It’s a uniquely difficult time for retirement planning. Because of the pandemic, the economy is on edge. Equity markets are volatile, and interest rates remain at record lows. So it’s not surprising that annuities—a key tool for retirement planning—are in a tizzy, too.

According to the Secure Retirement Institute (SRI), total annuity sales plunged in the second quarter by 24% from the corresponding period a year ago, to just under $49 billion. Both of the two main types of annuities saw steep declines: Variable annuity (VA) sales dropped 20% after four consecutive quarters of growth, and fixed-annuity sales slumped 26%.

Predictability Is Preferable
“Traditionally, during periods of low interest rates, individuals are more likely to seek variable annuities,” says Teodor (Teddy) Panaitisor, an SRI senior research analyst based in Windsor, Conn. “However, in recent months we have seen fixed products … gain more traction than other annuity products. This is due to the high volatility and uncertainty we’ve seen in the equity market. As a result, individuals are seeking these fixed products for safety and principal protection, regardless of the low interest rate environment.”

VAs, of course, invest in mutual-fund-like accounts that are tied to equity markets. Fixed annuities work more like bonds, with a fixed rate of return typically based on current interest rates. The conventional wisdom says VAs become more popular when interest rates are low, and fixed annuities gain popularity when equity markets are volatile. But with both these trends happening at the same time, it’s hard to tell what to expect.

In some ways it’s almost as if investors have become used to low interest rates, but the second quarter’s market volatility was more shocking—causing a flight to greater security. In the second quarter, one of the surprising gainers was fixed-rated deferred annuities, which work much like certificates of deposit, except that the interest is earned tax-free until it’s withdrawn. For the quarter, sales of these annuities jumped 33% from the prior quarter.

“Low interest rates dampened fixed-rate deferred annuity sales in the first quarter, but as we saw during the Great Recession, these product sales soared in the second quarter as consumers looked to protect their investment from market volatility and losses,” said Todd Giesing, SRI’s senior annuity research director, in a press release.

“The most basic value that annuities provide is protecting retirement portfolios, which is especially important during times of market volatility or downturns like we’re seeing right now,” says Colin Devine, New York City-based senior education fellow at the Alliance for Lifetime Income, the Washington, D.C.-based nonprofit organization dedicated to educating people about the importance of protected lifetime income in retirement. “Given that we’ve seen low interest rates for a long time now, annuity companies have been some of the most innovative in the financial services industry, creating other types of annuities, such as registered index-linked annuities.”

A Bright Spot
And those are one of the few bright spots in the SRI report. Registered index-linked annuities are types of VAs sometimes called structured or buffered annuities because they offer downside protection (a “floor”) in exchange for partial upside participation (a “ceiling”).

These vehicles continue to sell well. In the second quarter of 2020, registered index-linked annuities sales were up 8% year over year in SRI’s measure. That was their 22nd consecutive quarter of sales growth. For the first half of the year, their sales jumped 22% from the corresponding period a year earlier.

“Being able to provide some downside protection to a portion of equity portfolios through a buffered annuity is a very prudent move for advisors to help de-risk retirement portfolios that are being challenged by this rate environment,” says David Lau, founder and CEO of DPL Financial Partners, an insurance network for registered investment advisors based in Louisville, Ky. “Clients love the products because they offer attractive upside potential while providing a level of downside protection, bringing some comfort during what has been a very rocky ride.”

For carriers, advisors and clients, registered index-linked annuities offer less risk than other VAs. For providers, they are also less capital-intensive.

“Insurance companies like diversification as much as advisors and investors do,” says Graham Day, managing director of individual retirement at Equitable in Raleigh, N.C. “Some annuity products require more capital to provide the long-term obligations of the contract, such as lifetime income features. Other products, like [registered index-linked annuities], are ‘capital light.’”

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