Will seg fund providers make guaranteed income great again?

Despite steep rise in interest rates, segregated fund providers will likely proceed with caution to return to pre-2008 products, says planning professional

Will seg fund providers make guaranteed income great again?

While a higher interest-rate environment opens the door for segregated fund providers to improve some of their income offerings, lessons from the Great Financial Crisis will make them hesitant to do so, according to one financial planning professional.

“As someone who’s looked at segregated funds throughout his career, I know companies sold contracts to individuals with very healthy guarantees, which they had to continue honouring throughout the low-rate environment,” says Mehul Gandhi, managing director and senior insurance advisor at Westmount Wealth in British Columbia.

“Will they take this opportunity to make those guaranteed income products more attractive going forward? In my opinion, I think they’ll proceed with caution.”

Rising rates may not shake status quo

Having been in the business for more than 15 years, Gandhi recalls how early in his career there were still a considerable number of segregated fund products guaranteeing high income rates and high bonus rates. That included returns of anywhere from 5% to 7%, and healthy income withdrawal rates guaranteed for life.

Then came 2008, when the financial markets crashed and the world was thrust into a low-interest-rate reality. Suddenly, segregated fund providers found it harder to make good on those generous commitments.

“Around 2010 or 2011, you started seeing major seg fund providers starting to pare back and become more conservative on those guarantees,” Gandhi said.

With interest rates rising steeply over the past eighteen months, seg fund providers now have some more breathing room to keep honouring the heady guarantees they made to holders of seg funds sold pre-2008. Beyond that, they could choose to make their guaranteed income products more attractive – but Gandhi isn’t so sure that’ll happen.

“There might be some companies that see this as an advantage, and jump to market with something that’s slightly more appealing than what the rest of the competitive landscape is offering,” he says. “But I don’t see this across the board, especially in the larger companies. Actuaries will proceed with caution.”

While no one can say how close we are to the peak of the current central bank policy tightening cycle, Gandhi states that rates are likely to start coming back down in the next 12 to 18 months. That’s another point in favour of the segregated fund industry standing pat and maintaining the status quo.

“I don’t think these insurance companies want to be caught in another situation where rates are going to go back down, and they’re left having to honour guarantees,” he says.

Will mid-market Canadians get left behind?

Another question mark for the segregated fund industry was raised in May through a study commissioned by Primerica. The research came out after the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) voiced concerns about conflicted compensation schemes, saying they could result in poor outcomes for consumers.

The white paper warned that by imposing heavy-handed rules on advisor commissions, regulators could spark an “abandonment dynamic” that could leave middle-market Canadians unadvised on segregated funds. But from Gandhi’s perspective, that fear isn’t well founded.

“I think segregated funds are for a very specific type of client, or specific segments of the population,” he says.

According to Gandhi, segregated funds are very well suited for estate-planning purposes, which are typically appealing to older clients. There are some particular segregated fund products made for individuals seeking guaranteed income, which also include Canadians in their retirement years.

From where he sits, Gandhi estimates the majority of middle-market Canadians are still investing through the bank channels or through the independent broker channels, mostly with an eye on exchange-traded funds or mutual funds. While segregated funds are popular among insurance professionals, they’re only recommended for a certain type of clientele.

“I think for the mid-market majority of Canadians, this will not affect their financial planning,” he says.

Mehul Gandhi, CFP®, CLU®, TEP is a Senior Insurance Advisor and Managing Director for Westmount Wealth Planning Inc. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario. These comments are solely intended to refer to products sold under a life insurance license.