Segregated funds have evolved since the difficult times experienced by guaranteed withdrawal benefits (GWB) products. The low interest rates and stricter capital requirements that have plagued the industry since the 2008 crisis linger, but insurers are designing products accordingly. Their guiding principle: simplicity.
Canada Life, Great-West and London Life have launched HelloLife, a program that gives retirees payouts from both annuities and segregated funds, in different proportions.
HelloLife emerged directly from focus groups made up of customers and advisors. Great-West wanted to give Canadians a holistic withdrawal product explained in simple language, says Rob Ritchie, executive vice-president of Wealth Management.
The focus group customers were clear: they wanted to better understand how to convert their assets into retirement income. “The bottom line is: Am I going to be OK for my retirement? Help me to decide that, using plain language. Give me more control over my decisions,” Ritchie says.
Lower cost funds
On Dec. 7, iA financial Group will launch a series of reduced-cost funds for its clients who hold $300,000 or more in assets with the insurer. “We qualify our eligible clients automatically. Advisors don’t have to qualify them anymore,” says Marie-Claude Poulin, director, Savings and Retirement Products, at iA. The new funds will be part of the Prestige series.
SSQ Financial Group has announced a launch for Nov. 9. It centres on two main elements, says Sylvain Charbonneau, vice-president of Actuarial, Medical underwriting/New business with SSQ Insurance. SSQ is changing technological platforms to accommodate managing general agencies, all of whom switched to the back office system FundSERV long ago. SSQ delayed developing some of its functions due to costs. “For two years we have worked on modernizing the administration system to make it 100% compliant with FundSERV, and to become more agile in terms of product development,” Charbonneau explains.
SSQ is also sprucing up its product line. “For greater consistency, we are discontinuing the Astra brand,” Sylvain Charbonneau says. “We had a universal life product that we called SSQ Universal Life. This is why we are calling the guaranteed segregated funds SSQ Guaranteed Investment funds. We just wanted to simply say what this product does.” The offer notably includes four new funds.
The insurer kept regulatory requirements in mind during development. “Capital rules have not moved since the post-shock crisis that marked the end of GWBs as we knew them,” Charbonneau continues. “They encourage insurers and us to think more about the economic environment and risks as we develop and design products.”
Empire Life is also making changes. On April 20, the insurer launched the 75/75 fund line, along with the Monthly Income GIF. Although the new guarantee has not outdone the popular 75/100 series, it still has momentum, says Julie Yoshikuni, vice-president, Retail Investments Products and Marketing, at the insurer.
“We’re happy with what we’re seeing as momentum since the launch. The choice between 75/75 and 75/100 guarantees depends on investor needs. Young investors interested in segregated funds will more likely pick 75/75 guarantees, because of their higher risk tolerance. The idea behind the launch was to offer choice. In addition to that, some advisors say that 75/75 segregated funds are a great alternative to mutual funds,” she explains.
Since the strict capital rules took effect, Sylvain Charbonneau has noticed a growing trend toward guaranteed value of deposits of 75% at maturity and 75% at death (75/75). A lighter capital load for the insurer, this formula also offers investors a streamlined version, with a lower management expense ratio. “But advisors and their clients still see the advantage of a guarantee at maturity of 75% and at death of 100% (75/100), and we listened to our network when we developed the new funds,” Charbonneau points out.
Yoshikuni says that the current environment favours the launch of new segregated funds, of all stripes. “There is a lot of volatility in the markets and investors are quite concerned. A lot of people are demographically in the pre-retirement or retirement phase. That creates an environment that points towards segregated funds. In these volatile and uncertain times, segregated funds offer guarantees and protection for those looking for safety, Yoshikuni points out.
GWB still complex but leaner
The GWB product may not exemplify simplicity, but the industry did trim it down. In late 2014, iA Financial Group realized the goal expressed by CEO Yvon Charest a year earlier: deliver a “capital-light” GWB product. FORLIFE series replaces the capital heavy GWB.
“Sales may have gotten off to a slower start than we hoped, but advisors have given us positive feedback. They are seeing the market change. Companies are moving away from the traditional formula because the high capital requirements and low interest rates make (GWBs) a costly product.” Marie-Claude Poulin explains.
At iA Financial Group, sales of the new GWB are gaining momentum. “We have banked heavily on the simplicity of the new product. But change is not always that easy. Advisors were used to the old one and needed time to get behind the new one. Changing to a simpler product can be complex in its own way,” Poulin says.
She also mentions the popularity of 75/75 guarantees, which represent 55% to 60% of iA’s seg fund sales. 100/100 guarantees account for 20%, but the picture may change. “When markets are strong, people value guarantees less than during volatility,” Poulin says.
Desjardins Insurance reintroduced its GWB product, dubbed Helios 2, in spring 2014. The withdrawal guarantee gained a variable component. Here again, the new capital rules weighed heavily in the balance between product return and lightness. “The design of the features achieves this balance,” says Jean-François Girard, manager, Product Development and Marketing, Individual Savings, at Desjardins. The variable component is pervading the industry because it takes future rate variation into account, Girard continues.
The product also preserves protection by defining a minimum bonus level, Girard adds. “It is important that the bonus vary but also that the coverage remain in place. If everything is variable, the product will not be as appealing to people who value security,” he said.
Yoshikuni points out that Empire Life never left the GWB market; the insurer simply revamped its product. “Income payouts are lower but the product is still very competitive,” she says.
Fund mergers multiply
When interviewed on Sept. 30, Jean-François Girard says Desjardins Insurance was poised to change its segregated funds “in the next three weeks,” he said. These changes mirror others in the industry in recent months. Many lethargic mutual funds and segregated funds were closed or merged with more promising ones.
“We will close a few funds that underperformed and whose managers have disappointed us. We will replace these funds with more efficient ones,” Girard says. For one, Desjardins is launching a fund made up largely of US content.
Manulife Investments recently merged over 50 funds to eliminate overlap and confusion in advisors and investors. Standard Life Corporate Class and Manulife Investment Exchange Funds are becoming a single entity, to allow tax-deferred switching between these funds. The investment objectives and managers of some funds are changing.
There are no plans to close or merge segregated funds for now, says Marie Gauthier, associate vice-president, Segregated Funds at Manulife. With their acquisition of Standard Life, Manulife has added 50 Ideal Segregated Funds Signature 2.0. “Manulife wants continued growth in segregated funds. We are number one in the country in this sector in terms of assets under management and number two in gross sales,” Gauthier says.
Having held a similar position at Standard Life during the acquisition this spring, Gauthier wholly endorses this merge. “The block of Standard Life segregated funds was large. Together, the two blocks form a more diverse and thus more interesting product line,” she says.
Great-West is expecting a busy fall. In addition to its new program, the insurer will add some segregated funds to its lineup, says George Turpie, senior vice-president, Investment Funds at Great-West, Canada-Life and London Life.
These additions vary depending on the company. Canada Life is grafting a basic core bond fund to its Canadian palette of bond funds in fall. It will be managed by Portico. The insurer will also add an emerging market fund, managed by Mackenzie, and sub-advised by JP Morgan. Canada Life, Great-West and London Life are adding a Mackenzie-managed unconstrained fixed income fund. Great-West will offer a new dividend fund managed by Laketon.
Turpie singled out a fund launched in January for the three companies, which has already produced interesting results under difficult conditions: the Low Volatility US fund managed by Putnam. “As you know, the markets were volatile during the summer, so we were very pleased with the results,” he points out.
For the three-month period ending August 31, the return posted by this fund at Great-West for the 75/100 series was 2.48%. By comparison, the Morningstar Average-U.S. Equity-Segregated Funds index posted a negative return during this period of -1.03%, according to Morningstar Direct, and of -0.90%, according to Morningstar PALTrak. During the same period, the S&P 500 TR CAD index yielded a return of 0.28%, according to Morningstar Direct.