Financial professionals are trying to figure out exactly what types of advice consumers are most likely to seek.
Impaired life annuities continued to gain ground in the United Kingdom in 2011, representing "a continuation of an established growth trend for the enhanced annuity market," according to a senior consultant at Towers Watson.
Sales of these retirement-income products rose to 3.02 billion pounds in 2011, a 22% increase from 2010 and double that of 2008 levels, according to research by Towers Watson.
Awareness by advisers and consumers "has steadily grown as a result of industry and media activity," said Andy Sanders, a senior consultant with the insurance management consultancy team at Towers Watson, in an email response.
The products, also called "enhanced" life annuities, were first introduced in the United Kingdom in 1995 and are designed for people with serious medical conditions such as cancer, stroke or heart disease; people who smoke and people impacted by "negative lifestyle factors" such as weight or occupation.
The product, which is sold only to individuals, is an immediate annuity providing an income for life in exchange for someone's accumulated pension savings, said Sanders.
The annuity is "enhanced" relative to the income from a "standard" annuity, as medical conditions and lifestyle factors of the individual concerned are considered, with an indication that their life expectancy is shorter than the average annuitant, Sanders explained.
Sales were around 15% of the total annuities sold in 2011, he said.
Towers Watson's survey covered nine sellers of impaired annuities: Aviva, Canada Life, Just Retirement, Legal & General, LV=, MGM Advantage, Partnership, Prudential plc and Reliance Mutual, and the leading providers, alphabetically, include Aviva, Just Retirement, LV=, MGM Advantage and Partnership, Sanders said. The products are "overwhelmingly sold" through independent financial advisers, he said.
Clive Bolton, retirement director for Aviva UK, said the market needs to evolve to meet the needs of the current generation of retirees, who are facing twin issues of increased longevity and reduced income.
"One of the most noticeable changes in the retirement market over the past few years has been the rise in the number of enhanced or impaired life annuities," said Bolton in an email response. "These are annuities which use medical underwriting to provide a higher than average income to people with conditions or lifestyles that are likely to reduce their life expectancy — such as obesity, asthma or diabetes.
Bolton said Aviva UK proposes that basic medical questions are included in all customers' pension maturity packs to ensure those who qualify for an enhanced or paired annuity are more easily identified by the industry so firms can automatically offer them a tailored annuity. Where a customer has a health condition, they would automatically receive an annuity rate which factors in and provides access to "enhanced rates," where appropriate, across the market.
"It needs to be explained clearly that providing adverse medical information will only ever improve the income on offer, never reduce it," he said.
The opportunity in 2012 for enhanced annuity providers "is to achieve greater penetration of the overall annuity market," Sanders said. In 2011, only around 15% of people purchasing an annuity "received enhanced terms," he said. "The range of medical conditions and lifestyle factors that can be considered suggest a higher percentage may be eligible."
The Association of British Insurers also is seeking to compel its members to promote the "open market option" more aggressively, Sanders said. "This means that rather than take an annuity with the provider that the individual has been saving for retirement with, they are encouraged to go 'externally' to a company or adviser that can provide a range of choices.
"One of these choices will often be to take an enhanced annuity if the individual's lifestyle or health warrant it," he said.
As to regulatory challenges, the biggest in 2012 for all annuity providers relate to implementing gender-neutral rates, as required by a recent European Court of Justice ruling, as well as responding to the uncertainty around the treatment of annuities under Solvency II, Sanders said.
Attempts to get comment from Legal & General weren't successful.
According to information gleaned from websites, Just Retirement Group is one of the U.K.'s leading providers of retirement products and services. It was launched in 2004 and is backed by venture capital.
Partnership Assurance was formed in October 2005 after the demutualization and management buy-out of the Pension Annuity Friendly Society. Partnership specializes in financial products for people with shorter life expectancies.
LV= is the U.K.'s largest friendly society, offering savings, investments and insurance. Founded in 1843 as Liverpool Victoria, it's a mutual without external shareholders.
MGM Advantage (full name: Marine and General Mutual Life Assurance Society), formerly known as MGM Assurance, was established in 1852. Its initial business was providing life assurance to mariners and sailors and over the years, has developed to offer pensions, investment and protection products.
(By Fran Matso Lysiak, senior associate editor, BestWeek: firstname.lastname@example.org)