In January, Manulife Financial announced various changes aimed at reducing risk in its segregated fund portfolio. These changes include reducing the GIF or GIF encore fund lineup for new contract sales from the current 77 offerings to 38 by removing the option of purchasing 100% equity funds. The company is also closing the GIF encore Series 1 funds to new deposits and sales and deposits. This product line featured a 100% maturity guarantee. New sales and deposits will go into the Series 2 funds which have a 75% guarantee.
These and other changes apply to Manulife's older seg fund line and not its IncomePlus option. Certain changes took effect on Jan. 26 and others will be implemented April 30, 2009.
On its Repsource website, the company explained that "In light of the current market environment, Manulife has undertaken a strategic review of our entire Segregated Fund product line. We have decided to make some necessary changes consistent with our risk management philosophy and prudent approach to product design that will allow us to remain focused on our core retirement-oriented target markets."
The Repsource message added, "It is important to note that the upcoming changes only apply to our older segregated fund products: GIF/GIF encore and CAP, MLIA and MLIP. GIF Select, featuring our popular IncomePlus option, is not impacted by these changes."
No impact on IncomePlus
In an interview with The Insurance Journal, Roy Firth, Manulife's executive vice-president, individual wealth management, said the changes were made to dial back on the risk in the non-IncomePlus, non-payout type segregated fund product.
He added that Manulife did not think adjustments were necessary to the IncomePlus product suite. "IncomePlus didn't have some of the same benefits or features that we are changing in some of these other ones." For example, the maximum equity in IncomePlus is 80% whereas some of the other funds went as high as 100%.
Clients who open up new GIF or GIF encore contracts on Jan 26, 2009 or later, will no longer have access to the 100% Canadian and Foreign equity funds (39 in total)." Manulife still offers 38 funds for new purchases. There are 6 fixed income, 21 balanced, 5 fund bundles, and 6 Simplicity Portfolios, says the company.
Another change is that deposits over age 80 are no longer accepted. For contracts opened prior to Jan. 26, supplementary deposits are still allowed after age 80, says the Repsource message.
Mr. Firth says this measure is directly related to the death benefit guarantee. "...If you die in two years and the market is down 30%, then the insurance company has to make good on that." He adds that to continue offering deposits to people over the age of 80 would lead to higher costs. "If we leave it open, we would have to price it so high that it would appear to be prohibitive."
The company also announced on the Repsource site that "Effective April 30, 2009, GIF encore Series 1 funds will close to new deposits and switches in. Regular investments into these funds, such as pre-authorized chequing (PAC), will automatically move to the GIF encore Series 2 version of the same fund.
Series 2 has the same investment objective as Series 1, but with a 75% maturity guarantee instead of 100% guarantee. Because of this, the fund has a lower management expense ratio, adds the company. "Existing assets will remain in Series 1 and will still be covered by the 100% maturity guarantee."
Additionally, effective April 30, CAP, MLIA and MLIP will close to new contracts. "Existing contracts will remain in effect with no changes to the funds available or to the product features and benefits. This decision is as a result of the review process to determine what changes would be best for the future sustainability of our segregated fund products," says the Repsource message.
In addition, effective April 30, some funds will change names. Some of these changes involve eliminating 80/20, a reference to the asset mix, from the fund name. Mr. Firth says eliminating 80/20 from the names gives the company the option to change the asset mix in these funds, although clients would be advised if such changes were to be made.
Mr. Firth calls reaction from the advisor channel to the seg fund changes "muted" and says that while some advisors were attached to the older products, most seem to perceive it as a "non-event" and part of ongoing product refinement. He adds that these legacy lines also represent a small percentage of sales.
The IncomePlus line, on the other hand, is now attracting 70% of Manulife's segregated fund sales. Because of its popularity, he believes advisors would have been more concerned if changes had been made to this product line. That's not to say there will never be any changes, he adds. "Clearly we're always reviewing and fine-tuning and such."
Are Manulife's changes part of a trend toward more conservative segregated fund risk management in the market? Mr. Firth says he believes some refinements will be made in the market going forward. "In general, I would say that risk is going to be dialled down a little bit and pricing increased." He adds, "I don't think it's going to be massive changes because by and large (carriers) have been moving away from (100%) maturity guarantees in the past few years."
He says Manulife tends to have more conservative seg fund products, but he thinks other players may also adjust downwards the percentage of equities within their seg funds. "That's going to happen everywhere."