Bolstering seg funds

In addition, one insurer, Toronto-based BMO Life Assurance Co. (BMO Insurance), is entering the seg fund market for the first time with a suite of funds that’s slated to launch on Dec. 2.

Although overall seg fund sales are down in recent years, product manufacturers are confident that there’s plenty of appetite for the products in the Canadian market.

“This is our first entry into the traditional seg fund market,” says Steve Carter, senior vice president of product management and development with BMO Life. “We really think that these kinds of products are of growing interest to Canadians because they offer not only the opportunity to invest in the market, but they offer guarantees.”

“[Seg funds] are still holding their own,” agrees Scott Stobo, director of product development and marketing, savings and retirement, with Waterloo, Ont.-based Equitable Life Insurance Co. of Canada. “There’s still a place for them in many investors’ portfolios.”

Equitable Life recently launched a new series of seg funds called Pivotal Select. The series includes two classes: an estate class, which comes with a 100% resettable death benefit guarantee and higher fees; and an investment class, which has a 75% death benefit guarantee and lower fees.

“The main thing that we’re adding is choice,” Stobo says. “We can let investors pick the guarantee that best matches what they require.”

“FEE-CONSCIOUS” CLIENTS

Previously, Equitable Life offered only one seg fund contract, which was similar to its estate-class option. Offering a less expensive option that still has some downside protection, Stobo says, could appeal to a different segment of potential investors.

“I think consumers are more fee-conscious,” he says. “If they don’t value the enhanced guarantee, this allows them to be in a segregated fund without having to pay for the additional guarantees.”

For those who do want the enhanced guarantees, Stobo adds, Equitable Life has made the fees as transparent as possible: “It’s putting them right out in front of the clients. If they want the enhanced guarantees, this is what it’s going to cost.”

Montreal-based Standard Life Assurance Co. of Canada also is in the process of revamping its seg fund offerings. In December 2012, it launched Ideal Segregated Funds Signature 2.0, a series of funds that, similar to Equitable Life’s new offerings, includes different levels of fees and guarantees from which clients can choose.

Standard Life is planning on expanding that selection of seg funds this autumn with some new investment options as well as a new F-class series of seg funds for fee-based advisors.

“We’re trying to reach more investors through different distribution channels,” says Marie Gauthier, associate vice president, retail solutions, seg funds, with Standard Life.

Statistics from the Canadian Life and Health Insurance Association Inc. show that contributions to seg fund products declined by 7.3% in 2012 and by 2.5% in 2011. These declines have coincided with a diluting of product features by insurance companies in the aftermath of the global financial crisis.

In particular, the attractive guaranteed minimum withdrawal benefit options that insurers aggressively promoted in the mid-2000s have been dialed back significantly. Several insurers have withdrawn these options altogether as a result of the steep costs associated with providing these benefits. (See story on page B10.)

“Since they curtailed the guaranteed minimum withdrawal benefits, the appetite [for seg funds] has certainly diminished,” says Gregory Brown, an insurance advisor in Surrey, B.C., with Desjardins Financial Security Independent Network. “When you start stripping away some of the features, obviously the benefit to the client is not quite the same, so the appeal wanes a little.”

Even in the market for traditional seg funds, the trend has been toward weaker guarantees and less aggressive investment options. As the products already can be a tough sell because of their relatively high fees, any watering down of benefits can make seg funds harder for advi-sors and their clients to justify.

GUARANTEES HOLD APPEAL

Still, the guaranteed products are likely to continue to appeal to a certain segment of clients who like the prospect of earning potentially high returns with the comfort of some downside protection. With the recent efforts to revamp the products, insurers are looking for ways to recapture the attention of these clients.

“All the manufacturers are looking at ways to add some additional benefits back in,” says Brown, “because, obviously, their seg fund sales are way down.”

BMO Life’s new funds appear likely to generate some new investor interest due to certain competitive features. Specifically, the policies offer an automatic monthly reset of the maturity benefit guarantee, allowing clients to lock in market gains up to 10 years before the maturity date.

In contrast, many other providers allow seg fund clients to reset the guaranteed amount only once or twice a year, and the reset must be initiated by the client or advisor rather than happen automatically.

“We’re doing it monthly, so that the client doesn’t have to guess what’s the right time to pull the trigger on that reset feature,” Carter says. “We’ve deliberately designed our product to be a little different from some of the others out in the marketplace.”

Equitable Life and Standard Life, meanwhile, are hopeful that the flexible fees, guarantees and investment options associated with their funds will appeal to a broader cross-section of Canadian investors.

Brown says he welcomes innovation in this segment of the market, as it provides more options to present to clients.

“As an advisor,” Brown says, “I’m looking forward to seeing what comes down the pike in the next little while. There’s appetite for it — especially in today’s environment, in which security of capital, preservation of capital and guaranteed income streams are first and foremost on lots of people’s minds.” IE