Manulife imports variable annuity concept to Canada

By Alain Thériault | November 18 2006 07:55PM

By combining a variable annuity product with its segregated funds, Manulife Investments is spearheading the Canadian premiere of a concept that has long captivated individual investors in the United States.

Variable annuities are common currency in the U.S. The Securities Exchange Commission (SEC) the U.S. securities watchdog, even dedicates a whole section to them on its Internet site. Variable annuities, the SEC explains, are a contract where the insurer pledges to make regular payments according to conditions determined by the annuitant (duration, fixed or variable amount, etc.).

Here in Canada, few have heard of this concept. But Manulife Investments is doing its part to change this picture.

The insurer has launched a new series of segregated funds – GIC Select – featuring IncomePlus, Manulife’s variable annuity. This product has been a smash in the U.S. since its launch four years ago, says J. Roy Firth, executive vice-president, Manulife Investments.

These new funds are intended for a clientele that is conservative or that has a moderate risk profile. “It’s the ideal product for baby boomers that are afraid they will outlive their savings,” Mr. Firth adds.

How they work

At retirement, the segregated fund is transformed into an annuity that includes a guarantee of minimum payments for at least 20 years. The payments can exceed this basic guarantee if the fund returns permit. During the accumulation period, the product basically resembles a conventional segregated fund…with a few exceptions. To top up the annuity, Manulife gives its clients an annual 5% bonus. A client who invests $100,000 ten years before retirement can receive $150,000, Mr. Firth explains.

In addition, clients can lock in their gains, as the guaranteed balance is reset every third year during the accumulation period. The $150,000 amount guaranteed by the bonus can then be increased, if the 10-year return is decent.

Conversely, if the return is disastrous during this period, and the $100,000 ends up being worth only $75,000, the investor will still have accumulated the right to an annuity of $150,000, to be disbursed over 20 years at a rate of $7,500.00 per year.

Manulife uses the example of a 10-year accumulation period on purpose. The insurer is homing in on what it calls the “risk zone for retirement,” which it describes as the five to ten years preceding and immediately following the time when retirement income begins to be paid.”

Mr. Firth compares the annuity to 10-year insurance against unfavorable events that affect the market.

He has high hopes for this launch this fall. “It’s the period where RRSPs are converted into our RRIFs. Plus, the first baby boomers have turned 60. The market will mushroom in the next five years.”

This is the largest product launching in Manulife Investments’ history, Mr. Firth continues. “Risk management for this project is very complex and the costs of entering the market are quite high,” he adds. But the cost is worth it, he says.

An Investor Economics study commissioned by Manulife reveals that the Canadian variable annuity market potentially represents $28 billion to $54 billion in deposits in the next five years, Mr. Firth explains. In the United States, he adds, the market is worth about a trillion dollars.