Boomers want guaranteed retirement income, IRI says.

Boomers are good news for annuities.

The annuities market experienced a good year for growth in 2014, despite interest rate headwinds, and 2015 shows signs of continued strength as boomers look for retirement income, issuers seek product innovations and 401(k) plans offer deferred-income annuities in target date funds now that the U.S. Treasury Department has given them the thumbs-up.

In its “State of the Insured Retirement Industry” 2014 review and 2015 outlook, the Insured Retirement Institute said product issuers remain financially strong while balance sheets are sound and post-2008 risk management efforts are yielding positive results.

Key trends for annuities coming out of 2014 into 2015 include modestly increasing sales, highlighted by a shift in product types. IRI reports that industrywide sales rose 4.3% in 2013 and appear on track for a similarly modest increase in 2014.

With neither year showing significant growth, the bright spot for sales should come from the shift into fixed products and away from variable annuities. Indexed annuities, single-premium immediate annuities (SPIAs) and deferred income annuities (DIAs) are the strongest contenders in the fixed market, according to IRI.

“As 2015 approaches, persistently low interest rates are a formidable headwind, but demographics and growing consumer awareness of the need to create an effective retirement plan that includes the use of guaranteed retirement income products and solutions continue to create a favorable market environment for annuities,” according to this year’s IRI report.

Clients Receptive to Annuities

IRI’s survey of advisors said three-quarters reported their clients are receptive to annuities, with 90% interested in guaranteed income in retirement. Overall, industrywide annuity sales are on track to rise 3% to 5% in 2014, IRI says. A year ago, IRI similarly predicted more product innovation and ongoing consumer demand for annuities, and reported that 44% of financial advisors planned to grow their annuity business in 2014.

Todd Giesing, senior analyst with LIMRA Secure Retirement Institute, said 1.5 million boomers are on track to retire every year between now and 2025, which is helping to drive growth in annuity sales as retirees and pre-retirees look to supplement pensions and Social Security.

“When we look at boomers, that’s a big pool of retirees who will need income later, which sets the stage for the demand we’re seeing now in guaranteed lifetime income solutions, which annuities can help fulfill,” Giesing said.

Variable annuity sales, which continue to be the largest segment of the market, are expected to be down 3% to 4% in 2014 versus 2013 sales totaling $145 billion, he added. Three out of four consumers elect guaranteed living benefit riders in the VA market when available, according to LIMRA’s research.

Morningstar product manager John McCarthy’s most recent report on variable annuity sales notes that Q3 new sales dropped 1% to $34.7 billion from $35.1 billion in the previous quarter. Leading the quarter in new sales was Jackson National with a 16.4% market share, down from 18.1% in Q2 but up from 14.9% a year ago. SunAmerica followed with a 10% market share, Lincoln earned 9.6%, TIAA-CREF came in at 8.7%, and Transamerica captured 8.3%.

Net flows dipped down due to redemption events, including withdrawals under living benefits, death benefit payments and group rollouts, according to MCarthy.

Innovations Challenge Variable Dominance

New products are now giving variable annuities a run for their money. The Treasury Department’s approval of DIAs in 401(k)s in July was big news for the annuities market in 2014, and further product innovations are around the corner, LIMRA and IRI say.

Giesing said the DIA market has grown rapidly from just three companies offering such products in 2011 to 15 in 2014, while SPIAs also are a growth area. “We’re looking at growth up for SPIAs and DIAs combined to be up 15% to 20%,” Giesing said. “There are opportunities for advisors as they learn about Treasury changes and new products, but it’s going to take time for an impact on sales as advisors get a better understanding of the market and the insurance companies are studying the regulations and making tweaks and changes.”

Fixed products stumbled toward the end of the year, with IRI reporting that third-quarter 2014 fixed annuity sales dropped 10.7% quarter over quarter, based on data from Beacon Research and Morningstar Inc.

Boomers Want Income

But the 2014 IRI research shows boomer buyers remain ripe for annuity purchases, with only 35% of boomers confident in 2014 that they’re prepared financially for retirement versus 44% in 2011. A failure to calculate retirement savings goals along with insufficient savings contributes to this lack of confidence. But strikingly, boomers who work with financial advisors are twice as likely to say they’re confident about their retirement preparedness, IRI says.

Frank O’Connor, the IRI report’s author and IRI vice president of research and outreach, said in a phone interview that the lack of confidence came as a surprise, considering that the economy was steadily recovering between 2011 and 2014.

“I can infer that while it was three years of bull market returns in equity funds, boomers didn’t necessarily participate in those gains,” O’Connor said. “I’ve heard anecdotally that for those who are near or in retirement, the memory of 2008 is still fresh so they didn’t invest in the market.”

In addition, he said, boomers who are already worried about health care costs are bombarded with headlines declaring that their generation is unready to retire and Social Security is in demise, which adds to their persistent negative sentiment.

To be sure, the annuities industry continues to face skepticism from advisors and clients who question the cost of investing in annuity products.

For example, David Edwards, president and wealth advisor with New York-based Heron Financial Group, said he avoids annuities except in cases where a client has no desire to leave an estate for children and grandchildren. In such cases, Edwards looks for no-load, no-transaction fee deferred annuities.

O’Connor acknowledged that methods other than annuities, such as systematic withdrawals and dividend strategies, may be used for retirement income. But the only way to guarantee lifetime income within an overall financial plan is via an insurance product, he asserted.

“It’s very hard to tolerate risk when you’re never going to have another dollar of earned income,” O’Connor said. “If you have secured the income need, then you can potentially manage the rest of the client’s portfolio more effectively and have the appropriate level of risk.”

— Read about IRI’s year-end 2013 annuities outlook on ThinkAdvisor.