As the old saying goes, “The only constant is change.” As we move into 2016, that expression couldn’t ring more true for the annuity industry. From government policies to demographics and product innovation, the tectonic plates of the annuity business are shifting rapidly.
For some advisors, the signs point to trouble ahead. However, for those who keep up with the changes and adapt to them, there is, and will be, plenty of opportunity to thrive. With this in mind, the following are a few key issues to keep your eye on in 2016 and beyond.
Uncle Sam: Here to Help?
The federal government is at cross-purposes when comes to annuities. Some developments have been positive. For example, the Treasury Department adopted a rule that allows a portion of a retiree’s pretax assets to be funneled into a qualified longevity annuity contract, which is a form of a deferred lifetime income annuity. It allows a delay of required minimum distributions on that money up to age 85. This change should boost the use of annuities with individual retirement accounts and 401(k) plans.
Congress also made changes to the way spousal benefits can be claimed under Social Security. The net result will be smaller benefit amounts for many married couples and divorcees. While bad for retirees, it will present advisors with an opportunity to use annuities to fill any resulting income gaps.
However, the Department of Labor is in the process of requiring a fiduciary standard for financial professionals advising people about their retirement accounts, including their options for rolling over their 401(k) funds into IRAs. Ostensibly the purpose is to protect consumers from hidden fees or from advisors pushing products with higher commissions.
The practical impact could severely restrict client choices for achieving a secure retirement. Annuities provide guaranteed income for life at a time when people really need this type of product, but annuities are a commission-based product. The extent to which these commissions are permissible or whether they constitute “reasonable compensation” is up for discussion. The final regulations are due out early this year, and it is possible Congress could require additional changes.
Demographics Drive Change
More and more baby boomers are rushing headlong into retirement. For annuities, another important demographic change is life expectancy. With life expectancy increasing, annual payouts on lifetime income annuities will go down.
The National Association of Insurance Commissioners is requiring insurance companies to use the 2012 Individual Annuity Reserving Tables by the end of 2016. These tables determine the minimum level of capital reserves that carriers must have in place for their income annuity policies. As life expectancy rises, so will the reserve amount required to protect their policyholders. The 2012 Mortality Table projects further increases in life expectancy in upcoming years and thus will require higher levels of reserves over time. This will continue to put downward pressure on the payout rates that carriers are able to offer to policyholders.
The reduction in payouts could be offset by future increases in interest rates, although low rates seem to be the “new normal.” It does present advisors with a planning opportunity in the interim. Clients can lock in higher payout rates if they purchase a lifetime income annuity prior to 2017.
The Demand for Annuities
The reductions in Social Security spousal benefits noted previously, along with continued stock market volatility, should create continued demand for lifetime income annuities as clients near retirement. These would include fixed annuities such as single-premium immediate annuities and deferred income annuities.
Uncertainty in the stock market also should give clients in their 40s and 50s a reason to consider annuities that transition from asset accumulation to lifetime income. Fixed index annuities and variable annuities with a guaranteed lifetime withdrawal benefit would serve this market segment well. Some new products that combine a variable annuity with a deferred income rider also could be considered for this market.
Variable annuity guarantees have proved particularly challenging to our industry in recent years. Carriers must grapple with unpredictable markets and an array of new investment options. The trend is toward new variable annuities that protect principal by linking returns to a major market index and providing a buffer against losses. For example, a 10 percent buffer means the insurance company would absorb up to a 10 percent loss in a year. So if the index declined by 15 percent, the client’s account would go down by only 5 percent.
Our industry is growing and adapting to changes in government policies, demographics and the overall economy. We are uniquely positioned to help clients achieve their most fundamental retirement goal: stable income with peace of mind.