Guarantees in the retirement income market

27 January 2017
Do guarantees benefit customers and if so, when? To answer this conundrum we commissioned Millimans, a global actuarial consulting firm, to conduct an independent review of the UK retirement income market and whether guarantees really do offer customers better value for money.
Retirement Guarantees – Are They Worth It?

Milliman have carried out a unique review of retirement guarantees under an extensive set of different economic and market conditions.

The brief

The study was one of the most comprehensive undertaken and covered a wide range of products currently being sold in the UK market.

The purpose was to analyse how well these met the income requirements for three example customers, each with a different perspective and spending pattern, under a variety of economic and market conditions.

The basics

It won’t surprise you to hear that there was no single product that met each of our example customer’s requirements.

The products with the highest level of guarantee place the most significant restrictions on the financial freedoms of a customer.

As customer circumstances change over time this could restrict the ability to meet financial needs so retaining flexibility to respond to these changes is important.

The bill

The higher charges and more conservative investment strategy used in guaranteed products can significantly reduce the amount of money customers get back. The study found that a product with only a modest guarantee returns around 30% less over the average retiree’s lifetime than a similar product with no guarantees.

Guarantees are of most benefit in adverse market conditions but the extent of that higher income during these periods can be a lot smaller than many perceive and investment performance has to deteriorate considerably and stay that way for some time for the guarantees to actually provide more income than a product without a guarantee.

And in terms of money back to the customer across their retirement the study found that a drawdown approach with no guarantees delivered 25% more than a drawdown with a guarantee.

The balancing act

Guarantees are essentially a trade-off between financial freedom and investment growth versus security and the point at which the trade off becomes worthwhile, if it does at all, will depend on the customer and the product.

The bottom line

The issue is of course that whilst drawdown can deliver better value for money than a guarantee it also brings with it the risk of running out of money too soon. The good news is that there are now tools and investment strategies available in this space which can help you to explain how likely this is for your client and ensure that they don’t run out of money in retirement.

If you want to find out more please speak to your usual Sales Consultant.

About Milliman

Milliman is among the world’s largest providers of actuarial and related products and services. Founded in 1947 they advise over 80% of the world’s leading insurers and are engaged by 44 of the top 50 insurers globally.

In particular, they are a global leader in the retirement savings market and have assisted a large proportion of the industry to develop, manage and optimise the types of products featured in this analysis.

About the author

Lorna Blyth

Head of Investment Solutions

Lorna is Head of the Investment Solutions team at RLI and has responsibility for the development and promotion of Royal London's investment proposition including the award winning Governed Range. She has worked in pensions and investment since 1990 and holds the IMC qualification and a Masters in Investment Science.

Last updated: 30 Jan 2017

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