BMO Financial Group has encroached on insurers’ turf with a product that promises annual payments for life of 6%. One of the architects of BMO’s Lifetime Cash Flow product is an insurance industry migrant.

The Bank of Montreal has created waves in the guaranteed withdrawal benefit (GWB) market by launching a bank product that mirrors insurers’ formula. Although BMO limits its offering to people age 55 and over, it offers more generous payments than the 5% guarantee generally seen in rival products. The minimum deposit required is $5,000. 
BMO Lifetime Cash Flow secures the payouts through a bank deposit. Payments are made monthly. “It’s not an insurance product, but it’s close. It’s the evolution of the principal protected note,” Serge Pépin, Director, BMO Investments, told The Insurance and Investment Journal.
Locked in deposits
One caveat: investors must agree to lock in their deposit for the first ten years. The product cannot be redeemed during this period. “This decision requires serious planning by the client,” Mr. Pépin says. In contrast, insurers’ GWB products can be redeemed at any time before payments begin, at fair market value.
Payments begin as of the 11th year, and continue for 15 years. During this period, only the capital initially deposited by the client is used to provide the payments promised. At the end of this period, the total payout corresponds to 90% of the initial capital. The returns earned in the first ten years before the payments begin, along with subsequent earnings, are saved and remitted to the heirs after death, together with 10% of the remaining capital.
Starting from the 26th year, it is the bank’s turn to fulfil its pledge to the client. Through its financial capacity, the institution will disburse the promised 6%, for the rest of the client’s life.
This pledge is supported by a bank deposit that provides exposure to four underlying BMO funds: dividends, American equity, Canadian corporate and government bonds and international equity. The portfolio is managed conservatively to limit volatility. At first, it will be weighted with 80% equity and 20% fixed income securities. It will gradually be automatically readjusted until it reaches a weighting of 35% equity and 65% fixed income.
“The product was designed to meet the needs of future retirees, for example someone age 55 who plans to retire at age 65,” Mr. Pépin explains. “This is not a defensive reaction to insurers. Our product can be a fine complement for an investor whose insurance needs are already met. It targets more immediate needs.”
The management expense ratio of the underlying portfolio is 2.75%. This ratio compares favourably with those of insurers’ guaranteed withdrawal benefit products, Mr. Pépin adds. The product will be distributed by financial planners in the BMO branch network.
Mr. Pépin is no newcomer to risk management. At Maritime Life, he was on the team that created the Synchrony segregated funds in the late 1990s. Then, as vice-president, investment services at Manulife Financial, he was closely involved in IncomePlus, its GWB product.
He joined BMO two years ago. “I went to the right school,” he quips, to explain the similarity between BMO Lifetime Cash Flow and insurers’ GWB products. The main similarity, though, is the concept of payments for life. The BMO product is not an insurance product, Mr. Pépin stresses.