This article appears in the May 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Rising interest rates, in combination with stock market uncertainty, have spurred increased demand for annuities as some clients seek a guaranteed and predictable source of income. In turn, clients have benefited from higher payouts resulting from those higher rates.
The pickup in demand for annuities follows a period during which sales were falling due to low interest rates. However, the Bank of Canada’s recent hikes have created a better guaranteed-rate environment, and “weak economic conditions and market volatility also contributed to investors seeking guaranteed income,” said Ahilan Balachandran, founder and CEO of LifePlan Investments Inc. in Markham, Ont.
“Higher interest rates have made the income payouts on annuities more attractive to clients than they have been in previous years,” Canada Life Assurance Co. stated in an email to Investment Executive. The company saw an increase in both the number of policies sold and the average policy size compared with previous years: “We saw greater interest from advisors who had not previously sold annuities.”
Carlos Cardone, senior managing director with Investor Economics, a unit of ISS Market Intelligence (ISSMI) in Toronto, said term-certain annuities (which provide guaranteed income payments for a fixed period) were the most popular over the past year. They surpassed $3 billion in new premiums in 2022, “a level not seen in recent years,” he said.
According to ISSMI, new premiums (based on sales) for term-certain annuities jumped by 57% in 2022 from $1.96 billion in 2021.
New sales for payout annuities (which provide a steady source of income for as long as the annuitant lives) increased by 25% in 2022 to $755 million from $604 million in 2021. Within the category, new sales for joint life annuities increased by 6.5% year over year, while new sales for single life annuities jumped by 18%.
Higher sales were accompanied by higher payouts as a result of higher interest rates, said Gary Baker, chief operating officer with CANNEX Financial Exchanges Ltd. in Toronto and president of CANNEX USA.
Data provided by CANNEX shows the monthly payout for a 65-year-old man increased by 20.5% to $572.57 in February 2023, from $475 in January 2022. That amount is based on a non-registered single life annuity with a premium of $100,000 and a 10-year guarantee, with payouts commencing one month after purchase. (The figures are based on an average of the top three providers.)
For a 65-year-old woman, the payout for an annuity with similar terms increased by 22.75%, to $547.30 from $445.86 over the same period.
Baker said annuities with a 10-year guarantee were the most common option purchased in Ontario.
Payouts are higher across the board, but annuity providers do not necessarily offer the same payout rates for the same annuity. For example, based on data from lifeannuity.com, a 70-year-old man with a deposit of $100,000 in an annuity with a 10-year guarantee would receive a monthly payout of $655.67 from RBC Life Insurance, $614.41 from Sun Life Assurance Co. of Canada, $613.95 from Canada Life and $596.54 from Empire Life Insurance Co., as of April 11.
A 70-year-old woman acquiring the same annuity would receive $614.10 from RBC Life, $576.34 from Sun Life, $564.51 from Canada Life and $556.96 from Empire Life.
Michael Adams, associate director with AM Best Co. in New Jersey, sees larger Canadian insurers gravitating toward fixed-rate products as a result of market volatility.
Drawing on trends in the U.S. market, which Adams said are largely similar to those in the Canadian market, he anticipates an increase in demand for such products. He added that sales of segregated funds and variable annuity products will probably decline during the current high-rate environment.
Over the past several years, Adams said, Canadian insurers have been striving to de-risk their products and are hesitant to offer longer-term guarantees, and are instead focusing on shorter-duration products.
Adams believes the Canadian life annuity space is generally stable and that large insurance companies are well capitalized and have a stable outlook, which will help sustain growth in the annuities market.
“When it comes to annuities, everyone’s mind goes to life annuities for guaranteed, predictable retirement income,” Balachandran said. “However, I look at annuities based on the client’s investment objectives, risk tolerance and time horizon. This way, I can decide whether the client is fit for an accumulation or income-generating annuity.”
As for the types of clients suited to these products, “annuities can be attractive for risk-averse, middle-aged investors looking for a more stable investment choice than equities or other volatile assets,” Balachandran said. Such clients include retirees and near-retirees; risk-averse investors who prefer a low-risk investment option that provides a predictable return; and clients who require a guaranteed income stream for a specific period.
“Purchasing an annuity when interest rates are high is a good option for these investors,” he said. “[But] by locking into an annuity, they may miss out on potential market upside and cannot diversify their portfolio to accommodate potential changes in their financial objectives in the future.”
In spite of higher annuity sales, there have been no significant changes in the annuity product lineup, Adams said, and Canada Life noted that its annuity lineup has not changed.
Little progress on ALDAs and VPLAs
Almost two years have passed since the federal government amended the Income Tax Act in June 2021 to provide Canadian retirees with access to advanced life deferred annuities (ALDAs) and variable payment life annuities (VPLAs). However, both ALDAs and VPLAs remain generally unavailable.
ALDAs are designed to allow retirees to transfer up to 25% of the assets held in their RRSP or RRIF, to a maximum of $150,000, into an annuity that defers payments to clients — together with taxes on the payments — until they reach age 85.
VPLAs are designed to increase yields by incorporating mortality credits and longevity-risk pooling. Retirees’ annuity assets are pooled with those of other plan members and invested in a portfolio of securities. Payments are made to the plan members based on the performance of the pool.
“Only large defined-contribution plan sponsors can set up individual in-plan VPLAs,” said Noeline Simon, vice-president, taxation, pension and reporting with Canadian Life and Health Insurance Association Inc. “The DC plan membership must be large enough [to do so].”
Simon said that while the tax legislation is in place, the establishment of VPLAs must be enabled by the relevant provincial pension benefits legislation. The establishment of ALDAs must also be supported by the appropriate provincial legislation.
In November 2022, Saskatchewan became the only province to table such legislation when it introduced the Pension Benefits Amendment Act, 2022, which provides employers and residents with more options to fund and access retirement savings. (The bill passed second reading in March.)
For now, VPLAs and ALDAs are not insurance company products, although insurance companies might be used as administrators by plan sponsors. However, Simon said, insurers are advocating that the federal government establish stand-alone VPLAs, which they can offer to individuals who have registered accounts.