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The interest rate hiking cycle that central banks launched last year has given a boost to annuities, which are now back in favour among advisors and investors. But underlying changes in demographics as well as product innovation could result in annuities remaining popular for years – even if interest rates start dropping.
For example, new products include advanced life deferred annuities (ALDAs) and variable payments life annuities (VPLAs), which can help retirees avoid the risk of outliving their money.
Globe Advisor editor Pablo Fuchs spoke with Carlos Cardone, managing director of Investor Economics at ISS Market Intelligence, in a LinkedIn Live event to discuss the state of the annuities market and the outlook for these new products.
What are these new products designed to do, and what impact do you expect them to have on the market, overall?
[ALDAs] are products that target advanced life, as the name says. They’re deferred annuities and payments must be started before the end of the year in which a client turns 85 years old. For the most part, ALDAs are certainly good at mitigating longevity risk.
These products make a lot of sense for clients who reach that age with very substantial assets in registered accounts. For registered accounts or some tax-deferred benefits, there is the possibility of avoiding, to some extent or entirely, reductions in old-age security payments, and so on.
VPLAs are very interesting. We’ve been working with the heads of the defined-contribution record-keeping platforms in Canada, and with pretty much no exception, they agree these products are game changers for retirees. VPLAs are not yet available and are potentially coming to market very soon. They’re products that allow an insurance company to create a pension plan-like structure. With VPLAs, you have the financial risk, but there’s a variable component and there’s a fixed component, and payments could vary over time. The idea of the modelling is that, hopefully, payments will only go up, or mostly go up, over time.
Given that VPLAs are for members of a defined-contribution pension plan, there’s also a mortality premium connected to the overall payments. So, as members of the broader VPLA pass away, their assets are redistributed among the living members. We haven’t seen the final strokes of how these are coming to the market yet. But they’ve been in place in other global markets and have been quite popular.
What do you expect to see as this market continues to grow and evolve?
Insurance as an estate planning and legacy planning tool is a trend we’re seeing that will continue. The benefits provided by insurance policies of different types are impossible to overlook for many client segments.
And the higher interest rate environment is very positive for those who have assets and are looking to create income out of them. That creates a great opportunity to lower risks in portfolios by moving toward some deposit options, fixed income, insurance products, and beyond.
This interview has been edited and condensed. The entire interview can be viewed here.
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– Globe Advisor Staff