Annuities, hard hit by COVID-19, give retirees one less option

The falling stock market would have been a great selling point for annuities. But, much like dry goods and toilet paper, the products are vanishing from shelves.

That isn’t because consumers are clearing out the available stock. Instead, insurance companies — which are having to contend with unprecedented volatility and extremely low interest rates — haven't been able to adjust their annuities fast enough to keep them on the market.

“Short-term, we’ve seen a lot of product suspensions. The supply is shriveling up,” said Tamiko Toland, head of annuity research at Cannex. “Between volatility and Treasuries rates, it would normally necessitate product repricing. And that can’t be done as quickly as rates have changed.”

With fixed-indexed annuities, for example, products are either being pulled off the market altogether, or insurers are removing versions of those products that are available with living benefits, Ms. Toland said.

“We are currently inundated with updates of this nature,” she said. Instruments that insurers can buy to back the guarantees on their products are currently expensive, and budgets are low, she noted.

“COVID-19 is going to be a great educator about another black swan,” she said. “Human society is more at risk globally than it has ever been.”

Falling rates

Over the weekend, the Federal Reserve chopped down its key rate by a full percentage point, setting it at zero to 0.25%, which is the same record low seen in the 2008 financial crisis.

That, along with the erratic stock market, would seem to make annuities a good option for people who are on the cusp of retirement and have serious concerns about starting to draw down their assets. But a potential lack of products, as well as the uncertainty of making a long-term financial decision amid economic, social and political turmoil, could mean that people don’t begin buying annuities for some time.

“There is always a need for people to have guaranteed retirement income," Ms. Toland said. "The timing of their retirement might be skewed by this."

For investors who are panicking amid the volatility, buying annuities can be a better option than putting all of their assets in bonds, said Wade Pfau, professor of retirement income at The American College.

“They might still be able to lock in their goals, depending on how over-funded [their accounts] were,” he said.

Research has shown that in down markets, people have more interest in annuities than they do during bull markets, he said.

“Nobody’s tried to sell annuities in this environment before,” said Scott Stolz, president of global wealth solutions in Raymond James' insurance group. “In the short run, as companies cut back [on products and rates] … you’re probably going to see a blip before the product changes.”

Carriers have generally given sellers a couple weeks' notice ahead of product changes, he noted.

“After that you’re probably going to see a drop in sales with the new rates,” he said.

Challenging times

But the COVID-19 pandemic will almost certainly temper annuity sales expectations for 2020. Last year was a record for U.S. annuity sales, which were 3% higher than in 2018, at $241.7 billion, up from $233.7 billion, according to a report from Limra’s Secure Retirement Institute. The increase was in part due to rising demand for a relatively new type of product, registered index-linked annuities. Those products became available in 2010 and haven’t been tested in a financial crisis until now, said Todd Giesing, director of annuity research at the Secure Retirement Institute.

“We haven’t experienced anything as significant as this,” Mr. Giesing said, of the COVID-19 effect on annuity sales in general. “It’s going to be a very challenging time for manufacturers.”

Though the need for annuities is not going away, people who traditionally buy annuities — those in their early 60s — could be less likely to seek out the products in the short term, he said.

Some products, such as fixed-rate deferred annuities, could do well when things settle down, he said. There was strong demand for those products in 2009, when investors turned to them for fixed-rates and income guarantees, he said.

Demand for RILAs could be mixed, he said, as some investors will not want any downside risk, while others will seek the benefits of higher returns and some downside protection the products offer.

Sales will likely suffer for at least three to five months, Mr. Stolz said. But after that, investors could be eager to see products with guarantees, he said.

“I think this will be good for annuity sales in the long run,” he said.