In early December, the Insured Retirement Institute (IRI) announced the third-quarter results for U.S. annuities sales, and they were sorely disappointing.
This article was originally posted on FinancialAdvisor on January 2, 2018.
Based on data from Beacon Research, an annuities data tracker in Northfield, Ill., and the investment researcher Morningstar, Washington, D.C.-based IRI concluded that overall annuity sales dropped nearly 15% in the quarter from the same period the year before.
“Fixed and fixed-indexed annuity sales remain near historic highs,” said Frank O’Connor, IRI’s vice president of research and outreach, by e-mail. He added that the sale of “buffer” annuities (index-linked products that cap both losses and gains) and fee-based annuities, while currently small, were growing.
The sales decline has many explanations. In a press release, IRI President and CEO Cathy Weatherford attributed it to “an uncertain regulatory environment,” pointing specifically to the partial implementation of the U.S. Department of Labor’s fiduciary rule.
Steve Kaufman, editor of Annuity FYI, an online informational resource for prospective annuity buyers, says “Sales have been declining because the quality of some types of annuities, especially variable annuities, have deteriorated in recent years. Exposure to equity subaccounts has been reduced and, in general, fewer such offerings are available. … An additional factor, no doubt, has been the soaring stock market.”
Though variable annuities allow for a degree of equity market participation, they come with higher fees than direct investments. “In addition, many annuity purchases made as a result of the last market downturn have not kept pace with market returns,” says Judson Forner, a vice president at Akron, Ohio-based ValMark Financial Group.
But could the industry itself be at least partly to blame? “The industry has played its cards wrong,” posits Stan Haithcock, the Ponte Vedra Beach, Fla.-based expert known as “Stan The Annuity Man.” Specifically, he faults the industry for misrepresenting annuities as market-growth alternatives, which he calls a “false promise,” instead of making plain that they are contractually guaranteed transfer-of-risk products. “The industry should educate the public on the unique benefit proposition of lifetime income that only annuities can offer,” Haithcock stresses. “Consumers are smart enough to know that if they want real market growth, an annuity of any type is not the answer. So this is a huge branding blunder, which the industry keeps making year after year.”
Still, providers of annuities shouldn’t give up hope. One reason: Stocks may very well be approaching a bubble. “Annuities are designed to protect the client from market volatility,” says Jim Richards, managing partner at Annexus Ventures and board director at RetireUp, a product that classifies annuities as an asset class in building retirement income plans. “Participation annuities remain a safe haven for clients who want to protect their assets from market risk while retaining the potential for growth.”
While sales may continue to struggle in the near term, the long-range outlook is somewhat rosier. “Interest rates are highly likely to keep rising in 2018 and beyond, as the economy continues to percolate,” says Kaufman.
For annuities, that means “lower reserve requirements for insurers’ liabilities when guaranteeing lifetime income, allowing insurers to make lifetime income benefits more generous,” says O’Connor.