More financial service companies are focusing on the retirement income market, but they are moving away from using immediate variable annuities as the primary way for consumers to generate retirement income.
That is a key finding of the 2006 study of retirement income products of variable annuity issuers, conducted by Diversified Services Group Inc., Wayne, Pa.
Of the 42 companies surveyed, 12 are still actively involved in the IVA market, according to preliminary results of the survey. 3 more have an IVA but they are not actively promoting the product for sale in the IVA market.
Meanwhile, an additional 3 VA issuers have taken their IVA product off the market, choosing instead to focus on and promote alternative product choices for consumers to derive retirement income from their savings.
In addition, 8 of the issuers are active in the “substitute” IVA market. (Substitutes are VAs sold primarily for annuitization or products with strategic emphasis and packaging placed on payout options for retirement income.)
The preliminary survey results also show that industry sales of IVAs continued their downward trend, dropping to a total of $248 million in 2005, the fourth consecutive year of sales decline. But although the IVAs have been disappointing in terms of contracts sold, average premium per contract has improved.
Looking at alternative offerings, the early survey results show there is growing success in the sale of guaranteed living benefit riders on VA contracts.
For instance, nearly 74% of the surveyed companies now offer at least one GLB rider with their VAs.
The most popular form of this rider appears to be the guaranteed minimum withdrawal benefit. The GMWB was offered by 60% of the companies surveyed, an increase of 16% over last year’s results. Meanwhile, the guaranteed minimum income benefit was offered by 38%, and the guaranteed minimum accumulation benefit was offered by 52% of the surveyed firms.
Out of 22 respondents that were willing to submit an estimate for expected growth of GLB sales, the average growth expectation is approximately 18% per year over the next 3 years. Meanwhile, 71% of the 42 companies surveyed indicated they increased their level of activity in this market compared to 12 months ago.
Looking ahead, key trends will be continuing product modifications and increasing focus on education and training of financial advisors and consumers about the challenges related to retirement income and how various planning processes and product offerings can provide sound solutions.
In addition, innovative retirement income solutions will dominate market developments. So will increasing focus on education and training tools that help advisors solve for the diverse needs of a new generation of retirees.
As new waves of retirees face a growing gap between their retirement expenses and income covered by traditional pension benefits, they will need to become increasingly self reliant. In response, they will look to their own personal retirement savings (401k, IRA, and 403b) and personal investments/resources to supplement any retirement income benefits provided by their employers and Social Security.
The trends that have developed over the 7 years this study has been conducted demonstrate a remarkable shift in industry orientation. Many financial services companies now recognize the growing need for retirement income solutions, and many are now actively positioning (or re-positioning) themselves to provide appropriate solutions.