“Deferred annuity riders” have moved onto the radar screen of variable annuity regulators in Washington. At issue is how the features are or will be disclosed. The outcome will have impact on producers — not now, but in the future.
A few details about this inquiry appear in a speech given this fall by Norm Champ, director-division of investment management for the Securities and Exchange Commission (SEC). He was addressing the life insurance products conference of ALI CLE, the Philadelphia-based continuing legal education group of the American Law Institute (ALI).
In his remarks, as posted on the SEC website, Champ described the development of deferred annuity riders as a “recent trend we’ve noted.”
The riders permit withdrawals from the variable portion of the contract to be used to purchase deferred, fixed income payments under the same contract, he said.
This enables an investor to “build a stream of future annuity payments over time rather than making a single, lump sum purchase payment at the end of the deferral period for annuity payments that begin immediately,” he added.
The definition question
What might those riders be called in industry terms? It’s hard to say.
The linking of withdrawals to retirement income that Champ described makes the riders sound a little bit like guaranteed minimum withdrawal (GMWB) riders, except that GMWB riders don’t provide for “purchase” of future annuity payments inside the same contract; they guarantee annual withdrawals from an annuity’s principal until the amount is returned, regardless of investment performance or interest earnings.
How about a guaranteed lifetime withdrawal benefit (GLWB) rider? Here again, the riders don’t provide for “purchase” of future annuity payments inside the contract. GLWB riders guarantee a stream of payments for the owner’s lifetime, by way of withdrawals (or insurance-provided benefits if the account value drops to zero).
The linking also makes the riders sound vaguely like contingent deferred annuities (CDAs). These relatively new policies “wrap” an investment account (typically mutual funds or managed accounts) owned by the customer. They guarantee lifetime income payments if the underlying account drops to zero due to permitted withdrawals and/or poor investment performance. However, CDAs don’t involve making withdrawals from an annuity to “purchase” income payments.
Champ’s reference to buying a “stream of future annuity payments” makes the products sound more like rider versions of deferred income annuities (DIAs). The DIAs are fixed annuities that let the policy owner defer the income start date for several years or deep into the future. However, up to now, DIA contracts have been stand-alone policies, not riders, and they have been issued by the fixed side of the industry, not variable.
It could be the variable companies are adding the “deferred annuity riders” as a fixed payout option on their policies. Champ’s comment that the riders would use the variable policy withdrawals to “purchase deferred, fixed income payments” suggests that possibility.
Then again, the “deferred annuity riders” could be something entirely different. The available information is too sketchy to tell right now.
One thing that is not sketchy, though, is that the SEC wants the nature of the riders to be disclosed to the customers (or “investors,” as Champ puts it).
“The amounts transferred out of variable subaccounts to purchase these deferred income payments are no longer available to the contract owner, other than through the receipt of the deferred, fixed income payments,” Champ pointed out in his published remarks.
“This loss of liquidity is an important factor for investors to consider when determining whether to transfer amounts out of the variable portion of the contract.”