Guaranteed minimum withdrawal products stoke seg fund sales

By Ian Bolduc | September 27 2007 02:23PM

Segregated fund sales are continuing to grow this year despite uncertain economic conditions that have frightened investors and caused mutual fund sales to plunge. Driving seg fund sales growth is the popularity of the new guaranteed minimum withdrawal benefit products.

According to the most recent data compiled by Investor Economics, an investment fund research and analysis firm, the seg fund industry raked in nearly $2.9 billion in net sales in the first half of 2008. "This is one of the best results since the beginning of the decade," confirms Iassen Tonkovski, an analyst at Investor Economics.

Consumers' appetite for segregated funds have intensified since October 2006, when Manulife Financial launched IncomePlus, the first guaranteed minimum withdrawal benefit (GMWB) product in Canada. These products propelled net sales of seg funds to stellar heights at three of the four insurers that carry them. CI Investments (SunWise Elite Plus) and Desjardins Financial Security (Helios) posted sales growth of 99.9% and 189% respectively in the first six months of 2008 compared with the same period last year. Corresponding growth at Manulife was 79.7%.

Industrial Alliance is the exception to this trend: although the insurer introduced its version of GMWB, Ecoflextra, in December 2007. Its net sales plunged by 55.9%. Two of the key players in segregated funds, Empire Life and Great-West Life, are not yet offering the guaranteed minimum withdrawal product. They sustained declines in net sales of 58.3% and 48.5%, respectively, for the first half of 2008, compared with the same period in 2007.

Empire Life, however, is about to change course. Gaëtan Vallée, sales manager in Quebec, reveals that the insurer will soon be offering a GMWB. "We plan to launch the product in October." Empire Life intends to capitalize on the product's popularity among baby boomers, a generation nearing retirement. "This strategy has a dual objective: sales growth and retention of assets under management," he adds.

Mr. Vallée attributes sagging seg fund sales at Empire Life to faltering stock markets. "Brokers explained to us that they had a lot of trouble selling funds, so they're focusing on insurance," he points out. He admits that others have fared better in these rough times. "Some are benefitting from their guaranteed minimum withdrawal products."

Bob Tillmann, vice-president, marketing and business development, individual wealth management, at Manulife, confirms that the insurer's IncomePlus GMWB product has had a considerable impact on sales growth since the start of the year.

A new feature added in October 2007 also helped to boost sales. "We added a lifetime benefit for investors who don't make any withdrawals before the age of 65. This was a significant enhancement and we saw our sales increase in 2008," Mr. Tillmann says. In June, Manulife announced that deposits into IncomePlus had topped $5 billion, less than 20 months after the product's launch.

Jacques Carrière, vice-president, investor relations at Industrial Alliance, pins the drop in his company's net sales on market instability.

Great-West also agrees that net sales have been impacted this year by uncertainty in financial markets. The company did not notice major changes in redemption activity, rather, consumers' general malaise and reluctance, triggered by market instability, deterred them from investing more money in their portfolios, said spokesperson Diane Grégoire in an e-mail to The Insurance Journal. She added that the same scenario played out when the markets dropped earlier in the decade.

For the first six months of 2008, net sales in the segregated fund industry advanced by almost 1%. This doesn't seem too significant when compared with the explosion in seg fund sales in 2007 when growth reached a staggering 33% in the first half of the year. However, this year's growth is noteworthy compared to the mutual fund industry's disappointing sales results.

According to statistics compiled by the Investment Funds Institute of Canada (IFIC), net sales of mutual funds plummeted by 46.5% in the first half of 2008 compared with the same period last year, meaning investors withdrew more money from their mutual funds than they put in.

Also, the mutual fund sales that have been recorded are mostly short-term funds. The recent bear market has prodded panic stricken investors to seek refuge in money market funds. From January to June 2008, new investments in these funds swelled to $13.9 billion compared to $1.6 billion for the same period in 2007.

When stock markets are heading south, as they have been in the last few months, investors generally flee to safer havens, especially as retirement looms. "With the recent stock market weakness, many clients opted to place their money in guaranteed investment certificates," Mr. Carrière of Industrial Alliance points out. Investors are looking for guaranteed income and want to protect their capital.

Mr. Tillmann of Manulife thinks that GICs hold less appeal for baby boomers than they did for the previous generation. "Traditional investments like GICs may have worked for the boomers' parents because interest rates back then were higher. However, in the current rate environment, investing at 3% or 4% may not be enough to sustain the client for the rest of his life," he says.

If clients do not prepare a solid financial plan for retirement, they may have to prematurely withdraw the capital invested, rather than let it generate income. GMWBs provide insurance against the depletion of monetary resources during retirement. Given that life expectancy today is higher than it was a generation earlier, he stresses this is an important point to consider.

In Mr. Tillmann's view, the main advantage of GMWBs is in the certainty of steady income at retirement and possibly until the end of the client's life, "IncomePlus provides portfolio protection against a market drop and also offers growth potential," he points out. This advantage is ensured by automatic resets every three years.

For his part, Mr. Vallée, of Empire Life, adds that the guarantees offered ease investors' worries. They are then more inclined to keep their investment over the long term without redeeming any units. "The duration of retention of investments is a critical factor in investors' success," he says.

According to Mr. Tonkovski at Investor Economics, the segregated fund industry is continuing to grow solidly. He points out that this market has recovered since the sales plunge precipitated in part by the introduction of stricter capital requirements in 2001.

He sees the arrival of a new player as a sign of the market's vitality. "AXA Assurances has just entered the segregated fund segment in Canada after offering variable annuities in the U.S. and other countries."

Contrary to dire predictions made early in the decade, insurers did not abandon the seg fund market following changes to the capital requirements adopted by the Office of the Superintendent of Financial Institutions (OSFI).

Shortly after the introduction of capital requirements, segregated fund sales collapsed. Stricter rules had eaten away at guarantees and driven up management fees. From 2000 to 2001, net sales of segregated funds plunged by 63%, Investor Economics data reveal.

Mr. Tonkovski says that insurers simply had to adapt to the new constraints on capital requirements. Seg fund sales have grown steadily since 2003.

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