After having pulled Ecoflextra off the guaranteed lifetime withdrawal benefits segregated fund product market in 2012, Industrial Alliance is launching a new product tailored to today’s regulatory environment.Last year Industrial Alliance CEO Yvon Charest promised the market a “capital light” product in a strategic interview with The Insurance and Investment Journal. He portrayed an ideal GLWB product that would be sustainable in a business environment of low interest rates and tight regulatory capital requirements.
The launch of the new FORLIFE Series on Nov. 24 “is exactly that,” says Marie-Claude Poulin, savings and pension product director recently interviewed by The Insurance and Investment Journal together with senior vice-president and chief economist Clément Gignac. The product is part of IA’s individual savings and pension program.
Lighter in design
“We wanted to come back with a product that is easier to manage in today’s environment, while avoiding the problems we had with Ecoflextra,” Poulin explains. Clearly lighter in design, the product does not offer a bonus. The insurer also left maneuvering room regarding the minimum income rate offered. It will be announced periodically and may vary. For clients who invest in a FORLIFE Series, however, the rate will be set in the contract.
The minimum income for the FORLIFE Series is 5% at age 65. This rate is guaranteed if at least one of the deposits has been made 10 or more years earlier. It applies to 100% of the amounts invested for 10 years or more and to 75% of the amount invested for less than 10 years. This is another feature that makes the series lighter than Ecoflextra. “In Ecoflextra, the 5% rate was available at all ages foreseen in the contract,” Poulin points out (see payout chart).
The current income rate offered when payments start varies. Set at 5.14% on Sept. 1, 2014, the rate is reviewed periodically and is based on age, sex and interest rates. After payments start, the income can vary only upward in case of reset.
Industrial Alliance has also lightened its product by clearly separating the savings and payout periods. The result is two distinct versions of the same product: Savings Stage and Income Stage.
The Savings Stage allows growth, with a choice of 46 funds, three of which contain 100% equity. The Income Stage comes with two options: FORLIFE Guaranteed Maximum Income Fund and FORLIFE Guaranteed Income & Growth Fund.
“This lets us be more comfortable. We control the investment based on two funds only. One made up of fixed-income securities offers maximum income while the other, a diversified fund with 30% equity, will pay a lower income because of the additional cost associated with regulatory capital,” Poulin explains. This means that retirees who choose payout based on the maximum income option will get a rate of 5.14%. A rate of 4.30% applies to the growth option.
The FORLIFE Series is mainly aimed at customers who want immediate guaranteed retirement income. They can deposit a lump sum in the product and withdrawals can begin right away, as long as the pensioner is at least 50 years old at the time of deposit. According to the current rates (5.14% and 4.30%), someone who deposits $200,000 today will earn annual income of $10,280 under the fixed income option and $8,600 under the growth option.
The product also includes automatic income resets every three years, based on the fund value. “If interest rates rise, so will lifetime income,” Poulin says.
Countering longevity risk
“The product helps counter longevity risk, especially for a growing number of Canadians without a defined benefit pension plan,” Clément Gignac says. “According to Statistics Canada, only 28% to 30% of Canadians have a defined benefit plan...Who will assume longevity risk? The Canada Pension Plan…? And if you haven’t worked at all? There are lifetime annuities but it amounts to taking your money and throwing it away.”
FORLIFE lets investors easily access their capital even after the payments have begun, Gignac notes. “Someone who begins accumulating at age 50 who intends to retire at age 65 can remain in the growth phase for 15 years. At age 65 they can choose between two formulas depending on their risk profile. It’s the security of a pension combined with management flexibility,” he says.
Gignac thinks that many people underestimate the longevity factor when planning their retirement. “Statistics Canada finds that life expectancy at age 65 is now 83 for men and 86 for women. This upward trend is continuing while 10-year Canada bonds barely cover inflation,” he points out.
Although the stock market can beat inflation, it is not suitable for everyone, he adds. “With a product like ours, people will not be afraid to take this risk. I predict that the payout option focused on growth will be very successful even if it yields a slightly lower income initially. It may be particularly popular with a growing number of Canadians who decide to continue working part-time after age 65. If the markets do badly, the income will remain guaranteed. But if they do well, the client will have an even higher pension thanks to the reset option,” Gignac explains.