“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.”
Another important factor, he said, is the exposure an investor has “to the insurer’s credit risk that accompanies a transfer into the general account.”
In addition, Champ noted that “an investor who is shopping for a deferred, fixed annuity may have many options available outside the existing variable annuity contract, and there may be better annuity rates available elsewhere, under a separate contract with either the same or another insurer.”
The bottom line: When the SEC staff reviews variable annuities that have a deferred annuity rider, “we are looking for effective disclosure addressing these and any other factors that are material to investors,” Champ said.
The meaning for producers
That scrutiny will have impact on annuity producers once the products hit the streets.
For one thing, registered reps and advisors who sell variable annuities with such riders can expect the contracts will have the above points (and related points) covered in the disclosure materials. Depending on how the disclosure is worded, or if new concepts are introduced, these producers may need to update how they handle disclosure in client presentations.
On the plus side, those producers will have a new arrow in their quivers, and that can expand opportunities for their clients as well as themselves.
As for producers who are dual licensed and moving into income planning, the new products can help flesh out their growing portfolio of retirement income offerings. The disclosure requirements may expand as well, and it could be daunting to keep them all straight. But many requirements overlap, many providers and distribution firms provide support, and most producers phase products into their practice over time, so this should get easier along the way.
As for producers who are only licensed to sell fixed annuities, the disclosure issues surrounding the new riders will be of little moment, since these producers are not licensed to sell variable annuity products.
Still, fixed annuity producers may view the arrival of the new riders as a potential source of competition. This would be a distinct possibility if the riders turn out to be DIA-type products and if the producers are benefiting from the meteoric growth in fixed DIA sales. (The sales vaulted 132 percent in the first nine months of 2013 compared to the same period last year, according to LIMRA.) A fixed producer’s DIA production won’t go down automatically because of the riders; in fact, production could rise due to greater overall awareness of DIAs. Still, when more players and distribution channels are enter an annuity market, the existing players typically feel some competitive heat.
LIMRA has been predicting that year-end DIA sales will surpass $2 billion in the fixed market, doubling results from 2012. Fixed carriers have high expectations for fixed DIAs in 2014 as well. But if variable annuity carriers now bring out their own DIA-like riders and features, the tables could turn.
Much depends on what the riders will be like. What are the specs? How many are on ramp? What is the target market? When will they debut? Since the SEC is talking about them publicly, it’s only a matter of time before some answers will surface.
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