Mounting cost of hedging forces variable annuity providers to review charges

Variable annuity providers, including Lincoln and The Hartford, are reviewing their product charges to try to claw back hefty hedging costs that have already forced Aegon to increase its variable annuity pricing.

As markets tumble and more customers call on their guarantees, providers face a pricing dilemma that threatens to stall the sales of the fledgling products.

‘There’s no doubt that if you’re a variable annuity manufacturer you’re stuck between having to pay more for quite extensive financial engineering in these products and then cutting either your profit margin or charge it to the client,’ said David Harris, managing director at Living Time. ‘If you increase the charges to the client, they are not going to sell.’

Aegon last month revealed that product charges across its variable annuity products – Five for Life and Income for Life – had increased by between 0.1% and 0.35% depending on the equity income balance and type of product held.

And now other third way providers are starting to feel the pinch of expensive hedging strategies and are rapidly reviewing their products to decide whether the excess costs should be passed on to customers.

‘If they translated into the market the full cost – which is what they launched the product with –I think they know they wouldn’t be selling any,’ said Stuart Bayliss, director of London-based Annuity Direct. ‘And that’s why they are having reviews because they want to establish themselves in the market place.’

Guarantee blights could be a theme of life company results over the next few weeks, with analysts Nomura International remaining cautious on Standard Life, Friends Provident and St James’s Place in light of the lacklustre response to investment guarantees among consumers.

‘If insurers do not go back to pushing, rather than simply offering, investment guarantees, they risk being squeezed out of the value chain for savings, pensions and annuities,’ Nomura said in a note to clients.

A Lincoln spokeswoman said: ‘As far as the guarantee is concerned we regularly review the price of all our products across the range but we have no plans to increase the charge for the income guarantees available at the moment.’

Meanwhile a spokesman from the Hartford said: ‘As you would expect, The Hartford UK is constantly reviewing its products and charges in light of changes in the market but no decision has been made.’