Traditional variable annuities are back. Well, sort of.
Thought to be buried in an avalanche of heightened regulation, along with shinier new annuity product designs, VAs are selling well again, thanks to expected tax changes.
As this issue went to press, the Biden administration was continuing to negotiate its spending plans with various key members of Congress. What is virtually certain is that the wealthy will pay more taxes.
Perhaps a lot more in taxes.
Cue the flight to variable annuities again, where the wealthy can stash money in a tax-deferred vehicle, said Todd Giesing, assistant vice president, Secure Retirement Institute.
The tax debate is one that LIMRA and SRI are tracking closely as their annuity sales forecasts evolve in 2022. Advisors should watch out for tax news as well, Giesing said.
“If we have a change in the tax law, this has the potential to bring a different customer to the annuity market,” he explained. “And when you think about individuals who are looking for tax deferral, they’re likely going to be high-net-worth or even ultra-high-net-worth individuals.”
Variable annuities were certainly the story in the third quarter, according to SRI sales data.
Total VA sales were $30.7 billion in the quarter, up 28% from the prior year. VA sales represented 49% of the total annuity market in the third quarter, the highest level since first quarter 2018. In the first three quarters of 2021, total VA sales were $93.4 billion, 32% higher than the prior year.
The VA segment is boosted by new registered indexed-linked products, which dominated sales in recent years. However, traditional VAs rebounded strongly in the third quarter.
Traditional VA sales were $21.5 billion in the third quarter, a 22% increase from third quarter 2020. Year to date, traditional VA sales totaled $65 billion, up 17% from the prior year.
“Traditional VA sales have outperformed expectations this year, driven by the increase of investment-focused VA sales and fee-based annuities, which were fueled by an increased appetite for tax deferral solutions,” Giesing said. “As a result, we expect sales will grow nearly 20%, to almost $90 billion, exceeding our forecasted expectations.”
Forecasts Appear Strong
How annuities sell in 2022 will depend on several economic and market factors, of which tax changes are just one. Equity markets are performing well with low volatility, and that is projected to continue. Interest rates are inching upward but expected to remain very low for the foreseeable future.
The good news for annuity sellers is that a wide range of products fits many different economic scenarios. Most product categories are expected to do well in the year ahead. Giesing broke down the SRI forecasts for each.
Registered indexed-linked. This hot product continues to sell well but is slowing down just a bit, Giesing noted. Still, more insurers are entering this market, some with creative offerings. RILAs are expected to sell well through 2022, Giesing said.
“A subset of the RILA market that we’re looking at is guaranteed living benefits,” he explained. “As the inventory of guaranteed living benefits on RILAs increases, that’ll give that segment of the business an opportunity to compete with similar products such as traditional variable annuities and [fixed indexed annuities] that offer guaranteed living benefits.”
Indexed annuities. The SRI is projecting a steady 10% growth for regular indexed products, as 2022 market projections appear promising.
“We’re seeing slow and steady growth as conditions improve from an economic standpoint and under the expectations that interest rates will continue to rise slowly,” Giesing said.
Fixed-rate deferred. What is interesting here is the significant numbers of fixed-rate deferred contracts written over the past three years — about $150 billion worth. Many of those were short contracts, between three and five years, Giesing said.
“There will be a significant amount of replacement activity that will occur as we move forward,” he added. “Contracts will come out of their surrender period, and likely many owners will go look for another fixed-rate deferred contract.”
Income annuities. Single-premium income annuities and deferred income annuities should see slight growth in 2022, as interest rates remain low, Giesing said. “We do expect sales to increase from this year, but albeit very slowly — maybe a billion dollars higher for both.”
What Could Go Wrong?
The political environment remains a mix of good and bad for annuity sellers. On the one hand, the Setting Every Community Up for Retirement Enhancement bill signed into law at the end of 2019 is resetting the annuity sales environment.
The SECURE Act tweaked and relaxed a host of tax and regulatory guidelines, all aimed to make it easier for Americans to save for retirement.
While companies already can offer annuities in their 401(k) lineups, only 9% do, according to the Plan Sponsor Council of America. The SECURE Act aims to boost that figure and improve retirement readiness by eliminating companies’ fear of legal liability if the annuity provider fails or otherwise fails to deliver.
As of this writing, Congress was considering companion legislation known as the Securing a Strong Retirement Act of 2021. The bill would expand options for contributing to retirement accounts and further ease the use of annuities in those plans.
Things are dicier on the regulation side, where 2022 could see a return of the dreaded fiduciary rule first put forth by President Barack Obama in 2015.
The DOL’s spring 2021 Regulatory Agenda confirmed that it will be rewriting the definition of fiduciary. The Employee Benefits Security Administration plans to issue the notice of rulemaking by December 2021, the agenda stated.
That timeline will surely be delayed, said Fred Reish, partner at Faegre Drinker Biddle & Reath.
The DOL is likely headed toward a “definition of fiduciary advice such that any recommendation of a financial product to a retirement account is fiduciary advice,” Reish said during a recent conference session.
Watch FIA Treatment
In February, the DOL allowed the investment advice rule, written by the Trump administration, to take effect. That rule replaced the 2015 fiduciary rule, which was tossed out in 2018 by a federal appeals court.
The new rule has two main parts: a new prohibited transaction exemption 2020-02 and a reinstatement of the five-part test from 1975 to determine what constitutes investment advice.
For now, the DOL is certain to build on PTE 2020-02, Reish said.
PTE 2020-02 applies to advice for rollovers and other movement of retirement money. Broker-dealer representatives and investment advisors can use the exemption to collect compensation for transactions involving 401(k)s or IRAs. Insurance producers can still use PTE 84-24 for annuity and life insurance sales involving retirement funds.
“I think 84-24 will definitely be modified,” Reish said. “There will be provisions of 2020-02 that will be moved over to it. Probably the fiduciary acknowledgement, the best-interest standard and maybe specific disclosures of reasonable compensation limitation. It’ll look a lot more like a fiduciary type rule than it does right now.”
The thing to watch is how the DOL ends up treating fixed indexed annuities, he added. Regulators have tried for years to apply tougher regulations to these products.
“Fixed indexed annuities would be the one type of annuity most impacted by [rewriting 84-24],” Reish said.