Guaranteed minimum withdrawal benefit programs are becoming increasingly popular in Canada as an aging population seeks to put its retirement on autopilot and reduce the consequences of market volatility on its retirement funds.

Since GMWB products were first introduced by Toronto-based Manulife Financial Corp. in October 2006, three other insurance companies — Toronto-based Sun Life Financial Inc. , Montreal-based Desjardins Sécurité Financierand Quebec City-based Industrial Alliance Insurance and Financial Services Inc. have introduced similar products aimed at capturing a share of the booming retirement market. Rumour has it that two other companies, including a major bank, are on the verge of joining the competitive fray.

Designed to provide a guaranteed benefit in a segregated fund structure, these variable annuity-like products have a number of common characteristics, albeit with variations in benefits. They include: a guaranteed minimum benefit; downside protection, regardless of market performance; upside potential that can be locked in to escalate payments and extend guaranteed payments; estate and creditor protection; death-benefit guarantees; and annual bonuses in years when withdrawals are not made.

“The most attractive feature is the guaranteed minimum benefit,” says Philip Kung, president of RGI Financial Inc. in Markham, Ont.

“Investors view this benefit like a pension plan payout,” adds Prem Malik, an advisor with Toronto-based Queensbury Strategies Inc.

The popularity of these products is being driven by demographics — baby boomers are not thinking so much about wealth accumulation but more about wealth retention, says Moshe Milevsky, associate professor of finance at York University in Toronto and executive director of the Individual Finance and Insurance Decisions Centre.

“There is a primordial fear about not having enough money during retirement,” he adds.

Manulife’s GIF Select Income-Plus, which is the most successful product on the market so far — raising more than $2 billion in its first year — pays an annual 5% GMWB for life to individuals who are at least 65 years of age. When this product was first launched, the payout period was for 20 years.

IA’s Ecoflextra also pays a 5% annual lifetime benefit for a minimum of 20 years, while the benefit payout for Sun Life’s SunWise Elite Plus is for 20 years. Desjardins’ Helios product, on the other hand, pays out 7% annually but for only 14 years.

Put simply, depending on the percentage and period of the payout, each of these products will provide the investor with a guaranteed benefit, regardless of how the market performs. For instance, if an investor placed $200,000 in a product with a 5% payout for 20 years, the payout would be $10,000 (or 5%) per year, regardless if the market value of the investment falls to zero due to poor performance before the 20-year period is up.

One of the major benefits of investing in these products is the guaranteed annual bonus if withdrawals are not made during the year over a defined period. IncomePlus and Ecoflextra each pay a 5% bonus on the amount invested for 15 years, while SunWise Elite Plus pays a bonus for 10 years. Helios does not pay a bonus.

The bonus is like a guaranteed return on the invested amount for a defined period, which increases the GMWB. For example, if a client invested $100,000 and made no withdrawals for 15 years, the minimum amount available for withdrawal would be $175,000 using IncomePlus and Ecoflextra, and $150,000 for SunWise Elite Plus.

In each of the products, investors can choose to invest their money in a wide range of segregated funds. Each of the companies lay claim to differentiation in this area based on range of investment options and selection of managers. From an investor standpoint, the return obtained is what is important —the higher the return over the accumulation period, the greater the amount available for withdrawal. If the market return exceeds the guaranteed benefit, the added value can result in either a higher withdrawal or a longer withdrawal period.

Theoretically, investors can still participate in markets and get equity-like returns while enjoying minimum guarantees, argues Malik. “This is very attractive for conservative investors,” he adds.

RESET FEATURE

The greatest risk for all investors is poor market performance during retirement, which will lead to erosion of their capital, says Kung. For investors in these products, this risk is eliminated.

@page_break@The products also offer a reset feature that allows investors to lock in their returns, typically, every three years. Therefore, over the lifetime of the investment, investors potentially have the opportunity to protect their investments from future market downturns, thereby getting a higher or longer withdrawal in the future.

The products of each of the companies have varying bells and whistles and caveats that must be carefully evaluated prior to making a decision. For example, Ecoflextra allows investors to carry forward unused income in a particular withdrawal year, whereas SunWise Elite Plus allows only a portion of unused income to be deferred. On the other hand, Helios offers investors the ability to choose different levels of guarantees and set the GMWB rider but not take any income.

The death-benefit guarantees and resets vary with each product. Generally, there is a 100% capital guarantee at death, which can also be reset every three years. Because these products are offered through insurance companies, they are protected from creditors in the case of personal or professional liability or business failure, which may be an additional benefit.

In spite of the relatively attractive features, one of the more contentious issues of these products is their fees, which can approach 4%, depending on the investment options chosen and level of guarantees. Generally, the lower the risk of the investment options chosen, the lower the fees.

Milevsky argues that although fees in Canada are higher than in the U.S., where GMWB products originated, fees are not currently a major source of differentiation. Rather, competition is being fuelled by improvements in features. He expects to see more competitive features as the Canadian market evolves. IE