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: