Will Annuities Recover?

Following the Great Recession, advisors and investors began to talk about annuities. And, that conversation continued for over the last decade. 

If you’ve made it this far, that this shouldn’t be all that surprising as annuities provide reliable returns. “Annuities were one of the most successful vehicles for people trying to avoid or at least soften the impact of the stock market’s 2008 drop,” writes Eric Watson for Investment News. “In fact, they are still so popular that insurance group Limra estimates a 50% spike in sales of variable annuities through 2019, as investors who witnessed their retirement nest eggs fall apart in 2008 view annuities and the income guarantees they provide as a safe and favorable option.”

Even in 2018 annuities remained “an attractive investment vehicle for investors who may be worried they will outlive their savings, have an extremely low-risk tolerance, or are hyperfocused on achieving steady, predictable income,” adds Watson. “With annuities, clients have the option to receive payments immediately or defer them, allowing their earnings to accrue tax-deferred while some future payments can be tax-advantaged.” 

“Many investors prefer annuities for this reason and because they don’t limit how much you can contribute,” he states. “However, as with all investments, advisers need to be mindful and ensure that any potential risks that come with purchasing an annuity, such as liquidity or fees, don’t outweigh the potential benefits.”

However, not everyone was sold on annuities. 

Marc Lichtenfeld is the chief income strategist at The Oxford Club and the author of ‘You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle Without Getting a Job or Cutting Corners’ opined that annuities are a bad idea for everyone.  “Essentially, you’re betting the insurance company that you’re going to live longer than they think you will,” he argued. “They take your money, invest it and give it back to you in dribs and drabs (with steep penalties if you want to withdraw more than the contract states).” 

“Annuities are such terrible investments that the minute the government passed a law specifying that financial professionals had to act in their client’s best interest, annuity sales fell off a cliff,” he continues. “In 2016, new rules were passed by the Department of Labor that stated that brokers have to act as fiduciaries. That means they had to put their clients’ best interest ahead of their own.”

That’s not to mention the high commissions as well. And, the fact that sales of variable annuities crashed in 2016 despite the advantages. 

And, the pandemic and the economic disruption that it caused, only added fuel to the fire. Especially when considering that demand for annuities fell during the COVID crash. 

But, will annuities be able to bounce back? We believe that annuities will recover. 

Annuities might be down, but they are not out.

“The value proposition with annuity products is there,” said Todd Giesing, senior director, annuity research, Secure Retirement Institute. “We have that unique value proposition of guaranteed income protection out there in the marketplace and a demographic in our favor. There are just under 4 million people turning 65 in 2020. And we expect that to only grow as we move forward.”

What’s more, the pandemic might have actually been beneficial to annuities. 

• Allow technology to catch up. Because the pandemic drastically reduced in-person interaction, insurers and annuity companies have had to become more innovative. For example, being able to apply for an annuity online in under 10-minute. Another example is Morgan Stanley who has embraced AI to effectively match people with the right annuity type. 
• Development and acceptance of fee-based products. Fee-based annuity sales have remained at about 3% for variable annuities and less than 1% for indexed annuities. “This could be the next opportunity for growth from an overall industry perspective,” said Giesing. “From my perspective, and what I’ve heard, it’s not the value proposition of today’s product, or the product themselves. It’s more so just the operational hurdles of getting the proper platforms built and the integration of fee-based into a holistic portfolio and the annuity product into that.”
• Growing opportunities. Thanks to the SECURE Act, there is now a safe harbor for annuities. Moreover, there’s a demand for annuities. “The demographics are very clear that fewer people have that backdrop of a pension as they enter retirement,” says Giesing. “And we have more people who are going to be entering retirement here in the future.”

Annuities are in demand.

In addition to Giesing, various studies show that annuities are a hot commodity. For instance, a 2020 Secure Retirement Institute study found that “more than half (56%) of U.S. workers are interested in investing in a guaranteed lifetime income option within their employer’s retirement savings plan if it was available to them.” And, “Of those who are currently saving in their employer’s defined contribution (DC) plan, 61% say they would be somewhat or very likely to contribute to a guaranteed lifetime income investment option.”

As  Giesing previously stated, younger workers have the most interest in a guaranteed income as they’re less likely to have access to pensions. In fact, close to half of “Millennial workers expect their employer retirement plan savings to be their primary source of income when they retire.”

The survey also shows that 4 in 10 workers viewed “the financial security of lifetime guaranteed income and knowing how much income they’ll receive in retirement as the top advantages of a guaranteed lifetime income option in their employers’ retirement savings plans.”

A 2021 survey found similar results. According to the 2021 BlackRock DC Pulse Survey, 89% of participants are interested in owning a product that can generate a retirement income. And, roughly nine in 10 believe that a guaranteed income in retirement would have a positive effect on their financial wellbeing. 

Interestingly, 96% of plan sponsors revealed that they have a sense of responsibility in offering these products. And 82% reported that they’re likely to add an annuity solution in the next 12 months. Thanks to the previously mentioned SECURE Act, this may be more likely as it’s reduced the barriers in offering in-plan income solutions.

“Retirement income is a new frontier, and we’re encouraged that front-footed plan sponsors are embracing retirement income solutions – but the demand is much more urgent than the pace of adoption,” said Anne Ackerley, Head of BlackRock’s Retirement Group. “Workers saving for retirement today are concerned that they are going to outlive their savings, or that they may not enjoy a high quality of life in retirement. The time is now for companies to provide their employees with solutions that can help bring peace of mind.”

And, not surprisingly, 94% of millennials have the most interest in retirement income solutions.

Also, this data also highlighted the areas where annuities need to improve. Specifically, the fact that when it comes to their financial future, women are more concerned and feel less prepared than men.

“Our survey data reinforces what we have seen from previous industry studies on the gender savings gap, so it’s not surprising to see that women feel they are behind,” said Ackerley. “What’s helpful about these data points is that we know where we need to focus our efforts.” 

“We have an opportunity and a responsibility to help through enhanced plan design tools such as auto-enrollment, innovative solutions, and leading educational resources to help savers understand what’s needed to get back on track and stay there.”

Annuity sales are on the rise. 

Despite still feeling the ripple effects of the pandemic, annuity sales rose in the first quarter of 2021. Total annuity sales totaled a solid. $60.9 billion. That’s a 9% increase from the first quarter of 2020.

“Annuity manufacturers are cautious but optimistic due to improving market conditions. The S&P closed 6% higher at the end of the first quarter and the 10-year Treasury rate nearly doubled in the first three months of 2021 to 1.74%,” said Giesing in an announcement. “While SRI expects the equity markets to continue to improve in 2021 and interest rates to experience slow growth, concerns about increased regulations may disrupt the market.”

In particular, fixed-rate deferred annuities and registered index-linked annuities, or RILAs, were the main drivers as each saw purchases rise by 46% and 89%, respectively. 

In the first quarter, total variable annuity (VA) sales were $29.9 billion. That’s not only a 15% increase from the prior year.  More promising is that this was the highest quarterly VA sales recorded since the fourth quarter of 2015. It’s being predicted that VA sales will grow as much as 9% in 2021. And, if that trend continues, there will be continued positive growth in this market through 2025.

Furthermore, traditional VA product sales have gradually improved quarter over quarter since the second quarter of 2020. However, these still fell 2% below the first quarter 2020 results to $20.7 billion.

“Low-interest rates continue to deter manufacturers from selling traditional VAs with guaranteed living benefit riders,” noted Giesing. “Today, almost two-thirds of the VA GLB business is written by the top three VA carriers. As many traditional VA companies focus on the continued growth with protection-based offerings, this will offer little growth opportunities for investment-focused traditional VAs in the short term.” 

What about registered index-linked annuity (RILA) sales? These have also continued to experience significant growth. Mainly because additional companies have been introducing new products. In the first quarter of 2021, RILA sales soared $9.2 billion, which was 89% higher than the first quarter of 2020.

“Simply put, the current economic environment favors RILAs,” said Giesing. “RILAs offer better pricing than indexed annuities to investors looking to mitigate downside risk and enjoy potential investment growth as the bull market continues.”

With more carriers entering the RILA market, along with some expecting to introduce GLB riders to this product line this year, RILA sales are being forecast to grow as much as 50% in 2021. And, the RILA market is anticipated to grow through 2025.

As for fixed-rate deferred annuity, first-quarter sales were $14.3 billion. This was 46% higher than the prior year. In 2021, SRI predicts fixed-rate deferred annuity sales to contract slightly. But, sales growth is expected to rebound in 2022 and beyond.

“Consumers, still reeling from the economic fallout from the pandemic, are seeking principal protection, and crediting rates for fixed-rate deferred products remained steady and well above any other short-term investment vehicle, like CDs,” Giesing said. “Over the past three years, nearly $150 billion has been invested in short-term fixed-rate deferred products. These assets will be coming out of their surrender periods over the next couple of years. Given the current market conditions, we expect many investors will likely reinvest in fixed-rate deferred annuity products due to the rising rates, driving sales to close to $50 billion over the next few years.”  

The outlook wasn’t as bright for fixed indexed annuity sales as these dropped 15% in the first quarter to $13.7 billion. However, with improving interest rates, FIA sales should increase. It’s anticipated that FIA sales will increase 8-17% in 2021.

Despite these improvements, interest rates remain very low. As such, this is undermining interest in income annuity products. Immediate annuity sales were $1.4 billion in the first quarter which was 26% lower than the prior year. Deferred income annuities dropped 13% to $410 million, while total fixed annuity sales rose 4% to $31 billion.

The annuity market is expected to experience continually grow. 

According to the “Fixed Annuity Distribution In 2020,” the demand for securities will strengthen.

“The next decade for annuity distribution will be unlike any other,” the report states. “Commissions will be lower, regulatory supervision will be ramped up to levels that today’s typical annuity producer cannot imagine, marketing organizations will need to change or die, and the financial markets will continue to be volatile and difficult to forecast.”

At the same time, more fixed annuities will be purchased in the decade “than ever before because the fixed annuity value proposition will find a receptive ear in the 57.7 million people that are currently between ages 55 and 75,” adds the report. “Fixed annuities, through creative uses of living benefits, will finally be embraced by the financial community and be used to offer protection against the major uncertainties of retirement.”

“Wall Street could become the main annuity store for consumers because they have the marketing power, the capital, and they can meet a financial behavioral need best expressed by realizing that we buy both insurance and lottery tickets” the report adds. “ Today the ‘insurance need’ in a Wall Street portfolio is met by bonds.” However, it “could also be provided with a synthetic annuity attached to an investment.”

Several of the conclusions reached in the report “are that 1035 exchanges will significantly decline, securities regulators will essentially supervise the fixed annuity world, and that the largest distributors of fixed annuities in 2020 will be broker-dealers and advisory firms.”