MetLife’s decision to increase prices on its income for life and capital guarantees is likely to trigger price hikes by other players, warns Annuity Direct director Stuart Bayliss.
Money Marketing revealed last week that MetLife was pushing up prices as well as dropping the maximum equity exposure available on its guarantee from 85 per cent to 60 per cent.
The income for life guarantee will now cost between 70 and 145 basis points, depending on the equity exposure, while the cost of the capital guarantee will rise by between 130 and 180 basis points.
Bayliss says some variable annuity providers are subsidising the increased cost of guarantees but he predicts they will struggle if the derivative market remains volatile for some time.
He says: “It is almost inevitable that other players are going to have to raise their prices because continuing to subsidise guarantees will start to hurt.
“There is a view that even at MetLife’s new price they are subsidising the guarantees. Knowing what the market place is indicating for these guarantees and knowing what concerns there are in the States, it is almost inevitable that this might not be the last price hike from MetLife and that the others will probably have to put prices up as well.”
But despite price hikes, The Retirement Adviser head of retirement planning Nick Flynn is optimistic, suggesting that the third-way market may get a boost from plunging lifetime annuity rates.
He says: “As lifetime annuity rates fall, alternatives become more attractive. Annuity rates have been at reasonable levels over the last few years, making alternative retirement income products less attractive when the income is directly compared. But rates are slipping at an alarming rate, which may be the boost that is needed for third-way products. I think clients and advisers will start showing more interest as rates decline.”