Foreign & Colonial is offering a service to help life offices overcome the black hole of liabilities created by offering guaranteed annuities.
F&C says the problem arises because the ultimate size of the guarantee is unknown. It is offering a tailor-made service to give life offices a portfolio designed to compensate for interest rate movements.
F&C says it will give life offices a specific analysis of their liabilities and their risk characteristics. It will then advise on a portfolio made up of bonds and interest rate instruments to offset liabilities arising from guarantees.
The investment manager says many life offices have yet to impose measures to counterbalance the effect of further falling interest rates.
It says its service offers insurers greater freedom than current options, which it says are crude, and that most companies are put off by the cost of managing the cost of guarantees in-house.
F&C stresses it cannot make the liabilities disappear and that life offices still have to set aside reserves.
Product development director Derek McLean says: “Many UK life insurance companies are in the position of having sold a number of pension products that contain guaranteed annuity options but not having an effective hedge against interest rate movements.”