Manulife's head of individual insurance explains how this product category can support advisors, clients as they face the reality of 40-year retirements
Each month at WP we offer a slate of articles and content pieces that go deep on a particular topic. This December, we’re exploring how segregated funds and annuities fit in advisors' toolkits.
Longevity will continue to challenge Canadian advisors. Not only has the average Canadian lifespan steadily risen over the past few decades to around 83 years old, the number of Canadians aged 100 and older has tripled from 2000 to 2023, according to StatsCan. Financial plans and asset allocation strategies now need to confront the prospect of a 40-year retirement and one insurance expert believes a certain product set can help.
Paul Savage is Head of Individual Insurance for Canada at Manulife. He explained just how difficult longevity can be to plan for, especially when clients want to ensure they leave a legacy. He notes that while plans may be built around retirement at 65, many end up retiring earlier for reasons outside their control. Segregated funds, he argues, can help allay some of those concerns through certain guarantees that may allow advisors more freedom in the strategies they pursue to beat inflation long-term.
“Traditionally, as we get older we reduce risk, typically going from equities to lower risk assets like bonds or even cash. While that reduces market risk, it introduces significant longevity risk because you have a greater risk of outliving your savings,” Savage says. “Enter segregated funds. They provide guarantees like a death benefit and maturity guarantees that can give people the comfort they need to stay invested in some riskier assets, knowing that they aren’t going to lose their principal and ensuring they can leave a legacy.”
Savage stresses the importance of those guarantees and life benefits as well as seg funds’ capacity to accumulate in the leadup to retirement. He notes, though, that these products are not a panacea. They don’t provide guarantees of retirement income. He suggests that advisors may want to use these products in line with a life annuity purchased for clients in their retirement, to provide a guaranteed source of monthly income that can work together with CPP, OAS, and any needed asset drawdowns to support a client in retirement.
In using insurance products like seg funds and annuities to provide longevity protection advisors need to be clear and open with their clients about what can and can’t be done through these products. Savage believes that their uses need to start from the question of what they’re afraid of in retirement. These products can suit different priorities, be they the maintenance of adequate cash flow, leaving a legacy for their loved ones, or living a certain lifestyle.
The guarantees that come with seg funds and annuities can form the core that addresses those more fundamental needs. That core then frees up clients’ risk appetites for additional market growth exposure, which can be essential if those clients want to beat, or at least keep pace with, inflation over a multi-decade retirement.
As the needs of Canadian retirees have evolved, firms have adapted their product sets to match. Savage explains that Manulife has re-entered the payout annuity space in the past few years and increased the guarantee option for their segregated fund platform, moving from a 75 per cent guarantee on death and 75 per cent guarantee on maturity model, to 100 per cent guarantees on both death and 75 per cent guarantees on maturity. From an asset allocation perspective, Savage notes that there have been more calls for passive investments and indexing to help manage fees associated with those products.
To that end, Manulife recently launched seven new seg funds with two separate investment managers. Four new funds managed by BlackRock are aimed specifically at expanding the choices for index-tracking seg funds which Savage says will help manage costs. The other three funds are actively managed by Fidelity, which offer more specific exposure to market themes like AI.
While fees associated with seg funds are often critiqued, Savage highlights both the efforts to make these products more cost-effective, and the relative value they can provide. He argues that the guarantees provided by a seg fund contract can allow for some of those higher-risk investments in other portions of the portfolio that will help beat inflation without risking a client’s full nest egg or legacy. For clients with lower risk tolerances, the trade-off in fees may be worthwhile.
Savage also emphasizes what he believes is an overlooked feature of these assets: their utility in estate plans. He believes these can be a useful tool in the ongoing wealth transfer as they allow for a death claim to be processes and sent to an heir in as little as two weeks. As with all strategies, however, Savage emphasizes advisors’ role in determining their suitability for any particular client.
“It’s important to start with that comprehensive conversation and to ask what’s important to the client,” Savage says. “That could be maintaining income in retirement, leaving a legacy for their beneficiaries, or managing risk. If they have that concern about losing their principal, or passing on a legacy, then that could indicate that a segregated fund can be a good solution.”
