Guaranteed withdrawal benefits products are dwindling, as are their benefits. The last products standing may eventually collapse under pressure. Yet, some insurers and distributors are convinced that this retirement income product will survive, albeit in a more modest form.
As many players exited the GWB market, some observers predicted the product’s demise. The survivors have chosen to tough it out by slimming down benefits. They shaved the annual guaranteed lifetime benefit from 5% to 4% of the accumulated base amount, when the client begins withdrawals at age 65.
At press time, only Empire Life still offered a 5% guarantee. Canada Life preserved that rate until very recently, but lowered it on Oct. 19 (see page 3).
However, some managing general agents told The Insurance and Investment Journal that they’ve heard that Empire Life plans to make major changes to its GWB. Their advisors were urged by the insurer’s representatives to “take advantage of [the rate] while there was still time,” to sell the current product, they said.
Contacted to confirm the story, Laurie Swinton, director of corporate communications at Empire Life, replied that she did not have enough information about a change in Empire Life’s GWB.
Meanwhile, Empire life CEO Les Herr spoke about GWBs during a strategic interview last June with The Insurance and Investment Journal. Asked whether he was worried about keeping the guaranteed lifetime withdrawal product while others were shedding it, he said he felt at ease with the product at that time, but that changes could be made depending on the sales experience.
“It’s a pretty conservative solution…What we wouldn’t want to see is everybody exit it and then all of the sudden we’re getting everything, then we’d be taking on way too much longevity risk and it would put our product mix out of balance,” he explained.
At the time of the interview, Mr. Herr added that he was seeing an upsurge in GWB sales. “We just monitor it and keep a very close eye on it. If we think it’s getting out of hand, maybe we’ll have to modify it.”
Despite the market turmoil, the product is still attracting significant assets. A recent report by the investment fund research and analysis firm Investor Economics, called Insurance Advisory Service, underlines the important contribution of guaranteed withdrawal benefits to the growth of segregated fund assets.
This report finds that segregated fund assets rose by 0.3% in July, to reach $88 billion in Canada. By comparison, assets of guaranteed withdrawal products were up 1.1% during this period, the firm notes.
“The growth of GWB assets and strong sales indicate that even the dialed-down versions of the product resonate with clients seeking guaranteed income,” Investor Economics says. Most people who hold the older, more generous products are keeping them, aware of how lucky they are, the report points out.
Manulife Financial lowered its guarantee to 4% in April. It triggered a domino effect as other insurers followed suit, while some, like Desjardins Financial Security, Industrial Alliance, Standard Life and Transamerica Life of Canada, left the market entirely. Meanwhile, Sun Life Financial stopped selling its GWBs in the independent channel.
Manulife felt it had no choice to reduce the guarantee. “[IncomePlus] hasn’t changed materially in its income level since its inception in 2006. The 5% withdrawal guarantee at age 65 for life has remained unchanged since 2006. So it was obvious as long-term interest rates have been declining pretty severely since 2006, that the product needed to adapt,” Michelle Ostermann assistant vice president of Guaranteed Investment Products at Manulife Investments told The Insurance and Investment Journal in an interview.
Despite their disappointment, advisors did not react too strongly. They knew that returns were dropping across the board, Ms. Ostermann continues. “Even dividend mutual funds have seen a decline,” she says. Advisors’ reasonable reaction averted a sales plunge. Sales are continuing to decline, she adds, but not strongly.
The latest changes have not shaken Ms. Ostermann’s commitment to IncomePlus. The time when the product was declared “not targeted for growth” is past, she says. The insurer has since ensured that each product reflects its economic environment.
“We have globally repositioned many of our products, our risks and our capital to make sure that each product is able to reflect the current environment. We’ve worked hard to make this [IncomePlus] a more nimble product, so that when interest rates go up or down, with policyholders’ behavior changes, and regulatory or capital requirement change, all those things we’re now able to reflect in the product,” she says.
No regrets at SSQ
SSQ Life, one of the flock of players that lowered their guaranteed benefit to 4%, says it is very comfortable with the decision, even if it resulted in a decline in segregated fund sales. “A high proportion of our global segregated funds sales went to Astra Guaranteed Income II. The repositioning in version 2.1 had an impact on sales,” says Marc Trépanier, national vice-president, business development, for investments and retirement at SSQ Life.
In May, Astra Guaranteed Income II whittled its guaranteed withdrawal amount at age 65 from 5% to 4%. The new version, 2.1, keeps the 5% bonus paid for each year without withdrawals, and has a 3-year reset. Customers can also expose up to 90% of their portfolios to an equity fund. At the same time, SSQ introduced a payment scale ranging from 3% to 5%, according to the annuitant’s age at first payment.
SSQ Life has no regrets. “We felt this change was needed because of weak interest rates,” Mr. Trépanier says. “The initial product’s strong sales played an important role in our decision. We wanted to act prudently. We’re now comfortable, and do not plan to limit our capacity further, unless rates drop significantly.”
Mr. Trépanier is not worried about the future of the market, even if all the players switch to a 4% guarantee. The product’s continuity is assured, even with a guaranteed annual withdrawal of 4%. GWBs are indispensable, Mr. Trépanier adds. “Our clients need a withdrawal product that lets them participate in markets during the accumulation phase. Access to equity creates capital gains that cover inflation. In an environment where interest rates are 8% or 9%, customers wouldn’t have this need, but in the current environment they do,” he explains.
He also thinks that the guarantee protects investors from longevity risk by paying guaranteed income for life, regardless of market trends. “This product also lets customers leave an inheritance, an advantage that you don’t see with lifetime annuities,” Mr. Trépanier points out.
Several managing general agents say that the GWB product mirrors the defined benefit pension plan model, which Mr. Trépanier confirms. “We want to give small investors access to the investment strategies of the large pension funds.”