Equity-backed guaranteed products: Time for a return?

We recently conducted research to consider the potential for equity-backed guaranteed products (EBGPs) to offer alternative risk-return outcomes for savings customers. A summary of this research is provided below. If you would like to receive the full research write-up or find out more, please get in touch. 

Summary

• UK consumers consistently seek higher returns on their savings, expressing a preference for ‘stock market’ returns. However, over half have low or no appetite for investment risk and our recent consumer survey emphasised the demand that exists for products offering investment guarantees.

• EBGPs offer access to the additional upside associated with equity investments – typically 4% pa or more – combined with a ‘return-of-premium’ (ROP) guarantee to protect against losses. The charge for the guarantee is typically exceeded by the additional return, giving a net improvement in expected payouts relative to low-risk fund alternatives. 

• Available in unit-linked and with-profits formats, EBGPs were popular in the past but years of ultra-low interest rates heightened guaranteed costs and reduced their attractiveness. This has left risk-averse investors with limited options. Most advice models, with a focus on ‘capacity for loss’, direct such individuals to low-risk funds, with commensurately low returns that may lag inflation.

• However, with recent interest rate increases, guarantee costs have dropped and EBGPs are seeing renewed interest, particularly in the US where net inflows on these products, marketed as ‘defined outcome’ funds, have now reached around $10bn annually.

• In view of these developments, we examined the potential for EBGPs in the UK, including:

  • Modelling of current pricing for ROP guarantees at various levels and terms, for both accumulation and decumulation products.

  • Comparisons of customer outcomes vs low-risk fund alternatives.

  • The interest rate outlook and its impact on pricing and outcomes. 

• Our analysis indicated that EBGPs materially outperform low-risk alternatives, both on average and across a majority of investment scenarios, with some trade-off in a minority of scenarios where equities underperform. This remains the case even following significant reductions in interest rates, including below those forecasted by analysts. Potential mitigations to increase resilience to even lower rates were also considered in our research.

To receive the full research write-up or find out more, please get in touch. 

This summary is intended for insurers, reinsurers, asset managers, banks, and building societies only. It is published for informational purposes only, and does not constitute advice. 

This summary is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.