With more than $1 trillion expected to exit deferred annuity contracts over the next five years, manufacturers, asset managers and distributors will face both opportunities and challenges.
Each year, hundreds of billions of dollars are invested in deferred annuity solutions. With these inflows, deferred annuity in-force assets were worth more than $3 trillion at the end of 2019.
Having a surrender charge has long been the primary predictor of future movement of annuity assets. Two recent trends have tempered that logic: a prolonged period of low interest rates and the rise of guaranteed living benefit riders on variable and indexed annuities.
Different Types Of Annuities And Distribution Channels
More than 40% of variable annuity assets are protected by a GLB rider, making those funds less likely to move, even when surrender charges expire. Partly because of this, annual full surrenders of VAs are likely to decrease from $98.5 billion in 2019 to approximately $87 billion by 2023.
Taking a closer look at assets by distribution channel, GLB elections are higher in the broker-dealer and career agent channels. With a total of $460 billion in VA surrenders forecast through 2023, and only an estimated 20%-25% of that leaving VA contracts with GLB riders, the difference will likely come disproportionately from the already smaller holdings in the bank, direct and independent agent channels.
Indexed annuities are still relatively young — but they seem to have hit the annuity “sweet spot” by offering upside potential and downside protection. SRI is forecasting sales to exceed $80 billion annually by 2024. Indexed annuities are the only deferred annuity product type for which assets are expected to grow over the next five years.
Independent agents dominate this market, holding approximately two-thirds of the $500 billion of in-force indexed annuities at the end of first quarter 2020. That proportion will decrease as sales in other channels — particularly banks and broker-dealers — continue to accelerate.
The increased potential upside available through registered index-linked annuities might offer an alternative option, but these products are not generally available through independent agents.
Fixed-rate deferred annuity product design lends itself to a potentially significant amount of money in motion. As most of these product designs involve a set rate for a set term, once that term comes due, owners are likely to shop for the next best rate.
The SRI study “U.S. Individual Annuity Persistency” shows that surrender activity is volatile in the full-service national broker-dealer and bank channels, and these seem to be the most sensitive to interest rate swings. Assets no longer subject to a surrender charge in the full-service national broker-dealer channel have declined steadily, with annualized surrender rates often two or three times higher than those of other channels.
With high rate sensitivity, ready access to competitive fixed-interest products, and close to $90 billion held without surrender charges, the bank channel in particular is primed to shed annuity assets.
As fixed-rate deferred sales in 2019 hit their highest levels since the 2008 financial crisis, it will be important to watch the surrender activity of these assets in the next three to five years.
Where Will The Money Flow?
If fixed interest rates remain at low levels for an extended period, we will see continued surrender of fixed-rate annuities in favor of competing investments that are more liquid.
This trend will be most acute in banks and full-service broker-dealers, as they have ready access to alternative investments, although this may be tempered in the near term as today’s ultralow rate environment leaves those alternatives with similarly unattractive rates. The key question remains: Where will this money go?
A portion will flow back into individual annuities, but not at the pace seen in the past. The retirement industry should maintain focus on annuities’ unique value proposition — helping Americans transition from accumulating and protecting retirement assets to distributing lifetime income to maximize their retirement security.