=’s recent entry into the fixed term annuity market has been described as a “clear pointer to profound changes sweeping across the retirement income market.” What do you think these changes are likely to be?

Peter Carter is head of product marketing at MetLife
Demand from clients and advisers for increased flexibility and choice in the at-retirement market is driving product innovation, and providers are responding with a range of solutions.

Falling annuity rates and investment returns have given added impetus to the drive for new solutions.

Unit-linked guarantees have established themselves as part of the mainstream since launching in 2007, and are continuing to evolve with an expanded choice of guarantees on income and capital, plus term guarantees and increased income at key ages.
Advisers and clients should expect more innovation and more choice in the years to come with the emphasis on flexibility and guarantees.

Rob Childs is head of operations for pensions & actuarial services at DST International
We welcome this product launch and believe the trend of new providers as well as new and innovative products entering the UK retirement income market can only be beneficial to the end consumer.

With increasing life expectancy, the prevalence of enhanced annuities, low interest rates and Solvency II on the horizon, it is becoming ever more difficult for healthy middle Britain to extract best value from their accumulated pension funds. We believe the market will continue to develop new products, new software solutions and new advice models to meet this need.

Andrew Gadd is head of research at The Lighthouse Group
The profound changes sweeping across the retirement income market in the future will in my opinion be greater flexibility, in terms of legislation from the Government and innovation from product providers. This is due to the basic fact that population projections suggest that the number of people aged 65 and over in the UK will almost double by 2055. Couple this with the fact that The Department for Work and Pensions (DWP) estimates that around seven million people are not saving enough to deliver the pension income they are likely to want, or expect, in retirement and without greater flexibility and innovation in terms of pension income then the prospects for many are grim indeed.

Tim Gosden is head of annuity product development at Legal & General
The key reason why alternative annuity products struggle is because most consumers demand a guaranteed income. In recent times we’ve heard lots more on the demand for new alternatives and more flexibility, but in most cases it involves people taking more risk which in reality is something only those with bigger pots can afford to do.

So conventional annuities remain top choice and maybe the bigger question is whether anyone can launch an alternative product that will have the same mass market appeal? That remains to be seen.

Steve Lowe is marketing director at Living Time
There is a huge need for both innovative solutions and rules that ensure retirees make active and intelligent decisions, not just at retirement but through retirement. Providers and advisers reacting to these changes are creating the foundation of a truly 21st Century retirement income market.

My personal prediction is that fixed term annuities will account for one in four retirement sales during the next five years.

Nigel Orange is technical support manager (pensions) at Canada Life
Having a fixed, guaranteed level of income without the need to purchase an annuity has wide appeal but are there any changes around the corner that might add to the attraction of “Third Way” annuity products? There is one essential problem that these products do not solve and that is the requirement to purchase an annuity at age 75! (This assumes that rolling into an alternatively secured pension (ASP) is not everyone’s choice).

If the downward trend in annuity rates continue and with Solvency II (European Directive) adding to the uncertainty, these products can leave retirees exposed to the risk of falling income at a time when a significant proportion could live on for a further fifteen years or more!

Brian Please is business development manager at Xafinity Paymaster
Temporary annuities clearly have their part to play in offering an overall set of annuity related products that meet the needs of today’s retiring population. The maturity value guarantees contained within the product, evidence an appreciation of the value and importance of leveraging and accessing the underpinning assets for decisions later in life which are valued by customers.

I do wonder whether part of LV=’s response is driven by the potentially damaging issue of Solvency II in the UK annuity market particularly for lifetime annuities.

Paul Smith is chartered financial planner at Perspective Financial Management Ltd
LV=’s third way fixed-term annuity could be the first in a long line of innovative products aimed at an ever-increasing market.  With the vast sums of decumulation monies coming to the retirement market over the next few years, product providers need to offer advisers and their clients the retirement vehicles demanded to reflect the changes to traditional working and retirement strategies.

Flexibility is no longer an option, it is a must-have. With clients needing flexibility in terms of investment strategy, tax planning and levels of income more providers will bring innovative plans to the market place.

Mark Stopard is head of marketing at Sun Life Financial of Canada
The LV= fixed term annuity launch is indicative of the need for a wider range of flexible retirement products in the UK and is a positive move forward for the retirement market as a whole.  A lack of consumer awareness about flexible retirement solutions means that too often conventional annuities are bought by default.

Fixed term annuities provide welcome flexibility but truly flexible retirement solutions are at the forefront in meeting the needs of consumers, and in my opinion represent the most interesting part of the market. Not only do they allow the individual to select the level of income they need. They also mean that the fund stays invested, which is essential to help mitigate the risk of inflation eating into the real value of a fund.

Matt Trott is head of annuities at LV=
We have seen huge changes in the pattern of people’s retirement recently. To cope with this increase in living expense, people are changing the way they look at retirement. In particular, people are much more likely to work into their retirement, perhaps on a part time basis.

The Protected Retirement Plan effectively gives customers a break clause to review their circumstances and change their retirement income options at the end of the plan. Although the PRP will not provide the solution for everyone approaching retirement (it is certainly not risk free), the need for flexibility is likely to appeal to a large section of the market and should be considered as an alternative to a lifetime annuity.

Andrew Tully is senior pensions policy manager at Standard Life
There is a need and desire from consumers for a product which sits between a traditional annuity and drawdown. People like the guaranteed income stream provided by an annuity, but also want flexibility. Drawdown provides this flexibility but has a higher risk than some people are comfortable with, especially those with smaller funds.

A well-designed, reasonably charged, third way product has the ability to provide the best of both worlds. However, given the current financial climate, providing a solution which meets all of a customer’s needs and wants, at an attractive price is not a straightforward task.

Tim Whiting is proposition director at The Annuity Bureau.
The fixed term annuities market is increasing and we believe that more insurance companies will begin to enter the market as they explore alternatives to the traditional inflexible annuity. Particularly as income drawdown solutions are not a viable option for all clients due to increased cost and/or level of investment risk.

Retirement for many can be seen as a three-act play; a busy and active opening, a long but calm middle, and a finale that’s potentially short and expensive. The fixed term annuity provides a level of choice not available with a conventional annuity. Clients can have the flexibility to revisit their income as the changing scenes of their retirement unfold.

Ian Wilkinson is pensions director at Rutherford Wilkinson
The framework for products such as fixed term annuities was set out in the A-Day legislation, and their appeal is driven by the (possibly misplaced) perception of poor value traditional annuity rates. It has taken providers some time to embrace this framework, however there are several factors coming together to make such plans more viable from the providers’ point of view.

Firstly the demographics, as the size of the population approaching retirement grows larger, so does the market for retirement income of all types.

Secondly, the switch away from final salary schemes, where choice at retirement is effectively limited to ‘lump sum or not?’ As the proportion of the retiring population with money-purchase funds, with which they have choice and control, grows so will the overall size of the retirement market and therefore the market for the niche products.