Will hybrid retirement products make a comeback?

Major providers look to shake up market

Two major providers are mooting the launch of flexible drawdown products, but commentators are sceptical as to whether they will ever get off the ground.

Last week Money Marketing revealed that both Legal & General and Scottish Widows could expand into hybrid retirement products. But, with a number of major providers having already pulled out of the market, advisers have questioned whether there is any client appetite for these so-called third way retirement offerings.

Also known as unit-linked guarantees, guaranteed or hybrid drawdown aims to combine the investment benefits of pension drawdown with an annuity to provide a guaranteed income until death.

Back in 2015, it was thought that such products could be the perfect solution for clients facing the challenges brought by managing their portfolios under new pension freedom rules.

In reality, the innovation has been something of a damp squib, with major providers abandoning the market. MetLife, which sold guaranteed drawdown to around 50,000 customers, withdrew from the market last summer. The provider, which says it has no current plans to re-enter the market, said at the time: “The ongoing challenge of long-term low interest rates has made it difficult to deliver value.”

The providers that have attempted to crack the market so far have been varied in their approach, but the one thing they all had in common was higher fees and a lack of take up. Typically, these packages come at a cost premium of around 1 to 1.5 per cent a year, market experts say, setting the bar high for what they must provide to be a viable solution.

LangCat principal Mark Polson says: “You can talk about the case for these products intellectually, and it’s interesting and it all makes sense, but the problem is they are complex, expensive to build and there is a lot of cynicism from advisers.”

Adviser scepticism has been a major stumbling block so far, with many citing fees and complexity as prime reasons for shunning the market. Another issue is that the building blocks of hybrids – stock market exposure combined with guarantees – are all too reminiscent of with-profits funds, and advisers may be wary about backing something similar to a product that has courted controversy.

But as well as that, many advisers argue that they can do what these products promise for themselves, without paying the premium for the package. AJ Bell pensions analyst Tom Selby says: “There is nothing preventing an adviser combining the flexibility of drawdown and the security of an annuity for a client without paying an insurer a premium to package them together.”

Polson adds: “In general, complex products that achieve the same result as a combination of a few simple things are not really wanted. If you can get an adviser who can manage drawdown and volatility, they can probably generate a better return.”

Delivering value

It could be argued, though, that such a ready-made package could suit those savers in the advice gap, who either can’t afford or don’t want to pay for the expertise of an adviser. But whichever route providers use to reach the consumer, price has been a major obstacle.


At a time when there is an increasing focus on fees and charges, and providing clients with value for money, justifying a high-cost product can be difficult. Aspect 8 chartered financial planner Claire Walsh says: “Hybrids sound like a good idea in theory but whenever I considere

d the MetLife products it just never stacked up – and now it’s withdrawn from the market. The cost of the guarantee, and the fact that you can’t often guarantee the result, doesn’t tend to be worth as much as the fee.”

This becomes a vicious cycle, as higher costs put advisers and clients off, which in turn stops providers from reaching a critical mass where they can reduce the costs. FinalytiQ director Abraham Okusanya says: “You can have a new product but if not enough people buy it then it’s going to be very expensive for the few who do.”

Polson adds: “I don’t think providers have made these products unnecessarily expensive, I think it reflects the fact they are expensive to build and manage. But that means you need to know you’re going to sell lots of them to make it economic.

“To be fair, the products out there do work and do what they’re supposed to do. The problem is they come at a cost, and it’s not necessarily the case that they will provide the best possible return, but that’s not really what they are for.”

Polson believes there is a gap in the market for the provider that can create the right solution. “I think there is a pent-up demand for something which will take care of the retirement journey, particularly as we head into less certain and more volatile times, savers are looking for a more stable ride,” he says.

Yellow Tail Financial Planning director Dennis Hall says a deferred annuity contract might be of more interest to clients than guaranteed drawdown. “Right now, I don’t see hybrids becoming a big part of the market; I haven’t seen an appetite for it. The price premium on these products is a cost drag, and in a low yield, low interest rate environment, that’s a problem,” he says.

Plan Money director Pete Chadborn adds: “An instance where a hybrid product is a valid solution is if the client is phasing into retirement and reducing their earned income. But costs are always a concern, particularly if the outcome can be achieved for less with standalone drawdown and annuity products.”

The annuity puzzle

Some 68 per cent of 1,200 consumers aged 50 to 75 surveyed by PricewaterhouseCoopers when pension freedoms were introduced in 2015 said certainty of income was an important factor in how they would manage their pension.

Meanwhile, 61 per cent were concerned about life expectancy and how long their savings would have to last. Almost half (45 per cent) were concerned about investment risks and protecting their wealth, with a further 38 per cent worried about the erosive effects of inflation.

36 per cent also wanted a simple retirement product that they could easily understand.

Guaranteed drawdown does seem to tick a lot of the boxes for this
retirement income wish list – apart from the demand for simplicity – so providers are not yet giving up on the market.

L&G retail retirement chief executive Chris Knight says: “Annuity products have a vital role to play in retirement and the security of a guaranteed income in later life should not be underestimated.

“There’s a need for more innovation in the annuities market. The need for a simple and easier to understand product, solutions for maturing defined contribution customers and the potential for a guaranteed income annuity that addresses care costs are all areas we are actively investigating.”

While L&G and Scottish Widows are not yet forthcoming with the details on their potential launches – the latter says it is “reviewing its offering” in the drawdown market – advisers are still waiting for news of offerings from Old Mutual and others, which are believed to have stalled.

Some commentators believe that few providers will make it to the point of an actual launch, put off by adviser agnosticism and the retreat of their rivals. “I think it could be another instance where they end up shelving the idea,” says Hall.

But there is certainly growing pressure on the industry to create solutions for clients, which will provide a sustainable income over a longer retirement. The FCA has expressed concern about the lack of innovation since pension freedoms were introduced. In a recent report it said: “We have not seen products emerge for the mass market that combine flexibility with an element of guaranteed income.”

Scottish Widows head of fund proposition Iain McGowan says: “The main innovative challenge lies in the competing needs to be met: people want some control of their pension fund but are concerned about running out of money before they die.”

But Selby thinks providers need to focus on getting the basics right first, while the regulator should be focused on keeping costs low and encouraging people to save.

He says: “There is a danger in chasing shiny new solutions rather than doing the basics really well. Ultimately there is no product that can turn a tiny pension pot into a massive one.”

Other experts agree that providers and policymakers could be better spending their time on different issues; Walsh would like to see Nest develop a low-cost drawdown product, for example, while others would like to see the introduction of default drawdown investment choices. Not only could such innovations be more achievable, they could also be more helpful to savers.

Okusanya says: “I hope I’m wrong and that someone comes to the market with a really good product that combines longevity protection and flexibility but, from what I’ve seen so far, it doesn’t seem likely.


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