A new twist on retirement income

SunFlex has similarities to both GMWBs and traditional life annuities. The new product is designed to begin generating a stream of income in the first year the contract is initiated; thus, it cannot be used as an asset-accumulation tool in the way a GMWB could. Similar to an annuity, a SunFlex contract provides clients with a certain level of guaranteed income for life. The difference is that it guarantees a level of income that is lower than from an annuity; but, above and beyond that guarantee, clients have the opportunity to earn “potential bonus income” in the form of market returns that are tied to the performance of certain mutual funds.

“[SunFlex clients] are really not taking their money out of the market,” says Kari Holdsworth, vice president, individual wealth, insurance and investments, with Sun Life. “They’re leaving it in the market, but with the benefit of a guarantee.”

In this regard, SunFlex is similar to a GMWB, which typically offers clients the opportunity to lock in market gains periodically. However, clients using SunFlex are likely to see more volatility in their income. The income level fluctuates every year, based on the performance of the underlying mutual funds selected by the client, although income will never fall below the minimum guaranteed amount established at the beginning of the guaranteed period. In contrast, GMWBs typically provide the opportunity to lock in gains every three years, with no risk that the client’s level of income would decline.

“[SunFlex has been] developed to meet a similar need, but it does have a different value proposition than a GMWB,” Holdsworth says. “It just depends what the customer’s preferences are for accepting upside and downside market movements.”

In an environment in which traditional life annuities are paying very little, this prospect of additional returns is likely to appeal to clients, says Asher Tward, vice president of estate planning at TriDelta Financial Partners Inc. in Toronto: “Having a little upside attached to an annuity-type product, to me, is attractive if it works.”

The SunFlex product also appears to carry less risk for the insurer, vs a GMWB, Tward says: “It looks like [Sun Life is] trying to skew it more to the annuity side, which is more in favour of the insurer. It’s likely that there is less liability for [Sun Life].”

@pagebreak@If the product takes off, Tward suspects that other insurers will launch similar offerings.

Meanwhile, the market for GMWBs recently underwent yet another overhaul. Insurers have been boosting the fees and reducing payout percentages and, in some cases, pulling the products off their shelves entirely as they adapt to low interest rates that drastically limit the returns they earn on these products.

Kingston, Ont.-based Empire Life Insurance Co. is one insurer that kept its original GMWB product – called Class Plus – largely unchanged until the end of last year, although the company ceased new sales of that product at the end of 2012. Empire Life launched a new version of the product, Class Plus 2, in January.

This new product charges fees that are about 25 basis points higher than the previous version and features fewer aggressive investment options. In addition, Empire Life adjusted the payout structure: whereas the original Class Plus offered a lifetime withdrawal amount of 5% a year beginning at age 65, the new product has a tiered payout structure beginning at 3% at age 55 and rising as the client ages, up to a maximum of 5% at age 75.

“Part of the reason we did that was to manage risk,” says Julie Yoshikuni, Empire Life’s vice president of retail investment products and marketing. “We needed to make changes to our Class Plus product to address the ongoing impacts of low interest rates, the regulatory environment [and] increased capital pressures.”

Other insurers have made similar adjustments to their GMWB offerings to make the risks associated with the products more manageable. The ongoing adjustments aren’t surprising in the current economic environment, says John Dargie, president of Mississauga, Ont.-based Independent Financial Brokers of Canada. He points out that insurers are earning, at most, about 2% on their fixed-income investments, which falls far short of the 5% bonus that most GMWBs pay clients for each year that they hold assets in a GMWB without making a withdrawal.

The new features make GMWB products considerably less appealing to clients, Tward says. In particular, the more conservative investment options and the high fees make it almost impossible for clients to generate returns.

Some insurers have ceased sales of GMWB-type products altogether. In mid-February, Quebec City-based SSQ-Société d’assurance vie announced that it was suspending new contributions to all versions of its guaranteed-income products, known as ASTRA Guaranteed Income. This includes a new version of the product that SSQ launched last May. Although the newer version includes a lower lifetime withdrawal amount, along with slightly higher fees, SSQ says, even the revised product was “no longer viable in the long term.”

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