Demand for guaranteed drawdown products will bring providers back to the market in the future, commentators predict, despite a wave of recent exits.
In recent months, providers offering guaranteed drawdown products – and those planning on entering the market – have reassessed their plans.
A notable exit was Metlife UK, which announced in July it was closing its wealth management arm to new business. In 2015, the provider launched a lower-cost guaranteed drawdown product, which it claimed was the first genuine innovation since the pension freedom reforms.
In the same month, Old Mutual Wealth and Royal London poured cold water on potential guaranteed drawdown launches. Old Mutual Wealth cited cost to the customer of providing guarantees as one reason for reassessing.
Elsewhere, Aegon is selling its Irish business, which reinsures guaranteed drawdown products in the UK. Speaking to Money Marketing after the company’s interim results announcement, UK chief executive Adrian Grace said the company is reviewing the future of its Secure Retirement Income product, which will stay open until at least the end of the year.
He said: “We have always said there is a market in a pension freedoms world for customers looking for certainty and guarantees. At the same time, customers and advisers need to use those products. At this moment in time, we are doing quite a lot of business but is it a viable product?”
But despite providers rethinking their options on guaranteed drawdown products, commentators believe demand for the products will return.
Indeed, data published last month by technology firm Iress show fixed-term annuities account for nearly a quarter (23 per cent) of all quotes generated through its exchange portal compared to 15 per cent at the end of 2015.
KPMG partner David Fairs says one challenge for providers is that the market for these products is not currently developed, which could relate to low interest rates impacting the yield on guaranteed drawdown products.
He says: “As defined benefit schemes become more a thing of the past and people start to build up meaningful defined contribution [pots] then the demand will start to increase but at the moment it is a pretty niche market and there is not the volume there. If you have not got the volume and yields are low then these products look expensive and charges can be high.”
The Lang Cat last year published a report challenging providers to better explain guaranteed drawdown products as it considered advisers are wrongly discounting guarantees as part of the retirement planning process.
The Lang Cat principal Mark Polson says providers still face an uphill battle getting advisers to include guaranteed drawdown products in their recommendations due to complex pricing and because they do not always integrate well with platforms.
He says: “If we are heading into a period of extended volatility, if we could see a correction in the market and people’s plans for drawdown might get a bit of a knock, it will be interesting to see if demand for guarantees picks up.”
Polson adds: “I’m in favour of advisers having a broad arsenal of things to choose from and this is a tough one because you can feel that there is something there but it is tough to make these products, they are expensive to use and it is hard to get advisers to sit still for long enough to give them a hearing.”
Advisers have previously said a combination of costs and reduced drawdown income put clients off guaranteed drawdown products.
The Ideas Lab director Robert Reid says: “It is probably the old story that if you put a guarantee into something it doesn’t make it a particularly great thing to buy because of the cost of the guarantee. I have always felt it is an amendment to what is available, which satisfies a perceived need but dilutes the income a person gets.”