After enjoying four years of growth, which was followed by three years of consolidation, products with a guaranteed minimum withdrawal benefit (GMWB) have faded from the spotlight. Still, there is a select group of clients for whom GMWBs are useful.

“Sales are down significantly [because the products are] no longer meeting the needs of investors,” says Trevor Archer, product director, retirement plans, with Manulife Financial Corp. in Toronto. However, Archer continues, “The lifetime income proposition of GMWBs is still attractive.”

For that reason, GMWBs may still have a place in the portfolios of risk-averse clients who are looking for both a guaranteed income stream and protection against longevity, market and inflation risks.

The suitability of GMWBs for clients depends largely on the age of the individual investor, says Faisal Habib, chief operating officer and director of financial engineering with Quantitative Wealth Management Analytics Group Inc. (a.k.a. QWeMA ) in Toronto. Typically, he says, individuals approaching retirement are more inclined to focus on capital preservation and may still see value in GMWBs.

But GMWBs aren’t what they used to be. “Their features and benefits have been watered down,” Habib says, which makes these products much less attractive to clients.

GMWBs, first introduced by Manulife in 2006 and replicated by several other insurers, emerged as, says Derek Green, president of CI Investments Inc. in Toronto, “one of the most successful financial products ever launched in Canada.”

Among the early providers were Toronto-based Sun Life Financial Inc., Desjardins Financial Security Investments Inc. of Lévis, Que.; Canada Life Assurance Co. of Toronto; Industrial Alliance Insurance and Financial Services Inc. of Quebec City; Toronto-based Transamerica Life Canada; Montreal-based Standard Life Assurance Co. of Canada; and Kingston, Ont.-based Empire Life Insurance Co.

Now, all of these insurers — with the exception of Manulife, Sun Life, Canada Life and Empire Life — have ceased issuing new GMWBs or suspended sales for some or all of their GMWB products. The remaining providers have made significant adjustments to their product structures, reduced features or introduced restrictions on sales and distribution.

For example, SunWise Essential Series 2 Income Class is available only through Sun Life advisors, whereas other financial advisors can sell the Investment Class and the Estate Class versions of the product.

One of the more important changes in features of most GMWBs still available is the reduction in the equities component of investments to as low as 60% (down from 100%) by all providers except for Empire Life, a late entrant into this product space.

Market volatility during the global financial crisis forced GMWB providers to recognize that equities markets could collapse significantly within a short period of time and take a much longer time to recover. In Habib’s opinion, this change in asset allocation is one of the more undesirable changes: “Investors are generally willing to take more risk because of the guaranteed payout for life [offered by GMWBs].”

This change also is a nod to new regulatory requirements that dictate that the minimum capital requirements of insurers that issue GMWBs must account for the risk of loss arising from the guarantees embedded in these products. This risk increases with equities investments. These factors, when combined with low interest rates (the guaranteed payout rate is higher than prevailing interest rates), have pressured GMWB providers to make cutbacks.

As a result, the annual guaranteed payout rate for products such as Manulife GIF Select IncomePlus and SunWise Essential Series 2 has been reduced to 4% from 5% at specified ages; and the principal guarantee upon death has been reduced to 75% from 100% for most products (with the exception of the Estate Class versions, in most cases).

However, alternative, annuities-based options with lifetime income now are being offered to clients. For example, Manulife now offers its PensionBuilder and RetirementPlus products, which have greater flexibility than traditional annuities, insofar as clients can have access to their capital if needed. These products also offer income credits based on potentially rising interest rates. Both products offer guaranteed income for life, based on a unique rate that is tied to the client’s age at retirement.

CI, for its part, is offering a mutual fund, the G5/20 series, that provides annual cash flow of 5% for 20 years. A lump sum is invested for five years in a diversified portfolio of growth and fixed-income investments. Following the five-year accumulation period, the fund pays out 5% of the unitholder’s initial investment or the market value of the investment at the fifth anniversary date, whichever is greater.    IE