Where the retirement market will go next year is anybody's guess, but insurance industry experts foresee a ramp-up in product development for certain types of annuities.
For broker-dealers, 2014 appears to be the year of the indexed annuity, a fixed income product that credits a minimum guaranteed interest rate and a rate that is tied to the performance of an index. Indeed, product gatekeepers at Stifel Nicolaus & Co. and Raymond James Financial Inc. suspect that indexed annuity sales are eating into sales of variable annuities.
Variable annuities, meanwhile, have been through a variety of changes that make them less attractive to reps: Insurers have backed off of attractive guaranteed living benefits and many are requiring clients to choose investment options that use volatility management and other strategies to limit equity risk. The growing appeal of indexed annuities compared with variable ones is reflected in data from Morningstar Inc. and Wink's Sales and Market Report that show a steady decline in variable annuity sales and a climb in indexed annuity sales over the last four years.
So which products do insurers believe will capture reps' attention in 2015?
In: Qualified Longevity Annuity Contracts and indexed annuities
The changing face of the variable annuity industry is encouraging reps to look at the rest of their product offerings and nudging insurers to come up with new ones.
Meanwhile, income in retirement is becoming a new focal point from a policy perspective, particularly as the Treasury Department develops guidance that makes it easier for taxpayers to use deferred income annuities. Guidance from Treasury in October paved the way for annuities to be paired with target date funds in 401(k) plans.
AIG was the first to launch a product under the Treasury's QLAC guidance. That product allows people with a 401(k) or IRA account to use up to 25% of the balance — whichever is less — to purchase the contract. Money in the QLAC isn't subject to required minimum distribution rules that would require them to take money from their qualified retirement plans at age 70 1/2.
“It'll take a while, but in terms of the big new product for planning, it should be the QLAC for qualified retirement assets,” noted Joan E. Boros, an attorney with Stradley Ronon who specializes in insurance products. She counts QLACs and indexed products as “the bets for next year.”
Elizabeth Forget, executive vice president of MetLife Retail Retirement and Wealth Solutions, agrees that QLAC guidance holds a lot of promise for deferred income annuities. “I do think QLAC's a big opportunity in the qualified space for DIA in particular,” she said. As for deferred income annuities, MetLife redesigned and relaunched its Guaranteed Income Builder product this year.
“Advisers and clients are starting to understand what that product can do and how it can be used in a holistic plan,” Ms. Forget added.
Indexed annuities and structured product annuities will continue to be attractive in the New Year, noted Ms. Forget. “Customers are looking for principal protection,” she said. MetLife currently doesn't sell traditional indexed annuities, but offers a structured product annuity called the Shield Level Selector.
In: Investment-only variable annuities
Aside from principal protection, a number of clients are placing an emphasis on tax-deferral. Ms. Forget pointed to investment-only variable annuities as a product line that's grown in 2014 and will continue to do so in 2015.
Fully 40% of households with more than $5 million in investible assets point to tax deferral as a reason for their purchase of a variable annuity, according to data from Cerulli. Jackson National helped popularize the investment-only variable annuity, launching Elite Access in 2012, and a group of new insurers have joined them since then.
"This year, there are 12 to 14 companies with their own version [of the investment-only VA]," said Greg Cicotte, head of U.S. wealth management and distribution at Jackson National. "We think the more people enter the space gives it credibility and we hope it continues to grow."
Out: Variable annuities with living benefits
A recent report by Cerulli Associates, “Annuities and Insurance 2014: The Evolution to Sustainable Retirement Income Solutions,” predicts bleak prospects for anyone hoping to see a return to rich variable annuity living benefits. Don't hold your breath.
Exactly 68.8% of carriers surveyed by Cerulli in partnership with the Insured Retirement Institute anticipated that the availability of living benefits in the next three years would remain the same as today. Nearly 13% predicted there would be fewer living benefits, and only 18.8% expected these features to be more widely available.
Asset managers working with insurers point to three investment styles they believe will have the greatest potential for growth next year: alternative strategies, global equities and target risk, according to Cerulli's data.
Expect even more emphasis on controlling investment risk.
“Insurers are not looking for top-percentile performance as much as fitting the risk profile and illustrating that the fund strategy is appropriate for the portfolio,” according to Cerulli's report. “The VA industry is now pressuring [variable annuity subadvisers] to prove their product line can fit tighter standards, which are about appropriate levels of volatility, cost and differentiation.”
From the manufacturers' perspective, success in variable annuities with living benefits is a matter of balancing risk management. "2014 for us was a continuation of balancing our living benefits," Mr. Cicotte said. "We will have another big year in our living benefit business and the continuation of balancing Perspective II [a VA with living benefits at the insurer] and Elite Access ... will be a key initiative."