Advisers are emerging from the challenges of the recession and unprecedented stock market volatility to find that while confidence may be returning the issues of the recession have not gone away.

It is clear that providers must focus on restoring consumer confidence by providing products consumers want thereby helping advisers in the advice process, and reducing the risk of consumers buying products that don’t meet their needs.

The rise of unit-linked guaranteed products is a major part of the response from providers and MetLife research shows they have struck a chord with 59% of advisers reporting a rise in demand from clients for guaranteed savings, investment and pension products in the past year.

Nearly one in four (24%) advisers reported increased interest in guaranteed savings and investments while one in five advisers (18%) reported a rise in enquiries about guarantees in general and one in 10 enquired about guarantees on pension products such as unit-linked guarantees. Just 7% of advisers say they saw a rise in interest in structured products.

There is a lot to be positive about in the retirement planning and investment market which remains a key growth area for IFAs. The Association of British Insurers says new business premiums for pension transfers are worth around £10 billion a year while Towers Watson estimates the at-retirement market will double by 2013 with £32 billion of funds maturing. By 2017 Towers Watson estimates around £50 billion of funds will mature.

It points to a bright future but issues from the past remain. Research by MetLife shows more than one in four workers are either concerned about their company pension scheme’s performance or have been discouraged from joining because of poor performance. More than one in five companies have seen a rise in complaints from staff about the performance of corporate pension scheme in the past year with complaints about defined contribution schemes outstripping those about defined benefit schemes.

Advisers are concerned too that advice given during the global financial meltdown might cause them problems. A nationwide survey of IFAs last year by MetLife found nearly six out of 10 advisers are concerned that they could face regulatory issues justifying asset allocation decisions. Further analysis shows around 41 per cent who are concerned have plans in place to deal with any potential regulatory problems if their asset allocation advice is challenged while 18 per cent do not.

Guarantees help address concerns about performance of pensions and investments among clients and about possible regulatory issues for advisers by providing a mix of certainty in the accumulation phase and flexibility in the post-retirement phase. When investors are concerned about losing money and looking for someone to blame when they do, guarantees can help advisers justify decisions.

Products such as those from MetLife have been specifically designed in response to demand from advisers and their clients for increased flexibility and simplicity. Investors with MetLife can opt to lock-in potential gains every year or every two-and-a-half years with the income and capital guarantees. The annual step-up offers growth potential of up to 10% suiting investors with a moderate outlook on future investment performance while the two-and-a-half year step-up is unlimited to suit those who may be more hopeful of securing a significant investment return. All investors with unit-linked guarantee products are guaranteed to receive back at least their original investment less any withdrawals, and guaranteed death benefits are also payable.

Clients and advisers can insure against the income from their pension fund in future falling below a minimum level. If investments perform well that income may rise but if the investments perform badly the income is still fixed at the minimum level. That provides flexibility in retirement while the client can be protected in the run-up to retirement.

Unit-linked guarantees such as those from MetLife allow the use of deferred income guarantees. The deferred guarantees typically allow investors to guarantee an income base which is then guaranteed to rise by a set percentage such as 3% for every year that the decision to start taking an income is deferred. When the client starts taking an income the guaranteed income percentage will also be higher.

Guarantees however come at a price and it is essential to keep costs competitive. Unit-linked guarantee products have moved to simplified index portfolio ranges and have developed portfolios with lower equity content.

At MetLife there is a choice of portfolios with 30% equity content; 45% equity content; and 55% equity content. These portfolios are mainly invested in UK assets with limited foreign asset exposure, while AEGON UK’s Secure Lifetime Income offers different portfolios for 20%, 30%, 40% and 50% equity content.

The risk for advisers and clients of relying purely on equities and trusting that ‘on average in the long-run’ will pay off, is that averages don’t apply to everyone and that the long-run might prove to be too long for some.

The issue is illustrated by figures comparing the experience of someone retiring in April 2008 with a £50,000 pension fund and someone retiring in April 2009 with the same size of fund. In April 2008 the £50,000 pension fund would have secured an income of £3,700 with a conventional annuity but by April 2009 of the income would have shrunk to £2,692 due to a combination of falling annuity rates and stock markets. Had they protected their fund with a capital guarantee before retirement they would not have suffered as much from falling stock markets and if they had taken a deferred income guarantee they could have improved their income.

The future for retirement planning and for advisers is potentially bright but the lessons of the past have to be learned.

Peter Carter
Head of Product Marketing, MetLife