Despite a flurry of suspensions in sales, insurers insist that products with a guaranteed minimum withdrawal benefit (GMWB) won’t disappear anytime soon. In fact, industry experts say, sales of such products are likely to resume once interest rates rise and markets stabilize.
“GMWBs are a $30-billion market in Canada,” says Peter Wouters, director of tax and estate planning and retail insurance products and marketing with Kingston, Ont.-based Empire Life Insurance Co. “And, with aging demographics, the need for these products is only going to get bigger. Companies will not give up on them.”
GMWBs provide an “income for life” option that clients can tack onto their segregated fund – essentially, a mutual fund packaged within an insurance contract that provides the client with a guaranteed return and death benefit. At a certain age – typically, 65 – the GMWB option allows the insurance policyholder to withdraw a portion of the seg fund assets (usually, 3% to 5%) as a form of income for life.
However, as a result of the perfect storm of volatile markets, low interest rates and rising capital requirements, GMWB obligations have become harder for insurers to sustain. Four of the 10 Canadian insurers that offer GMWBs have either temporarily suspended offering the product or left the market altogether.
In April, Montreal-based Standard Life Assurance Co. of Canada and Lévis, Que.-based Desjardins Financial Security (DFS) temporarily suspended offering GMWB products. Then, in May, Toronto-based Sun Life Financial Inc. did the same for new sales within the independent channel of its SunWise Essential Series of seg funds having a GMWB benefit.
Other insurers, such as Toronto-based Manulife Financial Corp., Toronto-based Canada Life Assurance Co. and Quebec City-based SSQ Life Insurance Co. Inc., have kept GMWBs on their shelves, but have either reduced payouts or raised fees. For example, Manulife has lowered the payout percentages on its Manulife GIF Select IncomePlus product – a variable annuity with a savings component that offers clients a lifetime stream of income at retirement at ages 55, 65 and 75 – by 100 basis points. Thus, the withdrawal payout percentage for a client retiring at 65 will fall to 4% from 5%.
The only insurer that has kept its GMWB product intact is Empire Life, which has sustained the 5% payout percentage of its Class Plus product since its introduction in 2008. “We came out of the gate,” Wouters says, “when interest rates were already low and markets were volatile, so we do not need to make the same changes as our competitors.”
All that many insurers need for their original products to become profitable again is for interest rates on long-term bonds to rise by 50 bps, Wouters adds: “It’s not a sharp rise in the interest rates that insurers are looking for; over billions of dollars, half a per cent makes a large difference.”
In the meantime, both DFS and Standard Life are considering their moves a “time out.” They are retooling their GMWB options for current market conditions.
“We are very committed to this market,” says Alain Bédard, senior vice president of individual insurance and savings with DFS. “And we have full intentions of re-entering it once conditions improve.” Once resumed, he adds, the product may have a lower payout percentage or higher fees.
As for SSQ, it suspended new sales of its ASTRA Guaranteed Income (AGI) II product on May 18. However, pending regulatory approval, SSQ will add a GMWB option to its revamped version of the AGI II – ASTRA Guaranteed Income 2.1 – in which clients could receive a lifetime income payout of 4% at age 65 vs the 5% payout for AGI II products.
In the meantime, for financial advisors who had sold a large number of GMWBs to their clients, the future will be a struggle, says Andrew Guilfoyle, partner with Guilfoyle Financial Planning Inc., an independent wealth-management firm based in Toronto: “Clients will be very disappointed with these products in years to come, due to the fees embedded in them in the long run.” IE
© 2012 Investment Executive. All rights reserved.