Statistics don’t lie, but they can be interpreted.
Recently, the Secure Retirement Institute, a division of the industry data-tracker LIMRA, found that total U.S. annuity sales fell 3% in the second quarter of 2015 from the corresponding period a year earlier. For the first half of the year, they dropped 5% from the preceding year.
“If interest rates stay low, the negative sales trend could continue indefinitely,” says Andrew Murdoch, president of Portland, Ore.-based Somerset Wealth Strategies and senior vice president of market research at Annuity FYI, an information resource for annuity shoppers.
His sense of caution is based largely on the fact that annual annuity sales growth has been declining for years. As measured by the Insured Retirement Institute (IRI), an aggregator of industry sales data, annuity sales grew 10.3% in 2006, 8% in 2007, 4.6% in 2008, and so forth. In 2014, they rose only 3.8% from the prior year to $229.4 billion. “If you look at year-over-year figures, we are seeing a steady decline,” says Murdoch.
Silver Linings
To others, however, these numbers do not a crisis make. “In part, it is a perception problem,” argues Daniel Herr, a vice president at Lincoln Financial Group in Hartford, Conn. “Let’s be clear: Annuity sales aren’t down overall.”
Indeed, according to LIMRA, last year’s modest total sales gain was primarily due to monster growth in three product areas:
• Indexed annuity sales jumped 23% year over year to $48.2 billion, meaning they represent more than half of all fixed annuity sales for the first time ever;
• Deferred income annuities (DIAs) enjoyed a record 22% sales increase to $2.7 billion; and
• Immediate income annuities’ sales rose 17% over the previous year to $9.7 billion.
What hampered overall sales growth was one product category: variable annuities (VAs), sales of which fell 4% in 2014 from 2013 to $140.1 billion, the lowest they’ve been since 2009. (In contrast, overall fixed annuity sales rose 13% from 2013, to $95.7 billion.)
But even that may not be terribly alarming. “Variable annuity sales have declined from a peak reached just prior to the financial crisis and have been relatively flat for the past three years,” says Herr. “With VA sales, it appears to be more of a right-sizing of the market, following outsized growth and gains in 2006-2008.”
Behind the Numbers
Whether it’s right-sizing or simple deterioration, what lies behind the numbers may be most telling. First, low interest rates have made some annuity income guarantees pay out less, rendering the products less desirable than when rates were higher. Low interest also eats into the annuity issuers’ own accounts, causing them to raise fees or scale back benefits to make up the difference, which in turn impinges on sales.
“With VAs, there’s been a narrowing of the benefits relative to the fees,” says Ray Lucas, senior vice president of financial planning at Integrated Financial Partners in Waltham, Mass. “Specifically, I’m referring to some of the living benefit riders. Five or six years ago, you had companies offering 7% ratchets or step-ups [in automatic annual withdrawal rates] at a cost of less than 100 basis points. Now most are offering maybe 5%, and the cost is up.”
Another cause is the bull market. Why buy an annuity if you can make more by investing directly in mutual funds and simultaneously save on the fees? With VAs, of course, assets are invested in mutual-fund-like subaccounts. But you only receive a portion of market upturns, as well as downside protection if the market tumbles, for which there’s a high annual fee. With scant market volatility—at least through late summer—these annuity contracts “no longer seemed like a great value, and a lot of advisors didn’t even bother showing them to their clients,” says Lucas.