We welcome the high level of scrutiny and debate that keeps providers on their toes but we do not want IFAs or consumers to be left with an unbalanced picture of one of the few genuine product innovations to have hit the UK market in the last decade.
First, the US court cases relate to equity indexed annuities sold by some US life offices. These are totally different from the variable annuity products that The Hartford sells in the UK. We do not sell equity indexed annuities in the US either.
The distinction is important because you do not have to be registered to sell equity indexed annuities in the US. The Minnesota attorney general has uncovered a number of misselling cases where the people who sell equity index annuities are not licensed or trained in suitability issues. None of them are obliged to follow the type of treating customers fairly principles we have in the UK precisely because they are not regulated. There is no obligation to be transparent on fees or sales practices.
In contrast, variable annuity products are only sold by fully licensed professionals who understand the needs of the retirement market. We put great store in IFAs and we only sell our products via intermediaries.
Equity indexed annuities are also different in design and charges from variable annuities. There is far less flexibility with equity indexed annuities. Commission on these products can be as high as 11 per cent and to support this, customers need to pay big fees and surrender charges should they want to exit the product. In the UK, charges and commission for our products are the market norm and fully disclosed at outset.
We firmly believe there is a big appetite for third-way products in the UK which is why we have taken some of the best features of successful products in the US and Japan and integrated them into the UK’s mainstream bond and pension markets. We have enjoyed very positive feedback from distributors and consumers who value the protection and flexibility offered by variable annuities.
These products are not suitable for everyone but we are witnessing the same trends that drove the expansion of the market in the US and Japan, including an ageing demographic that wants to make the most of retirement. The variable annuity market in the US is worth $130bn a year and $50bn in Japan. The UK market is undoubtedly different and does not follow every US trend but actuarial consultant Tillinghast Towers Perrin estimates that inflows into variable annuity products will reach 70bn by 2016.
As with all new products, the costs will become more competitive as more providers enter the UK market. We warmly welcome the likes of Standard Life and others into the fray to ensure products remain competitive.
Even if we look at some of the products available now, we believe that consumers can get excellent value for money. The benefit of offering a guaranteed income for life, with the potential to increase income as markets perform, is very attractive. Clients also benefit from access to their funds and a guaranteed death benefit. An average investor in our pension or bond product would usually pay around 2.5 to 3 per cent charges for all these benefits. That includes the guarantee, annual management charge and fund management fee.
In a market that has been served essentially by two product types – annuities and drawdown – it would be a shame to dismiss an innovative product that gives consumers real choice by linking it incorrectly with a different product in the US. I am sure I can speak on behalf of other third-way providers when I say that variable annuities are set to become a valuable retirement solution for UK consumers.
Mike Kalen is chief executive of Hartford Life