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‘Almost criminal’: FCA urged to investigate unit-linked guarantees


Industry experts have branded unit-linked guarantees “almost criminal” and called on the FCA to investigate whether the products represent value for money.

Unit-linked products, commonly known as guaranteed drawdown, have been touted by providers since the 2014 Budget as a way to offer both guaranteed income and flexibility.

But Aviva head of pensions policy John Lawson says after charges are taken into account savers are unlikely to benefit, and warn: “these products only give value to the people to who run them”.

Pensions Institute director David Blake, who is leading a review into pensions market for the Labour party,  agrees while customers are attracted to steady, flexible income, “they don’t seem to realise the expense”.

He says: “People are being seduced by flexibility and guarantees but not realising they are paying really high charges.”

Blake is calling on the FCA to conduct a wide-ranging market study on the true costs of unit-linked guarantees.

So should advisers be concerned that alarm bells are being rung over unit-linked guarantees? And is the claim that the market should come under the regulatory spotlight a valid one?

Taking the third way

Although popular in the US, unit-linked guarantees have been regarded as a niche product in the UK.

But since the freedom and choice reforms were announced last year providers have revamped their offerings. Now the three main providers – Axa, MetLife and Aegon – report growing interest from advisers.

In a report on unit-linked guarantees earlier this year, Retirement Intelligence director Billy Burrows argues the products form a “strong proposition” where “the certainty that the future pension fund will either purchase a certain income or provide a minimum fund value is important”.

He says: “Their strength is evident to people like me who have wrestled with the annuity/drawdown conundrum where many clients want the best of both worlds; guaranteed income for life and pension flexibility. There is no product other than a version of a unit-linked guarantee that provide both of these in one policy.”

The products are essentially a mix of equities, bonds and cash with an insurance policy overlaid which guarantees the level of income or capital.  Consumers can choose to guarantee income, capital or both. Policies have a guaranteed death benefit attached that pays out the higher of either the value of the plan or the amount invested, less payments already made.

There is also the ability to lock in investment gains. Funds values are typically reviewed once a year and used as the new base to calculate the level of guarantee. The idea is income can only go up, and never down.

But Lawson says once fees are factored in, “the chance of outperforming the equity risk premium is not only negligible, it’s nil.

“Some unit-linked guarantees are almost criminal, the charges are so high there is little potential for upside.”

Product fees are made up of the product charge, fund management charge, and guarantee charge.

For example, clients using MetLife’s guaranteed drawdown option will be charged between 0.5 per cent and 0.7 per cent depending on the size of the investment, 0.54 per cent for fund management, and a guarantee charge of either 0.95 per cent or 1.2 per cent depending on the value of the locked-in fund.

Lawson says: “If advisers are thinking they’ll invest in these products because they give better long-term returns than an annuity then they’re kidding themselves.

“On a year-by-year basis you might outperform, but over the long-term based on historic equity risk premiums you’ve got no chance of outperforming an annuity. The only real benefit of going into this is you might have freedom to come out again, unlike an annuity.

“But if you’re going to do that, why not invest in cash? Without all those insurance charges and fund management charges, why not just have cheap straightforward cash deposits at the best rates available?

“These products only give value to the people who run them, with no value to the customer at all. I honestly don’t know why an adviser would use them. Providers are saying there’s a lot of interest in them but I don’t think that’s true.”

Figures from consultancy Towers Watson show premiums written reached a peak of £1.4bn in 2012 before dropping to around £900m in 2014.

The Blake review

Blake’s review of pension products is due to report in the summer. He will not say whether unit-linked guarantees are in the scope of the report, but warns it is difficult to see the “real costs” of the products.

He says: “Customers want flexibility and guaranteed income. But what is not transparent are the costs. In particular, using derivatives to create those guarantees and long-term options are incredibly expensive.

“There should be a campaign for the regulator to do a market study on these costs.

“I’m very much in favour of competition and transparency. The whole point about competition in a free market is knowing about pricing in order to see whether you have value for money.”

Providers are adamant the products are sufficiently transparent and do not merit a regulatory investigation.

MetLife UK wealth management director Simon Massey says: “Traditional providers are continuing to promote last century product solutions in a post-pension freedoms environment because they have not been able to come up with new innovative propositions.

“Our consumer research tells us customers are worried about running out of money, flexible access and, if possible, leaving some legacy. Our products satisfy those needs.”

Axa Life Invest UK says says critics misunderstand how unit-linked guarantees work.

Managing director Simon Smallcombe says: “There isn’t anything in the market that isn’t clear to clients in terms of the upside. Our portfolios over the year have averaged 11 per cent; I don’t think that shows the little potential for upside. That’s locked-in for the client’s lifetime.

“For instance, if you had three years of strong performance, we would cap to that performance every year and take a snapshot of your unit-linked value on the policy anniversary. And then if you have three years of poor performance just before you retired, we would base your income off the highest locked-in amount.”

Aegon’s guaranteed products are manufactured by its Irish subsidiary.

Aegon Ireland marketing director Duncan Robertson rejects claims that these are complex products offering poor returns.

He says: “We invest in very straightforward and controlled volatility managed funds and we don’t use derivatives. Our volatility controlled funds were launched 18 months ago and the performance has ranged from 4.2 per cent to 6.5 per cent per annum. Over the same period the FTSE did about 4 per cent.”

Expert view

I first came across unit-linked guarantees in the days of Hartford Life when they were called ‘variable annuities’ or ‘third way products’.

The strength of the proposition is evident to people like me who have wrestled with the annuity/drawdown conundrum where many clients want the best of both worlds; guaranteed income for life and pension flexibility. There is no product other than a version of a unit-linked guarantee that provide both of these in one policy.

There is a lot of detail, not only in the complexities of dynamic hedging but the associated costs. The process of dynamic hedging involves a certain amount of rocket science. On the basis consumers should not invest in things they do not understand, there is still some work to do in explain what happens under the bonnet. In my experience the costs are transparent. People may think the costs outweigh the benefits but this is different from saying the charges are not transparent.

There seems to be three distinct criticisms: in the long run unit-linked guarantees are unlikely to outperform an annuity; money might be better held in cash; and the products only favour the providers, not the investors. There are also suggestion advisers recommended unit-linked guarantees may not know what they are doing – clearly these are not balanced views.

We need to separate the strategy from the tactics. At the strategic level it comes down to a choice between certainty and flexibility, and at the tactical level it is about which particular solutions are most appropriate.

Retirement income planning is now about more than just a single product sale, and is increasingly about putting together blended solutions. It is incumbent on advisers to research all the potential solutions which may meet their clients longer term needs and aspirations.

Billy Burrows is director at Retirement Intelligence



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There are 19 comments at the moment, we would love to hear your opinion too.

  1. Richard Leeson 15th May 2015 at 9:46 am

    Great to see John Lawson making a stand on this issue. I fully echo his comments and concerns.

  2. Mr Lawson is providing a very one sided opinion. I fully agree that third way products have previously had a niche following in the UK but many clients do now wish to balance some certainty for the levels of income in retirement with the flexibility to access some capital if needed. This choice has only been brought about by the change in pension legislation. An annuity locks in the capital. Also there is the issue of legacy planning. If capital is invested into annuities then the capital, which is often substantial cannot be passed on to siblings. I have a handful of clients who have invested with MetLife and they have seen locked in secured income gains of around 35% over the last 3+ years….how can that be “verging on criminal”?? The issue is to clearly explain to clients the material costs of the guarantees and the effects of the charges given certain growth rate scenarios. In addition I would agree that this type of plan is more appropriate to clients with substantial pension holdings, who may be more concerned about legacy planning.

  3. Andrew Horlock 15th May 2015 at 10:33 am

    Industry experts or just John Lawson and a Labour party ‘expert’ seeking to score political points by slagging off plans that were first introduced during a Labour Government

  4. Andrew Horlock 15th May 2015 at 10:45 am

    Just as an after thought I clicked on another article which included a link to Aegon’s Retirement site where it stated that 70% of customers wanted SOME form of guarantee!!!

  5. IMO, the key to a lot of this is the guarantees. Will there be the MVA issue. If not, who stands behind the guarantee.

  6. This is a great article.

    I totally agree with John Lawson (maybe the first time!) and I don’t think that some of the other comments really answer the issues. Billy says you should consider all options: we do that and exclude unit-linked guarantees every time! If you want guarantees buy an annuity, if you don’t go into drawdown with a high equity content to achieve growth. If you want guarantees and flexibility you need to understand why the two do not go hand in hand. If you have enough of a fund you could put part in an annuity and part in drawdown.

    When looking at annuities you need to consider MGM’s Flexible Income Annuity and Pru’s Income Choice Annuity, both of which predate Budget 14 by some years!

    @Andrew Horlock this is not about politics. Everyone wants guarantees, but no-one wants to pay for them. I can guarantee that you will never be involved in a road accident … you just have to stay in the house all day every day! Are you buying??

    @MNewton your client has locked in 35% gains, but if you were offering ongoing advice on an invested portfolio you could have helped him capture gains of more than that.

    I have always felt that unit-linked guarantees offered much for IFAs: they usually pay more adviser charge than drawdown and they protect you from clients who might say ‘why didn’t you tell me to take my profits before the market fell?!’ I am sure MM readers would never see them that way, but some advisers do.

    • That is part of the issue isn’t it – “Headline got us all reading”- i.e. never let the facts stand in the way of a good story.

      It is interesting to see that AVIVA’s head of pension policy, a company that does not provide a unit linked guaranteed product, telling us, with little foundation, that these products, from competing providers, will not deliver over the long term.

      What it comes down to is meeting the clients needs effectively, having ensured the client understands the options available and then matching the solution to their needs.

      In some cases I put a ULG product as an option to a client, they see the value of the guarantees and the flexibility in it after all charges, and proceed with it. In other cases, clients are comfortable taking more risk in conventional drawdown. Other clients will be more suited to and comfortable with the ‘job and done’ annuity solution.

      I think its important not to let your own prejudices or those of the providers cloud the way you provide advice to your client.

      Also we are in the post RDR world, these products are not dictating what is paid to the adviser, that is agreed between the client and the adviser.

  7. People will always want the penny and the bun… market exposure for the growth and a safety net when the inevitable “correction” arrives. Rightly or wrongly people perceive annuities as “old tech” and markets as “volatile and unpredictable”. The attraction of these plans to clients is the balance between market exposure, the safety net and the retention of capital. Personally I find the costs eye-watering in most cases and am loathe to sign off recommendations of such plans without a detailed examination of the client data and discussions with the adviser. However, as IFAs we are “whole of market” and contracted to do what we believe is right for each client on a case by case basis… we shouldn’t be writing these plans off as “always unsuitable” based solely on our own prejudices…

  8. Matthew Barsauckas 15th May 2015 at 12:37 pm

    I agree with David, although I would add that I think your guarantee of “never being in a road accident – by staying indoors” – could be slightly suspect; vehicles have been known to come through front windows !

    My perspective is slightly different – Politics aside, we deal with numerous cases within our Advisors Network on every type of financial product and the commonality on this is generally to steer clear.

    They really are an accident waiting to happen with the standard get out clause for the provider – Such products with the label “Mis-sold” will of course be bouncing all over our desks within 12 months.

    And it is true – everyone wants guarantees and retention of capital is always the fulcrum point. The constraints however within the real world are important to highlight and all good Advisors operate within that realm.

  9. To suggest that drawdown with guarantees is verging on criminal is a statement he will come to regret, not least because it highlights a deep lack of knowledge of consumers, risk and practical solutions not to mind it being obtuse and extreme.

    For a man in his position it really is very poor indeed

  10. Stephen James 15th May 2015 at 1:08 pm

    Could you just share with us the “cost” of a traditional annuity guarantee and how anyone who has every sold/bought one can have known this. Then you enter the debate on costs of guarantees of alternatives claiming they are too expensive when you have something to compare them against.
    In the retirement arena, this is an investment for life. The main past issue with guarantees has been bond salesmen taking 8% up front, attempting to roll the investment over in five years and calling foul when their clients moan about broken promises and lost values.
    Guarantees have their place if used in the right way and explained fully.

  11. Lawson says there is no value and suggests that you may as well invest in ‘cash’… He obviously has no understanding of the products and has obviously not conducted any research of the returns from the various mix of guaranteed funds of both MetLife and AEGON. These funds even with the cost of the guarantee have well outperformed anything that cash would have produced in recent years.

    These guaranteed products suit a specific need, I believe the charges are as transparent as they can be, as they can be compared by an adviser to their clients against those products that have no guarantee. The client has an opportunity to decide and those wanting equity exposure with an underlying guarantee have accepted they are paying more for the benefit of peace of mind.

    If an IFA is not considering all the options (limited possibly by a good risk profile questionnaire and a detailed client discussion) then they are likely to be held responsible should the client take issue later on.

    I am a little concerned that some of these comments are coming from so called industry experts!

  12. This article is rubbish – and the use of the word criminal irresponsible and melodramatic. There is clearly a failure to understand these products, their niche and why they were appropriate in certain circumstances especially historically. Like Greg, I am concerned about some of the comments here. Some of these products have produced good returns for clients far exceeding cash, furthermore clients have been locked in to these gains and of course we are forgetting that markets have fallen in the past…..
    They are not products that you sell by having a quick discussion with the client – they take time to explain – but as an IFA they need to be considered. I suspect that in the past most advisers have ignored them because they could not be bothered to find out what they offer and how they work and were comfortable with traditional approaches. Charges are higher but cost is not everything.

  13. @ David Bennett: In answer to your question about who stands behind the guarantee, for Metlife, just as an example, the g’tee is supported by c.20 institutional counterparties.

    I find the trend fir these types of alarmist articles by uneducated ‘experts’ to be worrying and counterproductive to the industry as a whole.

    What drove John Lawson to write this nonsense? Large pension switched from Aviva to Metlife, Axa & Aegon perhaps?

  14. @markcoomber John did not write this article: Sam did. Sam has no axe to grind and has quoted all 3 of the unit-linked guarantee providers, to add balance. I think the headline writer has gone over the top – but then again he got us all reading.

    I think your reference to “uneducated ‘experts'” is insulting. I don’t know about John, but I have passed more than 20 professional exams over the last 35 years, and was a senior examiner for three of the CII’s pension exams. Were you educated by the MetLife salesman?!

  15. I am aware of just one complaint involving one of these products that has gone to an Ombudsman. This is now published at under DRN1371172.

    In this case, the adjudicator found in favour of the complainant but the Ombudsman overturned it.

    If this product really had been “criminal”, I very much doubt that would have happened.

    The fact is that the Ombudsman concluded that the product WAS suitable for “Mr T”. Advisers dismissing these products out of hand would do well to heed this.

    Advisers recommending them would do well to put a copy of the decision on their own client’s file and, where appropriate, to use the Ombudsman’s reasoning in their suitability documentation.

  16. So MetLife charges up to 0.7% for the product, 0.54% for funds and up to 1.2% for the guarantee. Add 0.5% for the cost of advice (and clients are unlikely to be buying these products without it) and that’s 3% a year in charges. In the current economic environment that could easily eliminate any capital growth, particularly given the constraints on how the funds can be invested.

    The only way these plans could be suitable is if the client is prepared to accept the “worst case scenario” that the plan never delivers any growth or rising income whatsoever, but if they are prepared to accept that, most would probably prefer a normal annuity knowing that they will get a higher level of starting income to start with.

    The justification for such products is always “clients say they want this”. Well, if you sell third way products and you commission a survey asking people “Do you want guarantees” then of course a lot of them will say yes. Advice does not just accept this kind of thing at face value but asks clients if they /really/ want capital guarantees given a) the astronomical cost of them b) the falls in value they seek to prevent should actually be irrelevant to the client. (If they’re not irrelevant, they shouldn’t be investing that money.)

  17. Gordon Sinclair 19th May 2015 at 4:09 pm

    Isnt he really just saying “more complex thing costs more than less complex thing”?

    Its bad enough the media and politicians hammering “rip off pensions” without those within the industry banging on about it too.

  18. “Sascha Klauß 19th May 2015 at 12:16 pm
    So MetLife charges up to 0.7% for the product, 0.54% for funds and up to 1.2% for the guarantee. Add 0.5% for the cost of advice (and clients are unlikely to be buying these products without it) and that’s 3% a year in charges. In the current economic environment that could easily eliminate any capital growth”

    I believe with these type of products they have a lock-in which is outwith charges. That is the selling point from memory. So there may be 4% growth in one year and yes 3% is taken in charges but the 4% lock-in would be confirmed on anniversary and any future benefits are based on that higher value.

    HOWEVER, should the client wish to LEAVE, then they would simply get the fund value at that time, which will have been affected by all the ongoing charges along with up/down volatility.

    So if the client is suitable to stay with the product for life, then it’s all rosey. Should they want to leave, its the gamble on how the fund has performed after charges. If the gloves fits, that seems fair to me.

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