senior couple meets with advisor at home

Toronto-based Manulife Financial Corp.‘s decision to discontinue external sales of individual fixed annuities will mean there are fewer options in an already limited annuities marketplace for clients who are seeking a guaranteed income stream during retirement.

Manulife’s decision also “puts [financial] advisors in a bad spot, especially those who are aligned with Manulife,” says Jim Ruta, executive vice president with the Covenant Group in Toronto. That’s because these advisors now have to contend with a “reduction in potential [income-oriented] solutions” for their clients.

An email sent to Investment Executive by Manulife stated: “The decision to discontinue external sales of individual fixed annuities effective June 29 was not made lightly.”

The email also stated that there will be no changes to existing annuities contracts and that Manulife will continue to offer individual variable annuities contracts as well as group annuities contracts.

Although Manulife is ceasing to issue new fixed annuities contracts to the public, new individual fixed annuities contracts can still be opened after June 29 for internal transfers, the email stated. The company also will continue to issue new individual annuities contracts in cases in which contract provisions allow for a transfer at maturity.

A fixed annuity, as opposed to a variable annuity, provides guaranteed income payments for as long as the annuitant is alive or for a guaranteed period. In the case of a joint life annuity, income payments are made for as long as the annuitant or his or her spouse or partner lives.

With a guaranteed period option or a term-certain annuity, the annuitant’s beneficiary receives the balance of the guaranteed income payments should the annuitant die before the period of guaranteed payments runs out.

A variable annuity, on the other hand, provides fixed as well as variable income benefits. The fixed-income component’s portion of the benefit usually is much lower than in a fixed annuity, while the variable income portion fluctuates with the performance of the investments to which the annuity is linked. The primary difference between a variable annuity and a fixed annuity is that the income provided is not guaranteed in the former product.

Thus, fixed annuities are a popular option for retirees who want a stable source of income during retirement and to protect themselves against the risk of outliving their money, says John DiNovo, financial planner with Aligned Capital Partners Inc. in Toronto.

Adds Ruta: “Annuities are part of the retirement process and not only a solution. You cannot outlive a fixed annuity, which is equivalent to a defined-benefit plan.”

Manulife became one of the largest providers of annuities in Canada following its acquisition of Montreal-based Standard Life Assurance Co. of Canada in 2015, the latter of which offered a “full spectrum of products,” according to Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont.

Manulife’s exit from the annuities business leaves a big gap. In fact, Geller says, there are “fewer and fewer” insurers offering annuities.

“Competition in the annuities space is diminishing,” adds DiNovo, “at a time when they are needed most” by Canada’s aging population.

Manulife’s decision could put advisors in a difficult position when they’re conducting their due diligence on the suitability of product recommendations for clients, Geller says: “[Advisors] have to exercise great [due] diligence in choosing an insurer’s products [in which to] place clients’ funds. So, if [an insurer] cannot show dedication to a product line, advisors could be on the hook for recommendations they make.”

Although Manulife did not explain why it will cease sales of annuities, Ruta suggests that they’re “expensive to issue,” and offering guaranteed products could affect an insurer’s reserve requirements. In addition, the lengthy low interest rate environment has made providing guaranteed incomes difficult.

In 2011, Manulife’s U.S. subsidiary, Boston-based John Hancock Financial, discontinued several annuities lines because of low interest rates and volatile equities markets. That year, Manulife’s income statement took a hit of $900 million triggered by John Hancock’s annuities-related losses.

Then, in 2013, Toronto-based Sun Life Financial Inc. sold its U.S. annuities business following earlier losses for reasons similar to those suffered by John Hancock, which forced Sun Life to beef up its reserves.

In addition to perceived market and interest rate risks, corporate profitability could be an underlying reason for Manulife’s exit from the fixed annuities business.

“There is a reversion to a mandate of profitability among shareholder-owned companies while the focus on clients has diminished,” DiNovo says.

Although Manulife is exiting this space, other big insurers, such as Toronto-based Canada Life Assurance Co., Winnipeg-based Great-West Life Assurance Co. and Sun Life, continue to offer fixed annuities in Canada.

However, not all advisors consider fixed annuities an important product offering. DiNovo says that some advisors view an annuity sale as “a one-time event” from which they receive a single commission. For these advisors, Manulife’s decision might not have any material impact.