July 2008

The price of a guarantee

Dear Editor,

Much has been written over the past year or so on the subject of income guarantees in retirement and, in that time, the market has seen the launch of a number of innovative products that have new ways of providing those guarantees.

I believe that guarantees are popular with clients because they provide peace of mind and go some way to de-risk what they might otherwise consider to be uncomfortable situations.

For the most part, the new products that have been launched have open and transparent structures and clear charges for the guarantees that they offer, yet the advisers appear divided on the cost and value of these when they are charged for explicitly. Why is this?

Over the '70s, '80s and '90s, product providers and advisers alike learnt that clients like guarantees; final salary pensions, with-profits contracts and conventional annuities have all been very successful and popular with the general public and all, or part, because they each carry some form of guarantee. However, there is one important difference between these old guaranteed products and the new ones: the cost of the guarantee.

When the cost is hidden, either in the charging structure or deducted implicitly by adjusting the investment return given, people seem to forget that there is a charge. But within the industry we must all surely know that guarantees don't ever come for free?

Funding difficulties have seen final salary pensions closed to new members, with-profits contracts have generally declined in popularity (because they weren't transparent?) and there is concern that conventional annuities don't deliver the income levels and flexibility that those approaching retirement these days are looking for.

So, here we are in 2008, with advisers and their clients calling for product innovation and new ways to deliver guaranteed income in retirement and providers are duly answering those calls with new products. However, this is 2008 not 1988 and the new products are, as I said at the start, open and transparent and allow advisers and their clients to see what they're getting for their money.

Among the current providers the cost of the guarantees on offer are fairly consistent, which would suggest that they are competitively priced. Yes, products with a guarantee do cost more than products without them but that really shouldn't come as a surprise.

Simon O'Connor
Retirement Income Head of Product and Marketing
Lincoln Retirement Income