Segregated Funds: guaranteed withdrawal benefits outshine traditional products

par Alain Thériault | April 12 2011 01:29PM

Fees that were already considered high have increased. Generous guarantees have been abandoned, and products have been shut down. Despite these austerity measures, guaranteed withdrawal benefit products have not simply survived; net sales have actually boomed while traditional segregated funds have suffered from withdrawals.

As insurers have reduced their risk exposure in guaranteed withdrawal benefit (GWB) products in order to maintain profitability, their product offerings have become more uniform. Overly risky features have disappeared or been modified. These changes have had some positive effects. The product has become more straightforward, and advisors now feel more comfortable presenting it to clients.

Investment funds can post net sales or suffer net redemptions, and the result depends on the difference between gross sales and withdrawals. Guaranteed withdrawal benefit products have remained in positive territory since they first appeared in Canada in 2006. Statistics provided by Investor Economics show that net sales of GWBs have grown even stronger. In the last quarter of 2010, they reached $ 1.7 billion, the highest point in the last eight quarters.

In 2010, GWB sales declined slightly compared to 2009, dropping below the billion dollar mark in the third quarter, a slack period compared to the previous six quarters. Net sales for 2010 totaled $5.2 billion compared to the $5.7 billion reported a year earlier. Sales hit a record in 2008, when they reached the $5.8 billion mark.

These sales surpass the results of other segregated funds. During the past three years, traditional seg funds have experienced net redemptions instead. Net amounts withdrawn came to $100 million in 2008, $900 million in 2009 and $2.9 billion in 2010.

According to Investor Economics’s March 2011 Statistical Report, the trend continues in 2011. The research firm reports that GWB products already account for 26% of the $90 billion accumulated by segregated funds as of Feb. 28, 2011. GWB products experienced net sales in January and February, while traditional funds suffered net redemptions during the same period.

However, this is far from being the end of traditional seg funds, which have been the real engine behind growth over the last few years. “If you look on a gross sales basis, you’ll find that traditional segregated funds continue to capture 50 to 60 cents of each new dollar of gross sales in this segment,” comments Iassen Tonkovski, senior analyst at Investor Economics.

The insurance industry’s own research firm, LIMRA, reports seg fund sales in terms of annualized premiums, that is for deposits alone. This data is similar to gross sales. However, LIMRA’s Canadian Individual Annuity Sales Report for the fourth quarter of 2010 does not distinguish between traditional seg funds sales and GWB product sales.

The LIMRA report shows that annualized premiums for segregated funds came to just over $9 billion in 2010. This is a decrease of one percent compared to 2009. With $2.3 billion of premiums reported for the fourth quarter, seg funds registered a decline of 14% compared to the same quarter last year.

Steady growth

Despite a sales decline in seg funds, GWB products have grown steadily. Although the products underwent numerous changes in 2009 and 2010, this seems to have barely affected their performance. According to insurers active in this market, it could not have turned out otherwise. For demographic reasons, the demand for income products will continue to grow for at least the next ten years.

At Manulife Financial, more than half of the insurer’s segregated fund assets are attributable to its IncomePlus GWB product. 2010 was the most difficult year for segregated funds. Measured in terms of gross sales, seg funds fell by 20% in 2010 compared to 2009. However, the GWB product is not to blame. The decline is mainly the result of withdrawals made as the insurer’s older GIF and GIF Encore products, which were closed earlier, reached their maturity dates.

“We closed them down to new contract sales and put limits on the amount of supplemental deposits,” explains Michael Ondercin, assistant vice president, of guaranteed investment products at Manulife. “If we exclude those products, our sales were actually a little bit stronger than 2009 in 2010. Again, [these were] driven by our GIF Select product which features IncomePlus,” Since many of the old contracts expired in 2010, Mr. Ondercin expects that there will be fewer redemptions in 2011 and 2012.

Manulife also expects sales of segregated funds to be stronger in 2011. “We are seeing sales above 2010 levels so far. We have sales targets that are higher than in 2010.
“Our actual gross sales are well into the billions. Last year was over $2.5 billion. The year before that they were $3.3 billion. Our sales projections are still at that level. What’s going to help is reduced redemptions,” he adds.

As for Sun Life Financial, vice president of individual wealth, Brian Taylor believes that its assets under management in segregated funds reached an all time high at the end of January. He attributes much of the insurer’s success to its SunWise Essentiel Plus GWB product

“We had record high levels of sales in retail annuities and SunWise Essential sales are exceeding our plans,” says Mr. Taylor. In his opinion, these results demonstrate that there is still a great deal of interest in the market for GWB products

Manulife and Sun Life said they did not separate their GWB sales from overall results. They confirm, however, that they have experienced sustained growth in GWB sales.

At SSQ Financial Group, the product is picking up steam. “The accumulated assets under management in our AGI product total almost $250 million,” says Marc Trépanier, vice-president of business development for individual and group savings, at SSQ Investment and Retirement.

Sales of the product increased by 51% in 2010 compared to 2009. Mr. Trepanier notes that 40% to 50% of SSQ’s new segregated fund sales are for AGI II, the latest version of its GWB product, launched earlier this year.

Empire Life more than doubled its GWB assets between January 1, 2010 and February 28, 2011, says Julie Yoshikuni, vice president of retail wealth marketing. With $550 million in assets under management, all of its net seg fund sales now flow into its Class Plus product.

Despite experiencing redemptions of $1 billion due to maturity guarantees triggered in 2010, Transamerica Life Canada has seen growth in net sales in its Five-for-Life GWB product. “We only had a little redemption activity in Five-for-Life in 2010. Net sales are quite positive. At first, it’s an accumulation product so you can benefit from the [5%] bonus. If you withdraw one year, you cannot have the bonus for that year. It’s a disincentive to redeem,” explains Geraldo Ferreira, vice president of investment products at Transamerica.

Managing general agents confirm that there is a great deal of enthusiasm for the product in the field. Allan Bulloch, the president of Ottawa’s Independent Planning Group (IPG), is selling an increasing amount of GWBs. IPG is both a managing general agent and a mutual fund dealer with $2.5 billion of assets under management, and about half of those assets are in seg funds.

“We see a shift between mutual funds and GWB products. Most of this money is not new money but reallocated money,” he says. For example, Mr. Bulloch says that once a client reaches the one million dollar mark in equity mutual funds, his or her advisor may move 25% of those assets into a GWB product, 25% into a traditional seg fund, and reallocate the rest toward a dividend mutual fund.

Mr. Bulloch believes that when it comes to the GWB product, redistribution is the key word. “I would be concerned if an advisor were putting all of the client’s money in a GWB product, because it isn’t a fit for everyone. It isn’t a fit for the whole portfolio either,” he comments.

The innovations in the guaranteed withdrawal benefit product market are increasing at a rapid pace. Standard Life is about to launch its own product (see p.17), and SSQ will soon migrate a version of its individual product into its pension plan lineup. Recently, Sun Life launched eight new SunWise Essential funds, seven of which will be managed in-house.

The list of changes is a long one, and the market has readjusted since 2009. Rare are the insurers who, like SSQ, have maintained a guaranteed withdrawal period of 20 years. Products have changed to offer lifetime benefits, rather than fixed term payout options. Capital resets have also increased, switching from an annual reset date to a three year frequency. These resets are mostly automated. The majority of players have increased their fees too, albeit slightly.

On the other hand, several players have extended the period in which a bonus is payable for each year without a withdrawal. Almost all the players in this market have established a system that allows clients to make withdrawals before age 65, usually for a reduced payout rate of 4%. There is also the option of waiting until age 75 to remove funds, in which case the payout rate will be increased to 6%. Mr. Taylor says he thinks GWB products have a bright future, since customers perceive the changes made by insurers as advantages.

Mr. Ondercin argues that changes made to Manulife’s IncomePlus product have helped to spark a renewed interest in the product amongst advisors, for whom the main point of interest is doubtlessly the more generous bonus. He points out that for all investments made into IncomePlus after January 31, the client is entitled to a 5% bonus. The insurer also introduced an option to allow for withdrawals to start as early as age 55, but at a lower payout rate of 4%. Manulife has also built in preferred pricing for high net worth clients.

What is the next round of changes likely to bring? Sun Life has already made enhancements to its SunWise Essential Plus, including the addition of a two-life income stream option. Mr. Taylor says that this generated a great deal of interest amongst advisors. Under this joint guarantee, withdrawals are possible when the younger spouse reaches age 65. Payments continue until the death of the surviving spouse.

At Empire, Ms. Yoshikuni expects to see more conservative investment options and more transparent fee structures. “One of the big trends we are seeing in the industry is a shift towards more conservative funds in the product,” she says. While equity based investments were the initial area of focus, advisors can expect to see more balanced funds used in GWB products. “We’ll also see different fee structures, layered between MERs, GWB guarantees, and other fees,” adds Ms. Yoshikuni.

Indeed, Sun Life recently opted to “unbundle” the management expense ratio and charges for the guaranteed withdrawal benefit. This is a change that Mr. Taylor has described as win-win for customers. Under this restructuring, fees are only levied on the portion of the account that is subject to the guarantee. When the balance of a customer’s account increases due to returns, the relative cost of the security declines, he says.

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