The Department of Labor’s fiduciary rule certainly will have a significant impact on individual annuity sales in 2017. As of Feb. 10, LIMRA Secure Retirement Institute estimates that total U.S. individual annuity sales will be around $200 billion, dropping 10 to 15 percent in 2017.
Variable annuity (VA) sales are projected to drop as much as 20 percent to 25 percent — to between $80 billion and $85 billion in 2017. Several factors are contributing to the decline in VA sales:
» Sales of VAs in individual retirement accounts will need to use the best interest contract exemption. This likely will have an adverse effect on the number of advisors active in this market and the type of compensation they receive.
» Exchanges will decline. We anticipate that the number of annuity contracts that exchange from an annuity at one company into a VA at another company will drop, particularly for qualified contracts that now will fall under the fiduciary rule.
» Additional contributions will drop. We also expect a decline in additional money going into existing IRA contracts because, if compensation is paid, it would trigger a fiduciary standard.
» Distribution firms will offer fewer VA products. The additional requirements that are involved in the regulation will prompt many distribution firms to shrink the number of products they have on their shelves.
» Some companies will become less active in the VA market. Given the additional risks and responsibilities required to comply with the DOL rule, some companies may scale back their efforts in the VA market. Also, they do not have a lot of time to address some critical issues such as putting the necessary policies and procedures in place.
LIMRA SRI also projects fixed annuity sales will be relatively flat in 2017, totaling $115 billion to $120 billion. Market conditions in 2017 will impact fixed annuity product categories differently.
» Sales of indexed annuities are expected to drop 20 percent to 25 percent for many of the same reasons listed for VAs. In addition, distribution intermediaries such as independent marketing organizations (IMOs) need to adhere to special requirements in order to receive the special exemption status provided by the DOL to become a financial institution.
» Sales of fixed-rate deferred annuities (traditional book value and market value adjusted annuities) are expected to grow 25 percent to 30 percent in 2017 as they attract more retirement funds. Products with guaranteed lifetime benefit riders will help grow these sales. Interest rates also have improved — rising more than 100 basis points from the record lows of early July 2016. In addition, these products will need to comply with the less onerous Prohibited Transaction Exemption 84-24 within the DOL rule.
» Sales of income annuities (single premium immediate annuities and deferred income annuities) could grow 20 percent to 25 percent as the need for guaranteed lifetime income products continues to grow. Individuals are spending more time in retirement than ever before and must take on more of the responsibility for generating retirement income. These products will benefit from the improving interest rate environment and must comply with PTE 84-24.
Although LIMRA SRI can project the likely effects the planned DOL rule will have on the annuities market, a lot of uncertainty still surrounds the possible impact if the Trump administration delays the implementation of the rule. The impact will depend upon the length of the delay and whether the rule is modified. However, if the rule is delayed beyond 2017, we anticipate the following impact to 2017 annuity sales (over 2016 sales):
» Total annuity sales will be relatively flat.
» VA sales will drop 10 to 15 percent.
» Fixed annuity sales will grow 5 to 10 percent. Total fixed indexed annuity sales will grow by 5 percent; fixed-rate deferred annuity sales will improve by 10 to 15 percent, and income annuity sales will increase by 20 to 25 percent.
It is still too early to tell whether 2018 will be a transition year or a turnaround year for the annuity market. However, LIMRA SRI does expect individual annuity sales to eventually turn around and improve, given the growing demand for retirement income products. We project that the number of retirees will grow from 49.5 million in 2015 to 66 million in 2025. The amount of retirement income market assets held by individuals aged 55 and older is expected to almost double from $13 trillion in 2014 to $25 trillion in 2025. In addition, we estimate that the guaranteed lifetime income market could be as high as $750 billion today.
Amid the changing administration, one thing we are certain of is the individual annuity market will only grow larger in the years to come.
Joseph E. Montminy, ASA, MAAA, is assistant vice president, LIMRA Secure Retirement Institute. He may be contacted at firstname.lastname@example.org.