Financial advisers who have been fans of MetLife Inc. aren't the only ones who will be affected by the company's decision to cut its variable annuity income benefit to 4%.
Other major VA manufacturers and financial planners also are watching with bated breath, wondering how the tweak will affect the calculus of retirement income.
This month, MetLife filed to release a 4% guaranteed-minimum-income benefit that also will allow buyers' income benefit bases to grow at an annual rate of 4%. The new product will hit the market next Monday.
This is a concern to advisers, as the downgrade on MetLife's product feature is only the latest in a series of steps that the insurer has taken to reduce its sales volume. However, Prudential Financial Inc. and Jackson National Life Insurance Co. — MetLife's two chief rivals — stand to pick up those missed sales.
That is a double-edged sword, given that these long-dated liabilities will add to the pressure both companies are feeling from having to hedge living benefits against low interest rates.
Further, industry observers question the symbolic value of the 4% GMIB: If 4% is the rule of thumb for a sustainable withdrawal rate from an investment portfolio in retirement, does the downward creep of lifetime-income percentages suggest that variable annuities with living benefits could lose their place in retirees' financial plans?
“Variable annuities have a place if you want lifetime income, but I don't know if I'd be more inclined to use them at 4%,” said Carrie Streets, president and senior financial consultant at Crest Financial Strategies.
“When VAs came into play, 5% or 6% [income riders] were a true benefit,” said Andrew Murdoch, an adviser with Somerset Wealth Strategies Inc.
MetLife forecasted sales of $17.5 billion to $18.5 billion in 2012 VA sales, and it has been working to reduce its volume to a targeted range of $10 billion to $11 billion this year. Expect the excess flows to go over to Jackson and Prudential, both of which have taken steps to moderate their own growing VA liability amid long periods of low interest rates.
The trio of companies account for about 45% of the VA market share, according to Morningstar Inc.
But could 4% become the industry norm?
NO QUICK SHIFT
“The dynamics are the company's decision to change and the decisions that are influenced by what's going on around you,” said Tamiko Toland, managing director of retirement income consulting for Strategic Insight.
The consensus among MetLife's biggest competitors is that while the company's adjustment is meaningful, it won't necessarily lead to a quick shift for their own products.
“A company of MetLife's stature absolutely impacts the industry,” said Greg Cicotte, president of Jackson National Life Distributors LLC.
Still, he said that Jackson National doesn't expect to make product changes to contend with the expected influx of money.
“We never make changes based on what our competitors do,” Mr. Cicotte said.
Bruce Ferris, vice president of sales and distribution at Prudential Annuities, thinks that there will be other companies that will step up to take in new volumes.
“Everyone likes to point to us [Prudential, MetLife and Jackson] as the poster children, but there is evidence where you see renewed appetite from new entrants or a resurgence from long-term players in the business,” he said, noting that those developments are taking place in variable annuities and other annuities.
Advisers are confronting the reality that as withdrawal rates decline and as fees rise across the industry, the role of the variable annuity could very well change in the future.
“The lucrative guarantees won't be part of the landscape, and you'll have the fortunates and the not-so-fortunates,” said Moshe Milevesky, associate professor in finance at the Schulich School of Business at York University.
But the value of the guarantee of lifetime income is still there. Some experts predict that in the long run, though,variable annuities may become more of a tax-deferred investment vehicle rather than a means for lifetime income.
“Everyone who has cold feet is getting out of the water and coming out with contracts that are more focused on subaccounts and tax deferral, as opposed to living benefits,” said Kevin Loffredi, vice president of custom solutions at Morningstar.
Instead, expect income annuities, contingent deferred annuities — stand-alone living benefits that are tied to a managed account held outside of the insurer — and other products to fill in where variable annuities can't within a client's portfolio.
“[These annuities] have a common denominator in that they focus on longevity; that's the insurer's raison d'Ítre,” Mr. Milevsky said.
Mr. Murdoch noted that he uses some indexed annuities because the withdrawal benefits are “as good, if not better than, the VAs.”
But he has also recommended secondary-market annuities, in which investors buy a package of annuity payments from an individual who may have won the lottery or a court settlement. Those streams of income are calculated at a higher rate of interest than those of fixed annuities.
Meanwhile, look for even greater development in deferred-income annuities and other products, said David Blanchett, head of retirement research at Morningstar Investment Management.
“I think the one thing we're going to see is an increasing array of benefit types,” he said.
Still, Mr. Blanchett warned against thinking that a 4% income benefit is totally worthless.
“Don't, as an investor, think that it's not as good as it used to be; 4% guaranteed is better than a 2% bond yield that isn't guaranteed for life,” he said.
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