Variable annuities in jeopardy after Aegon downgrade

THE future of hybrid retirement products, combining guarantees with flexibility, has been called into question after life company Aegon's credit rating was downgraded by ratings agency Fitch.

TransAmerica, Aegon's US subsidiary, is one of the largest issuers of so-called variable annuities, which are popular in the States. The downgrade follows concerns about the guarantees it had sold.

Aegon launched variable annuities in the UK in September 2007, with "Five-for-Life", which guaranteed an income of 5 per cent for the rest of a person's life, while allowing retirees to maintain a stock market exposure.

The company has moved quickly to reassure retirees that their annuities are safe. A spokesman said: "Aegon UK currently has a suite of unit-linked guaranteed products, sometimes referred to as variable annuities. This downgrading has no bearing on its ability to provide its guaranteed suite of products."

Hargreaves Lansdown pensions analyst Laith Khalaf said: "These kinds of products open companies up to a lot of risk on their hedging strategies. It is not difficult to get the hedging wrong and, if you do, you've still got to honour the guarantee to investors."

The underlying guarantee on Five-for-Life is provided via a hedging arrangement managed out of Ireland. Even so, it was withdrawn from sale in 2009, after the Bank of England slashed interest rates. Existing policyholders continue to receive the 5 per cent as promised.

It was replaced by a product offering a lower 3.5 per cent guarantee at age 65 and followed by another which guarantees a 5 per cent income for twenty years.