Following Manulife Financial's lead, Sun Life Financial has launched a guaranteed withdrawal benefit product in its group pension plans. Some competitors have announced that they will also be getting on board, while others are watching and waiting.
The guaranteed withdrawal product has taken the individual investment sector by storm since Manulife opened this market in Canada in fall 2006. IncomePlus was soon emulated by a host of competitors: Sun Life, Desjardins Financial Security (DFS), Industrial Alliance, SSQ Financial Group, Empire Life, Transamerica Life Canada and Great-West Life (including Canada Life and London Life).
Today, insurers are hoping to achieve similar success in the group savings sector with this product that revolutionized the individual segregated fund market.
The timing seems to be excellent. Actuarial consultant Watson Wyatt (now Towers Watson) examined 84 defined contribution (DC) plans in September 2009 and found that three-quarters of the plans have taken or plan to take other measures to help their participants maximize the returns on their investments. Most often, these measures will involve changes to investment options, 49% of the survey respondents report.
Jean Lamontagne, Senior Consultant, Investment at Towers Watson, says that the results augur well for a product such as the group guaranteed withdrawal benefit. "It's a product with a bright future. It is well adapted to defined contribution plans because plan members want both guaranteed income and an investment that can go up in value," he told The Insurance and Investment Journal.
Another growth driver of these products is plan members' increasing need for security, according to an Ipsos Reid survey conducted by the Canadian division of Russell Investments, an international firm that manages $190 billion in assets across 40 countries.
The survey results are disturbing. Apparently, Canadians ages 50 and over are leaving about one-quarter of the investments in their portfolio in stagnant vehicles (guaranteed investment certificates, high interest savings accounts); this proportion is at a nine-year peak. These investment vehicles hold $300 billion in Canada, Russell Investments reports.
If Canadians are letting their savings lie dormant to protect their capital, it is because of the exceptional volatility in the past two years, says Fred Pinto, Managing Director, Distribution Services at Russell Investments Canada. In today's context, "many Canadians have a lower risk tolerance and a higher desire for security," he explains.
The fourth largest player in group savings, Manulife caused a stir with its launch of Group IncomePlus in 2008. The February launch of a group guaranteed withdrawal product by Sun Life, the leader in the group pension market, may strengthen the trend. The most recent Fraser Group data show that Sun Life controlled 41% of the group accumulation pension plan market in Canada in 2008, with assets of $28.6 billion. Manulife has 13% market share with $9.2 billion (see table on p. 33). This means that the guaranteed withdrawal benefit is now available in more than half the Canadian group savings market.
Fraser Group found that survey participants on accumulation plans in Canada hold total assets of $69.3 billion, 46% of which is in defined contribution plans. This is the target niche of the group guaranteed withdrawal products. Group RRSPs account for 40% of the market. The rest is divided among deferred profit sharing plans (7%) and other types of plans such as non-registered plans, stock option plans and hybrid formulas (7%). The group guaranteed withdrawal products can be used in all accumulation plans.
Great-West ranked second with a 24% share and $16.5 billion in assets in group accumulation plans, had not returned our calls by press time about whether it has plans to introduce its new guaranteed withdrawal product into the group market.
Standard Life Canada, the third largest group savings player, with a Canadian market share of 15%, currently has no guaranteed withdrawal product, but confirmed to The Insurance and Investment Journal that it is looking at entering this market in the next 12 months - both on the retail and group side (See p. 30).
DFS holds the seventh ranking in group savings in Canada with a 1% market share and assets under management of $900 million in accumulation plans. The insurer says it is not rushing to follow the trend but that it is considering it.
"A product like Sun Life's has its place, but it is vital that the participant be guided in the transition to retirement, whatever product they select. We have always tried to guide and educate participants in this area," says Éric Filion, Senior Director, Product Development and Marketing, Group Retirement Savings at DFS.
Weighing its options
Before committing itself, DFS is carefully weighing its options related to group guaranteed withdrawal products, Mr. Filion explains. Pricing and flexibility are being considered, he adds. The company is looking at how it can set a reasonable cost for the guarantee while ensuring the profitability of the product and how easy will it be to transfer the product if the plan sponsor changes suppliers.
Industrial Alliance holds a 2% market share in group savings in Canada. "It's all being studied," Jacques Carrière, Vice President Investor Relations simply replied, when asked whether the insurer plans to launch a group guaranteed withdrawal benefit option.
SSQ Financial Group announced that ASTRA Guaranteed Income will be offered to group plan members. The time horizon: during 2010. "We have to take the time to clearly define aspects such as pricing, sponsors' liability, de-accumulation method, etc," Marc Trépanier, Vice President of Business Development, individual and group savings at SSQ Financial Group told The Insurance and Investment Journal.
The migration of the retail guaranteed withdrawal product to the group sector is inevitable, he says, adding that the product has great potential in this market. "With two large players in the market, others will likely follow. We are one of them. The actuaries are clamouring for it. The phone is starting to ring and they're asking questions about the group guaranteed withdrawal product, a sign that the trend is really taking shape."
Known for both its group and individual savings products, SSQ says that its individual guaranteed withdrawal benefit product launched in fall 2008 has been quite successful. It now generates 30% of sales of individual investments, a proportion that is constantly rising, Mr. Trépanier points out. In group, the product will interest clients ages 50 and up, he adds.
Empire Life, another small player in the group savings plan sector, does not plan to offer its guaranteed withdrawal benefit product in the near future. Spokesperson Mary Beth Gauthier points out that group savings are not a priority for Empire Life. It is more interested in the group insurance sector.
Transamerica, which offers a guaranteed withdrawal benefit product for individuals, is not active in the group savings sector.
Manulife, which pioneered both the individual and group products, says it is pleased to see Sun Life entering the group guaranteed withdrawal product market. "I think it's great having competitors; it vitalizes the market," says Mike Collins, Group Savings and Retirement Solutions Marketing Vice President at Manulife.
Mr. Collins expects the arrival of new players to draw attention to the group product, particularly in the case of larger case market consultants. "It creates another option for them when providing service to their clients," he says.
Manulife thinks this market will enjoy a growth spurt. For now, Mr. Collins has seen half of his new clients purchase Group IncomePlus. The proportion is much smaller in existing plans. While not mentioning sales figures, he does say that this product sells more easily to new groups. This is because the product is quite complex and existing groups would have to update their communication plan for participants to include the new offering.
Straightforward communication and proper training is the cornerstone of the product, Mr. Collins explains. If plan participants do not understand the product clearly, they will not invest in the guaranteed withdrawal benefit option. Manulife, which targets both small and large groups, reports member participation ranging from 4% to 60% depending on the group. This percentage is steadily rising at the company, as participants grasp the benefits of the guarantee, Mr. Collins says.
Based on U.S. experience, he predicts that group guaranteed withdrawal benefit products will inevitably catch on in the Canadian group market. "From our experience in USA, we can tell that the trend from retail to group investment [will] take a while," he says.
For now, an average of 73 members opt for the group guaranteed withdrawal benefit option per plan, for total average assets under management of $1.2 million, Mr. Collins reports.