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Third dimension

A series of cases inthe US relating to deferred annuities should serve asa reminder to the UK financial services community of the risks inherent in direct salesforces marketing complex packaged products to elderly people.

It adds weight to the concerns that some UK advisers have about third-way annuity products,which had been hailed asthe US solution to low retirement incomes.

I have yet to see it reported in the UK but, over the last year, the attorney general of Minnesota, Lori Swanson, seems to have made it her personal business to take on a string of America’s biggest annuity providers over the way they have been market-ing deferred annuity plans to senior citizens.

Her latest target is Amer-ican Equity Investment Life Insurance Company, the third-biggest deferred annuity provider in the US, which earlier this month was forced to agree to allow up to 2,400 pensioners in Minnesota to claim refunds of $125m. American Equity is the third US operator brought to book for third-way annuity misselling, following similar class actions brought by Swanson against Allianz Life, the US arm of the German insurer, and Midland National Life Insurance Company.This means that 10,000 people in that single state can seek redress against their insurers.

Swanson is also filing another case against AmerUs Life Insurance/American Investors,a subsidiary of Aviva,for the alleged missellingof policies.

You could argue that this is a local problem where teams of local salespeople have fallen foul of local laws but US deferred annuities are not a million miles away from variable annuities – the third-way annuitiesthat US insurers have brought over here.

They are sold to peoplein their 60s and 70s as a flexible approach to retirement, they allow benefits to be deferred to build up income later in life, they come with guarantees and offer upside through exposureto mutual funds and they come at a high cost.

I am not suggesting that the products offered by US insurers such as Lincoln Financial, MetLife and Hartford Life are the same as those products that have been sold in Minnesota or that they face identical problems.

In the cases brought by Swanson, there were specific flaws in the sales process where salespeople did not make clear the penalties for taking money out of the products. Swanson’s suits also attacked these insurers for the suitability of the products for ordinary Americans.

It is hard to see how the third-way offerings of the trio of US providers in the UK are going to be suitable for many UK investors either.

Take the Lincoln i2Live product. If you opt for full capital protection, then you will pay 0.95 per cent for your guarantee plus upto 2 per cent for fund management chargesand a maximum 1 per cent on top if the IFA takesfull commission.

Add to that the £200a year management fee and 3 per cent up-front charge and somebody with the minimum £50,000 fund is potentially looking at an AMC of up to 4.35 per cent. Given the fact that you can get over 5 per cent at the building society, your fund will have to perform north of 9 per cent a year foryou to be better off.

We all know that the industry has to come up with something to deal with the problem created by low annuity rates. Everyone agrees that with retire-ments often stretchingfor up to 30 years, some form of equity exposureis attractive.

Standard Life is understood to be lookingat a third-way annuity launch this year. It will doubtless want to offer some form of capital protection to its ever growing book of self-invested personalpension customers.

A familiar name and economies of scale from greater sales may persuade IFAs that third-way products are worth another look when the Edinburgh insurer comes to market but Standard is going to have to make sure that the combined costs of administration, management and guarantees are low enough to give a chance of realising some upside.

John Greenwood is editor of Corporate AdviserMoney Marketing

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