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Third way at crossroads

Aegon Scottish Equitable has become the latest third-way annuity provider to raise the price of its guarantees.

The stormy economic backdrop has meant the cost of the underlying guarantees on these products has soared, prompting Aegon and MetLife to increase the cost of guaranteed income.

Aegon has cut the level of guaranteed income by 1.5 per cent for new business across all age brackets on its Income for Life product. The single-life guaranteed income rate for a 55-year-old will now be 3 per cent while the joint-life rate will be 2.5 per cent.

The cost of MetLife’s income for life guarantee for the highest equity exposure will rise by 55 per cent from 95 to 145 basis points. For the lowest equity ratio of 35 per cent, the cost will increase from 50 to 70 basis points. All these changes will be for new business and will take effect from April 7.

MetLife is also reducing its maximum equity exposure from 85 per cent to 60 per cent.

There are rumours that other variable annuity providers are also considering reducing their maximum equity exposure in an effort to de-risk the product.

Worldwide Financial Planning IFA Nick McBreen says the guarantees were the unique selling point of these products and raising the price will have an impact.

He says: “It is an indicator that they are not taking up the volume they need to keep the guarantees at that price. This will harden up the decision-making on whether advisers use these third-way products.”

Recent figures show that sales of variable annuities exceeded £1bn in 2008, which is more than double the total in 2007. Watson Wyatt research suggests that sales rose as the attraction of guarantees became more apparent with the turbulent market conditions.

William Burrows Annuities director Billy Burrows does not see the price rises as the death knell for guarantees.

He says: “People in future will be far more cautious in the way they invest their money because of what has happened and products with guarantees will continue to be attractive.

“It is all very well advisers saying they will not touch them with a bargepole but the brutal reality is there are clients licking their wounds over 30 or 40 per cent losses so they do have their place.”

Annuity Direct director Stuart Bayliss says the fact that Prudential and Standard Life were planning to enter this market but have not done so is an indication of a pause in the sector.

Bayliss says: “They are certainly not going from strength to strength and this may not be the last lowering of the guarantees as the providers have been subsidising them for some time.”

“The need is still there. Whether the current providers will survive and whether and when the others will come into the market, I just do not know. There is not going to be a mad rush to enter and it is going to take a while to recover.”

Hargreaves Lansdown pensions analyst Nigel Callaghan believes variable annuities have missed the boat because as the FTSE has halved already, the chances of this happening again are very slim. He says: “Why would you pay such a high price for what is a pretty unlikely event? The analogy I use is it is a bit like paying for really expensive home insurance when your house has already burned down.”

Callaghan says it is likely The Hartford and Lincoln will have to follow suit and raise the price of their guarantees or continue to subsidise the costs.

He says: “At some point, you would have thought their parent companies in the US will say, show me the money, we are not a charity. It is probably the worst possible time to have brought these to market.”

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