Interest in seg funds rises again

“There is definitely evidence of renewed growth in traditional seg funds,” says Steve Carter, senior vice president, product management and development, with BMO Life Assurance Co. (BMO Insurance), a unit of Bank of Montreal, in Toronto.

Although capital markets have performed well in the past couple of years, many clients like the idea of having exposure to equities with downside protection – especially given the elevated market volatility in recent years, says Marie Gauthier, associate vice president, seg funds, retail solutions, with Standard Life Assurance Co. of Canada in Montreal.

“Seg fund offerings respond to advisor and client needs,” Gauthier says. “With the uncertainty of the markets, seg funds are reassuring.”

Also contributing to the surge in traditional seg fund sales has been the decline of the guaranteed minimum withdrawal benefit (GMWB) segment of the market. When GMWBs were introduced in 2006, many financial advisors and clients shifted away from traditional seg funds in favour of the lucrative income guarantees offered by GMWBs. Now that many insurers have exited that market or dialled back their guarantees on those products, that trend has begun to reverse.

Most recently, Kingston, Ont.-based Empire Life Insurance Co. launched a new version of its GMWB product, called Class Plus 2.1, which has a death benefit guarantee of 75%, down from the previous guarantee level of 100%.

For the first 10 months of this year, industrywide gross sales of GMWB products were down by 22% vs the corresponding period last year, according to Investor Economics’ report.

“A number of those [GMWB] plans have been removed from the market or [insurers] have pulled back on some of the benefits so they’re not as attractive anymore,” Carter says. “What brokers are doing is they’re going back to the traditional seg fund plans.”

BMO Insurance, for its part, has seen strong uptake among advisors and investors since launching its guaranteed investment funds in December 2013, Carter says: “We’re definitely seeing momentum in our sales.”

To broaden market reach, BMO Insurance recently expanded the account types that are eligible for its seg funds to include locked-in plans and tax-free savings accounts. The firm also added a new Prestige Class of seg funds for clients who invest at least $250,000, as well as a new “death guarantee reset option” that lets clients enhance the value of their death benefit by locking in market gains every three years for an extra fee of 10 to 15 basis points.

Other insurers have expanded their seg fund offerings in recent weeks. In mid-November, Standard Life announced the addition of two new fund portfolio managers – CI Investments Inc. and SEI Investments Canada Co., both based in Toronto – and 13 new funds to its seg fund lineup. In particular, Standard Life expanded its offerings in the fixed-income and balanced-fund categories.

“We always want to make sure that our fund offering is complete and well diversified,” says Gauthier. “We tried to fill in the gaps.”

Empire Life also recently embarked on an overhaul of its seg fund offerings, replacing its Elite and Class lines of seg funds with a single, new line of guaranteed investment funds. These new funds feature some new investment options, as well as features that aim to simplify the products, including automatic resets to lock in market gains instead of the client-initiated resets that previously were in place.

In addition to these enhancements, Empire Life raised the fees on its seg funds by an average of 10%. That was necessary because of the high capital requirements and other challenges associated with offering long-term guaranteed products, according to Julie Yoshikuni, vice president of retail investment products and marketing with Empire Life.

“There’s a lot of pressure on reserves. And with market volatility that’s been unprecedented, it was time for us to make changes in terms of pricing,” says Yoshikuni, adding that many firms have increased fees on seg funds.

“We didn’t want to have to drop our GMWB line,” Yoshikuni continues, “or any other products, for that matter. We wanted to continue to be able to offer a range of solutions.”

But rising fees, along with guarantees that have become less attractive over time, have made seg funds far less appealing for clients, says Asher Tward, vice president of estate planning with TriDelta Financial Partners Inc. in Toronto.

“The products have become diluted, and the fees are high,” Tward says. However, he adds, for certain clients, these products have value.

Nevertheless, Yoshikuni says, industry sales figures suggest that despite higher fees, seg funds still appeal to many investors.

“As long as the market values the peace of mind and all of the other benefits that come with seg funds that you don’t necessarily get with other uninsured products,” she says, “we’ll always see a place for seg funds.”

© 2014 Investment Executive. All rights reserved.