Quit­ting an­nu­ities

Investment Executive - - FRONT PAGE - BY DWARK A LAKHAN

toronto-based man­ulife Fi­nan­cial Corp.’ s de­ci­sion to dis­con­tinue ex­ter­nal sales of in­di­vid­ual fixed an­nu­ities will mean there are fewer op­tions i n an al­ready lim­ited an­nu­ities mar­ket­place for clients who are seek­ing a guar­an­teed in­come stream dur­ing re­tire­ment.

Man­ulife’s de­ci­sion also “puts [fi­nan­cial] ad­vi­sors in a bad spot, es­pe­cially those who are aligned with Man­ulife,” says Jim Ruta,

ex­ec­u­tive vice pres­i­dent with the Covenant Group in Toronto. That’s be­cause these ad­vi­sors now have to con­tend with a “re­duc­tion in po­ten­tial [in­come-ori­ented] so­lu­tions” for their clients.

An email sent to In­vest­ment Ex­ec­u­tive by Man­ulife stated: “The de­ci­sion to dis­con­tinue ex­ter­nal sales of in­di­vid­ual fixed an­nu­ities ef­fec­tive June 29 was not made lightly.”

The email also stated that there will be no changes to ex­ist­ing an­nu­ities con­tracts and that Man­ulife will con­tinue to of­fer in­di­vid­ual vari­able an­nu­ities con­tracts as well as group an­nu­ities con­tracts.

Al­though Man­ulife is ceas­ing to is­sue new fixed an­nu­ities con­tracts to the pub­lic, new in­di­vid­ual fixed an­nu­ities con­tracts can still be opened af­ter June 29 for in­ter­nal trans­fers, the email stated. The com­pany also will con­tinue to is­sue new in­di­vid­ual an­nu­ities con­tracts in cases in which con­tract pro­vi­sions al­low for a trans­fer at ma­tu­rity.

A fixed an­nu­ity, as op­posed to a vari­able an­nu­ity, pro­vides guar­an­teed in­come pay­ments for as long as the an­nu­i­tant is alive or for a guar­an­teed pe­riod. In the case of a joint life an­nu­ity, in­come pay­ments are made for as long as the an­nu­i­tant or his or her spouse or part­ner lives.

With a guar­an­teed pe­riod op­tion or a term-cer­tain an­nu­ity, the an­nu­i­tant’s ben­e­fi­ciary re­ceives the bal­ance of the guar­an­teed in­come pay­ments should the an­nu­i­tant die be­fore the pe­riod of guar­an­teed pay­ments runs out.

A vari­able an­nu­ity, on the other hand, pro­vides fixed as well as vari­able in­come ben­e­fits. The fixed-in­come com­po­nent’s por­tion of the ben­e­fit usu­ally is much lower than in a fixed an­nu­ity, while the vari­able in­come por­tion fluc­tu­ates with the per­for­mance of the in­vest­ments to which the an­nu­ity is linked. The pri­mary dif­fer­ence be­tween a vari­able an­nu­ity and a fixed an­nu­ity is that the in­come pro­vided is not guar­an­teed in the for­mer prod­uct.

Thus, fixed an­nu­ities are a pop­u­lar op­tion for re­tirees who want a sta­ble source of in­come dur­ing re­tire­ment and to pro­tect them­selves against the risk of out­liv­ing their money, says John DiNovo, fi­nan­cial plan­ner with Aligned Cap­i­tal Part­ners Inc. in Toronto.

Adds Ruta: “An­nu­ities are part of the re­tire­ment process and not only a so­lu­tion. You can­not out­live a fixed an­nu­ity, which is equiv­a­lent to a de­fined-ben­e­fit plan.”

Man­ulife be­came one of the largest providers of an­nu­ities in Canada fol­low­ing its ac­qui­si­tion of Mon­treal-based Stan­dard Life As­sur­ance Co. of Canada in 2015, the lat­ter of which of­fered a “full spec­trum of prod­ucts,” ac­cord­ing to Lawrence Geller, pres­i­dent of L.I. Geller In­sur­ance Agen­cies Ltd. in Camp­bel­lville, Ont.

Ma nu life’ s exit from the an­nu­ities busi­ness leaves a big gap. In fact, Geller says, there are “fewer and fewer” in­sur­ers of­fer­ing an­nu­ities.

“Com­pe­ti­tion in the an­nu­ities space is di­min­ish­ing ,” adds DiNovo, “at a time when they are needed most” by Canada’s ag­ing pop­u­la­tion.

Man­ulife’s de­ci­sion could put ad­vi­sors in a dif­fi­cult po­si­tion when they’re con­duct­ing their due dili­gence on the suit­abil­ity of prod­uct rec­om­men­da­tions for clients, Geller says: “[Ad­vi­sors] have to ex­er­cise great [due] dili­gence in choos­ing an in­surer’s prod­ucts [in which to] place clients’ funds. So, if [an in­surer] can­not show ded­i­ca­tion to a prod­uct line, ad­vi­sors could be on the hook for rec­om­men­da­tions they make.”

Al­though Man­ulife did not ex­plain why it will cease sales of an­nu­ities, Ruta sug­gests that they’re “ex­pen­sive to is­sue,” and

“Com­pe­ti­tion in the an­nu­ities space is di­min­ish­ing”

of­fer­ing guar­an­teed prod­ucts could af­fect an in­surer’s re­serve re­quire­ments. In ad­di­tion, the lengthy low in­ter­est rate en­vi­ron­ment has made pro­vid­ing guar­an­teed in­comes dif­fi­cult.

In 2011, Man­ulife’s U.S. sub­sidiary, Bos­ton-based John Han­cock Fi­nan­cial, dis­con­tin­ued sev­eral an­nu­ities lines be­cause of low in­ter­est rates and volatile eq­ui­ties mar­kets. That year, Man­ulife’s in­come state­ment took a hit of $900 mil­lion trig­gered by John Han­cock’s an­nu­ities­re­lated losses.

Then, in 2013, Toronto-based Sun Life Fi­nan­cial Inc. sold its U.S. an­nu­ities busi­ness fol­low­ing ear­lier losses for rea­sons sim­i­lar to those suf­fered by John Han­cock, which forced Sun Life to beef up its re­serves. In ad­di­tion to per­ceived mar­ket and in­ter­est rate risks, cor­po­rate prof­itabil­ity could be an un­der­ly­ing rea­son for Man­ulife’s exit from the fixed an­nu­ities busi­ness.

“There is a re­ver­sion to a man­date of prof­itabil­ity among share­holder-owned com­pa­nies while the fo­cus on clients has di­min­ished,” DiNovo says.

Al­though Man­ulife is ex­it­ing this space, other big in­sur­ers, such as Toronto-based Canada Life As­sur­ance Co., Win­nipeg­based Great-West Life As­sur­ance Co. and Sun Life, con­tinue to of­fer fixed an­nu­ities in Canada.

How­ever, not all ad­vi­sors con­sider fixed an­nu­ities an im­por­tant prod­uct of­fer­ing. DiNovo says that some ad­vi­sors view an an­nu­ity sale as “a one-time event” from which they re­ceive a sin­gle com­mis­sion. For these ad­vi­sors, Man­ulife’s de­ci­sion might not have any ma­te­rial im­pact.

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