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Retirement Planning > Retirement Investing

An Oncoming ‘Boom’ in the Retirement Income Market

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There is some $9.5 trillion sitting either in IRAs, defined contribution plans or non-qualified mutual funds that may soon be looking for an investment option that provides a lifetime of guaranteed income. And annuity insurers are well-positioned to capture that burgeoning market, says a new report by Conning Research & Consulting, “The Big Payout: Growing Individual Retirement Income Opportunities.”

Breaking down the numbers further, Conning estimates that individual and group annuities accounted for 46 percent of all defined contribution (DC) plan assets as of the end of 2011. A nice percentage, but Conning says there is even more in play. It calculates there was another $7.3 trillion parked in IRAs and DC plans not invested in annuities, with an additional $2.2 trillion held in non-qualified mutual funds that were earmarked as retirement income.

What does that mean for annuity insurers? It underscores an enormous opportunity to move those dollars into their products, Scott Hawkins, (below right) vice president of insurance research and consulting for Conning in Hartford, Conn.

Two bites

As he sees it, annuity insurers have two chances to bite into that marketplace. The first is when people turn 65 and look to liquidate a portion of their accumulated funds to support their retirement. As the Conning reports points out, 2.7 million baby boomers reached age 65 in 2011.

There are the retirees who turn 70-and-a-half and must start taking required minimum distributions from their DC plans or IRAs. Last year, 2 million members of the so-called Silent Generation turned 71.

“Not only are insurers responding by marketing to this emerging group of retirees, but they are actively enhancing their existing products lines,” Hawkins says. “They are developing rollover variable annuities that are aimed to capture that IRA rollover market.”

More than just devising new products, annuity insurers have a distinct advantage over mutual funds in their quest to grab a higher share of the retirement income market. “Only insurers can guarantee you get a steady income that you cannot outlive,” Hawkins says.

Annuity insurers do face some headwinds in netting more of those assets, though. Perhaps the most daunting is convincing a skeptical public that annuities are, in fact, a good financial product. Many consumers think that once they invest their hard-earned dollars in an annuity, they give up control over their funds.

However, annuity providers have addressed those concerns by inserting liquidity features into their products so that if a policyholder has an emergency, he or she can take a larger withdrawal, Hawkins notes.

What’s more, annuity insurers have shored up their capital structures after the economic collapse of 2008 and instituted new risk management techniques that include everything from scaling back once-rich benefits to restricting fund selection and raising fees. They have also updated their hedging strategies to better match their investment risks, Hawkins says.

They are also taking a page from the property and casualty insurance playbook and increasingly using a more predictive model to evaluate an individual’s probable lifespan. Instead of looking at an actuarial template, they are looking at person’s health history, lifestyle and socio-economic background.

“If I have a better sense of your health, I can better adjust my payment to you and perhaps the premium I have to charge, based upon your life expectancy rather than just using a standard table,” Hawkins relates.

One product, in particular, is poised to gain a major portion of the retirement income market and that’s the contingent deferred annuity, or CDA. Still a work in progress on the product development side, CDAs have yet to overcome several regulatory and reserving hurdles, even though the administration earlier this year endorsed a proposal that would allow 401(k) participants to purchase longevity insurance through their plan.

“The biggest hindrance so far is not so much from the product side, per se, but the plan sponsor side, or what is the sponsor’s fiduciary responsibility,” Hawkins says. “If they put a product in today, they have to be sure 20 years from now that that company or that product is still going to be there and be able to pay off the claims for the retirees. Plan sponsors are naturally a bit hesitant about going with a product if their fiduciary responsibility isn’t clear.”

Hawkins predicts that eventually regulators, annuity providers and plan sponsors will work those issues out and “you will start to see product manufacturers move into the DC plan space.”

Emerging market

Even in light of the capital and regulatory pressures annuity insurers face, Hawkins contends the industry can process that $9.5 trillion, if for no other reason than that those assets are not going to transfer into retirement solutions all at once,

“We are looking at a market that is just starting to emerge and will last for decades,” Hawkins says. “That gives insurers a chance if they have properly priced their products and managed their risks, to absorb this opportunity gradually, which lessens the demands on their capital. We also think this opportunity may attract new entrants or some that left may move back in again. So over time, the insurers will be well positioned to get their share of this retirement income market and it should be a big payout not only for the retirees who will get the income, but eventually a profitable business for the insurers.”

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