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Does guaranteed drawdown have a future?

In recent months, providers have reassessed their plans on offering guaranteed drawdown products

Pension-Pensions-savings-retirement-piggy bankDemand 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?”

MetLife UK closes to new wealth management business

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.”

Why are advisers put off by guaranteed drawdown?

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.”


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. You cant cite Iress quotations as an indicator because we have to do annuity quotes for comparison purposes on all pension drawdown business.

    • Seconded. A handful of those fixed term annuity quotes will have been mine. Number of fixed term annuities I have actually arranged: zero. Where we have a client who e.g. wants to withdraw their pension using their remaining personal allowance each year, it makes sense to get a fixed rate annuity quote to show that we have considered them alongside income drawdown – and discounted them as shockingly bad value.

  2. The principle drawback of these GDD plans is the low levels of income they allow relative to a conventional annuity, particularly an underwritten/enhanced one. They’re so low, in fact, as to virtually eliminate the prospect of the guarantee ever needing actually to be called on. Thus, they’re weighted in favour of the insurer.

    I’m not quite sure why MetLife pulled out ~ was it lack of demand or lack of profit? Or maybe both?

    Personally, I still favour the idea of a retirement income plan designed specifically to utilise the entire fund over the remaining (underwritten) lifetime of the plan holder, subject to a moderate level of investment growth. The guarantee would come into play if the plan holder lives longer than expected and if investment performance is seriously lower than anticipated.

    If investment performance turns out to be significantly better than anticipated, the level of income being paid could be ramped up a notch.

    Either way, the level of income payable should (in theory) be rather better than an annuity with no loss of security.

    A measure of mortality cross-subsidy could be designed in so that on early death, perhaps only half the remaining fund would be returnable. The insurer would keep the rest to offset the cost of the guarantees for everyone else.

    I think that such a product could be highly attractive. But so far no providers seem to be interested. Prudential shied away on the grounds that the guarantees would be too costly. That’s actuaries for you I guess.

  3. New Solvency regulations have made these products even more uneconomic for insurance companies than they were before (hence the recent pull outs. The real culprit though is the perpetually low interest rates we’re experiencing and seem set to experience into the future. The products are extremely unlikely to reappear unless there’s a fundamental shift in interest rates in particular. There is apparently also strong demand for anti-ageing pills, but they aren’t currently produced!

  4. I would suggest that guaranteed drawdown does have a future but it doesn’t need to be a 100% guarantee.

    I know there are other factors in play but the main purpose of a pension pot is to provide a lifetime income. Attaching a 100% guarantee to drawdown is expensive because of the risk that, if 1 fails then they all fail, at least in a particular cohort. Reserves have to be held for such eventualities which is costly. If the priority is a 100% guarantee it will be paid for life then the solution is an annuity.

    Only if a 100% guarantee is not required then drawdown is an option. But that still leaves scope for some sharing of risk between a policyholder and an insurer. So guarantees that form a limit to a potentially severe loss, rather than 100% cover, should be more relevant to drawdown.

    Of course, with drawdown, a loss arises when someone live too long and runs out of money. No product will protect investors from running out of money if they spend it all in 3 or 4 years but working out whether the pot needs to last for 30 or 40 years is a different matter. It is that area where insurers can assist with guarantees and longevity swaps and deferred annuities will probably be useful.

  5. GDD is a market place developed by the providers, an expensive contract , where your client pays the provider to give them their money back

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