Milliman’s actuarial and financial risk management teams reviewed a wide range of income guaranteed products in the UK retirement market for Royal London.
They then tested them against an extensive set of economic and market scenarios to conclude that these products can actually make customers poorer.
“The higher charges and more conservative investment strategies associated with retirement guarantees could significantly reduce the amount of money a retiree will receive,” Milliman said in a white paper produced as a result of its study.
Longevity little help
Further it found that “investment performance has to deteriorate considerably and stay that way for some time, for guarantees to actually provide more income than a product without a guarantee.”
“Our analysis showed that for a retiree 20 years into their retirement (age 85) there is roughly a one in seven chance that a typical index-linked annuity would be providing the same or higher level of income than a drawdown product with no guarantee,” it said.
Milliman’s product review spanned index-linked annuities and fixed term annuities with guaranteed maturity values through to drawdown products with guaranteed minimum incomes and fully flexible drawdown products with no guarantees.
Russel Ward, a principal at Milliman in London, told a press briefing on Wednesday that the study showed there was really no single retirement product or even a combination of products that would satisfactorily meet all customers’ preference for income security, flexibility and value for money.
“There no ‘one size fits all’. Retaining flexibility can be key,” he said.
“Are guarantees worth it? Unfortunately, there isn’t a one-word answer – it really does depend.
“On the one hand there is financial flexibility and then potential for increased investment rewards, and on the other the is security,” he said.