Assets in annuities will jump to $2.9 trillion by 2012–a compound annual growth rate of 7.9%–sparked by demographic trends and product development that addresses both guaranteed income and principal protection, according to recent research by Cerulli Associates. Combined net assets of variable annuity contracts saw continued growth in 2007, with net assets at year’s end of nearly $1.5 trillion, an 8% increase over net assets in 2006, according to NAVA, the variable annuity trade group.
Qualified variable annuities, which hail from IRA rollovers or direct investments from workers who’ve maxed out their 401(k)s, are seen by asset management and insurance companies as having “very strong growth potential,” the Cerulli study notes. Qualified VAs should not be confused with the relatively new trend of including annuities as options in 401(k) plans.
The Cerulli study also found that variable annuity asset managers and insurers are optimistic about the long-term growth prospects of longevity insurance, with 43% of respondents saying longevity insurance has “significant growth potential,” notes Lisa Plotnick, associate director at Cerulli and the study’s lead author. Only 25% of the respondents Cerulli polled in 2006 were as optimistic about longevity insurance.
Annuities within 401(k) plans “work a bit differently” than longevity insurance, Plotnick says, “but the concept is the same.” Longevity insurance is basically an annuity whose payouts are deferred for a significant period of time, usually about 15 to 20 years, she explains. Because of that, “the premium amount is not necessarily very high and it accumulates over time. Should the annuitant still be alive when it comes due, that will generate a lifetime income.” Like longevity insurance, plan participants who buy an annuity within a 401(k) plan “are buying pieces of that future income, and since they are buying it at younger ages it’s less expensive because it’s based on today’s mortality rates,” she adds. In both cases, with longevity insurance and annuities in 401(k) plans, the account holder “is the not getting the benefit of the payout right away.”
A Different Way of Thinking
While study respondents were optimistic about longevity insurance’s future growth, Plotnick says that “increased acceptance and the implementation of longevity insurance solutions will be several years away” because when moving into decumulation “people have to think about annuity units instead of money accumulating–you’re not buying shares of something that’s going to accumulate, you’re buying shares of future dollars.” That’s “difficult to grasp,” she says, and this leads to marketing challenges for companies. “Companies have to strategize with communication issues about the products, the fees they charge, and how it might work with other programs the worker owns.”
Another investing vehicle that shows promising growth is fixed immediate annuities, Plotnick says. “If someone wants to receive a lifetime income for an amount that won’t fluctuate, other than perhaps inflation riders that may be built into [an annuity] contract, we anticipate fixed immediate annuities being used as a base level of income for retirees,” she says.
While fixed annuities actually had a pretty good first quarter in terms of sales, Plotnick doesn’t see a lot of growth over the long term in qualified fixed annuities.
While advisors prefer to generate income for their clients via mutual funds, the study found they are increasingly embracing annuities with a guaranteed minimum withdrawal benefit (GMWB). “Even though it comes at a cost, GMWB is a powerful combination of principal protection and guaranteed retirement income,” Plotnick says.
Products Attractive to Advisors
When it comes to creating products for advisors, the study found that insurers must assess “how often advisors use annuities, how they use them, and what other products they are using at the same time,” she says. That’s critical, she says, “because product developers on the insurance side need to build the annuities so that they can work in tandem with the products that advisors are currently selling.” Insurers should strive to understand “the advisor’s world and how the advisor is constructing a retirement portfolio; it’s not just enough to look at differences in advisor by channel, they also have to be broken down further into practice types. For instance, wealth managers have completely different needs than a financial planner. A wealth manager will use more products, so the annuity has to fit in better, but also you have to look at the client base–whether it’s mass market, middle market, or high-net-worth.”
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.