Decumulation has brought high growth and high returns to many UK life insurers – can this be sustained?
In this article, I'll be breaking down WTW's answer to that question into four parts, looking at factors that may determine future supply and demand as well as the industry's capacity to continue to secure the retirement income of millions of pensioners. These four parts are:
- Institutional and regulatory drivers
- Pricing and investment issues
- Supply and demand
- Retail trends
After a period in which annuities have been expensive due to low interest rates and challenging investment conditions, we are starting to see a resurgence in annuity values and consumer interest. We put this down to higher interest rates, an enhanced focus on security in the wake of the COVID-19 pandemic, and heightened recognition of later-life care needs.
For example, our benchmark for the annual value of a single life, level and no guarantee period annuity for a 65-year-old man with a £100,000 fund stood at £6,283 in August 2022. This compared to £4,696 in August 2016, an increase of about 15% after allowing for inflation.
Will such increases be enough to stimulate annuity sales after a period in the doldrums? Possibly, but there are also things that insurers, to some extent backed by governments that want to encourage higher levels of retirement saving, can do to make them more attractive.
One, already common in the UK, is offering the flexibility to allow drawdown in earlier retirement years but, importantly and less commonly, in combination with a facility to allow undrawn funds to continue to attract investment income. Another change in practice that could be beneficial is including inflation protection in quotes as standard, along with an explanation of how this helps the annuitant. This could help counter the historically low take-up of inflation protection and the negative outcomes and perceptions this can lead to.
New services that life insurers could usefully consider to increase attractiveness, in our opinion, include the provision of periodic general practitioner visits and access to wellness and exercise activities. This would also have the effect of promoting 'prevention as a cure', thereby also helping to reduce strains on the National Health Service.