Since the beginning of the financial crisis, the word “guaranteed” in the product name has impacted advisors and clients more powerfully than ever before. Shaken by the situation, baby boomers will likely continue to respond more positively to guaranteed products than before the crisis.
Guaranteed Withdrawal Benefit (GWB) is a feature available under a segregated fund agreement or a guaranteed investment fund agreement and comes in two varieties. Guaranteed Minimum Withdrawal Benefit (GMWB) offers a guaranteed payout – often but not necessarily 5% – of its capital base – sometimes called the GWB benefit base, regardless of whether the original deposit amount or adjusted market value capital base is reset and on periods lasting up to twenty years.
A Guaranteed Lifetime Drawdown Benefit (GLWB) provides a percentage – usually 5% – of your original or adjusted capital base for life, usually with an age limit on when withdrawals can begin. GWB stands for another combination of segregated fund offerings. “This is another benefit, similar to a death benefit guarantee or maturity guarantee, that is only available through a separate contract,” says Geraldo Ferreira, vice president of investment product development and management at Toronto-based Transamerica Life Canada. Some advisors believe that the attractiveness of GWB is increasing as the number of defined benefit pension plans declines.
GWB manages market risk, inflation risk and longevity risk, suggests Troy Rumpel, regional vice president of estate planning at Assante Estate & Insurance Services, a certified financial planner and a 17-year financial planning veteran. He sees the addition of a lifetime warranty as one of the most important changes to these plans.
According to Brad Brain, a certified financial planner and president of Brad Brain Financial Planning Inc. based in Fort St. John in British Columbia, these plans have undergone several other changes over the last eighteen months and has fifteen years of experience in financial planning. The most important changes include some companies reducing the maximum amount allowed in shares – often in the form of balanced funds – with the remainder held in cash or fixed income instruments, along with the removal of some fund choices, increased fees and reduced guarantees. These changes have made GWB less permissive, slightly more limited and, in some cases, more expensive, he says. Fee increases do not eliminate the entire growth potential, he emphasizes. “We are still aware of the fees and do not use the most expensive products.”
According to Rumpel, reduced warranties may not have a very serious impact. “On the surface (they) seem like a discount, but ultimately people buy (GWB) because of these three risks… so does having a maturity benefit of 75% really matter in the long run because customers won’t want to give up ( him)?”
Brain sees several specific uses for GWB, including as an additional source of retirement income. In one scenario, a person works part-time after formal retirement to supplement retirement income and then begins to draw on GWB once part-time employment ends. In another scenario, a person may start using GWB immediately after retirement and become bored, start working part-time and stop collecting benefits. Brain also sees GWB as a sustainable income opportunity for a retirement portfolio. “We’re not looking at replacing annuities here, but rather replacing a bond fund or even a bond fund.”
Despite the security and guaranteed payouts, GWB companies offer little prospects for net capital growth, according to Robert MacKenzie, a 14-year veteran financial planner and independent advisor in Ottawa. MacKenzie acknowledges the benefits, but questions the potential for returns above the guaranteed amount, even if re-set. (See Figure 2.) He points out that the guaranteed payout of 5% plus fees and expenses means that the threshold for exceeding guaranteed returns is around 8.5%. “Is it possible to earn an average of 8.5% over three years?” he asks. “It’s actually about 25.5%. (When a specific plan includes a three-year reset option). You have to do it within three (years) to be able to add anything to your plan,” he says, a prospect he finds almost impossible.
Meanwhile, according to Ferreira, several factors appear likely to impact sales competition in the near and medium term. For example, the increasing standardization of features such as resets and bonuses means that companies will compete with others based on the investment choices and other benefits and services they provide. Meanwhile, the number of entities offering GWB will increase from the current eight insurers, he predicts, suggesting that all unbundled fund companies will eventually offer GWB solutions.
“Due to the bear market we’ve had, insurers (insurers that don’t currently offer GWB) may feel uneasy because the benefit may be too expensive to offer right now,” he says, adding that demand for advisors and other market factors may make them rethink their decision.
Al Emidfinancial journalist from Toronto, covering insurance, investing and banking.
