During the past 8 years, a number of significant changes have occurred in the retirement income products industry.
These include organizational shifts to better address retirement income needs, the number of companies participating in this new opportunity, and product evolution and innovation as a key factor in many company strategies.
There have been a few surprises too. Despite the stated intentions and efforts of a number of firms, immediate variable annuities (IVAs) have not achieved the potential originally expected of them and certainly have not grown along with the attention on the retirement income market.
In fact, total IVA sales reached only $272 million in 2006–a modest increase over 2005, but substantially lower than any of the annual periods from 1999 through 2004, according to the 2007 Retirement Income Products Study. (See chart.)
[Note: The study, conducted by Diversified Services Group Inc., Wayne, Pa., covers 42 insurance and mutual fund companies plus interviews with 21 retirement income executives.]
Consistent with this, executives active in the industry have lowered their estimates of IVA future potential.
On the other hand, sales of variable annuities with guaranteed living benefit (GLB) options have accelerated at a rate few would have predicted even 4 or 5 years ago. In particular, guaranteed minimum withdrawal benefits with lifetime income–also called guaranteed lifetime withdrawal benefits (GLWB)–are now one of the primary product solutions offered among companies active in this market.
Given the rate of change in this marketplace, it is perhaps a bit rash to make predictions about its long-term future. But some logical projections about the near-term future, based on the survey results and executive interviews, are definitely in order. Here are 4 to consider:
1. Single premium immediate annuities will capture a greater share of the retirement income market.
Despite the growing popularity of variable annuities with GLBs, more companies have fixed immediate annuities in their portfolio of products than any other guaranteed payout product. In the past few years, companies that primarily focus on fixed products have stepped up to the plate to make their products more competitive.
First, they began offering an inflation adjustment option. More recent enhancements planned or underway include long term care riders, medically underwritten SPIAs, liquidity features and other improvements. As these products become more flexible in their ability to offer guarantees, their market share is likely to grow, particularly among more conservative retirees who focus on certainty in payouts, or whose retirement plan builds upon a fixed income base to counter absence of a corporate pension.
2. Variable annuities with GLBs will show sales growth at a double-digit rate for the foreseeable future.
Half of the surveyed companies having VAs with GLB riders had selected this product category as their primary means for providing retirement income. This significant usage and growth should continue for several reasons:
o When asked what sort of GLB growth they expect for their own firms in the next 3 years, the average response was in the 30% range.
o Innovation continues: 11 out of 15 executives interviewed who already offer VAs with a GLB option are currently designing new GLBs for their VAs. Also, a number of new and unique features to enhance these products are in the planning or development stage.
o Consumer surveys make it clear that many retirees want continued control of their assets, upside potential with downside protection and guaranteed lifetime income. The GLWB provides a solution that can address all of these needs.
One area of concern that could negatively impact future growth is the increasing complexity of the products; some advisors are already reaching information overload, according to industry reports.
3. Mutual fund companies will become a growing factor, and perhaps the greatest challenge to insurer penetration of the retirement income market.
Mutual funds have built a well-established business model, allowing them to help manage substantial assets. Now, a growing number of such firms are recognizing the possible impact on their business of boomers who retire and seek out income solutions. They also see that competition for their assets will come from annuities because these products alone can guarantee income for a person’s lifetime.
The mutual fund companies, therefore, are concluding that to retain these assets, they will need to establish an income “guarantee” of some sort. Mutual fund companies are already investigating ways to solve this issue–a lot is happening, much of it still below the radar at this point. The point is that these companies are determined to do something about this competitive challenge. Beyond offering systematic withdrawal programs, they are generally considering two not mutually exclusive approaches: developing income oriented funds, and/or developing a means of providing some form of guarantee, perhaps with the assistance of an insurance partner.
4. Longevity insurance will be a difficult sale.
“Longevity insurance” appears to be the next area where companies will focus, but there are significant differences of opinion over whether consumers will buy such a product. Among the 42 companies surveyed, 6 already offer this product and another 5 are developing one. Executive interviews revealed that another half dozen or so are considering the possibility.
At this point, there is little to show in the form of results. A number of executives are doubtful about the ultimate success of these products, primarily because it is difficult to convince consumers of the value since they may not see the benefit for quite a few years, if at all.
It may be too soon to tell how successful this product will be among the baby boomer retirees, but it is fairly clear that selling the product will present some real challenges.
Expect plenty of change over the next 5 years. Partly driven by the growing mass of baby boomers reaching retirement age, and partly driven by increasing activity among competitors, an abundance of innovation and creativity is being applied to this fundamental need for satisfactory retirement income solutions. The future should prove to be fascinating as well as continually surprising.
James R. Sholder is a principal of The Diversified Services Group, Inc., Wayne, Pa. His e-mail address is .