Page 3 Profile
Gary C. Bhojwani
The Income Decree
by Carolyn S. Ellis
In January the Obama administration announced its plans to promote Americans' use of annuities to transform their retirement savings into income for life. Life & Health Advisor spoke with Allianz CEO Gary Bhojwani about the implications this initiative may have for the annuity industry as it responds to new consumer demands for safety and the security of retirement income.
L&HA: President Obama recently announced retirement security proposals that include encouraging Americans to use annuities to guarantee lifetime income. What was your reaction to that news?
GB: We think that's a fantastic step for President Obama to take. It's the right thing to do and it's a natural extension of what needs to be done right now. The reasoning is simple. Historically, Americans have been taught that we should prepare for retirement assuming our income will come from three sources: roughly one-third from Social Security, one-third from corporate pensions, and one-third from our own investments. As least two if not three of those have been significantly damaged in the last couple of years. This has brought to light the need for Americans to have guaranteed lifetime income. Only annuities can do that.
L&HA: It sounds like this proposal will be good for the industry.
GB: It will be good for Americans, too. Comparing annuities to investments, let's say I have money in certain target-date funds or systematic withdrawal plans. These are fabulous investments. The problem is that if 100 people invest in some type of systematic withdrawal investment, some will die 10 years earlier or 10 years later, meaning some people will outlive their money. An annuity does what insurance does; it pools those risks. With an annuity, no one will run out of money.
L&HA: Are you concerned about inflation and can annuity products protect people from it?
GB: Am I concerned about inflation? Sure. Can we manage it and do we have tools to deal with it? Absolutely. I believe that when you put more money into the system, you will inevitably see inflation, but I can't tell you when.
L&HA: Do you think American workers have enough savings to make a material difference in their retirement, 10, 20 or 30 years out?
GB: Americans don't have enough savings today. The last figures I saw said the savings rate was climbing to about five percent, but it was only a couple of years ago that the savings rate was down to a negative. We have some catching up to do. Americans need some income guaranteed for life, but this is a newer issue. If you look at what this country has been through in the 60 years since World War II, you can see two very different periods of time and as we move forward we will see a third, calling for a different approach.
L&HA: Could you describe these periods for us?
GB: In the first 30 years after World War II, banks were where people put their money and expectations were for a return of four to five percent a year. The average American valued safety and guarantees most. The corporation was playing a certain parental role, if you will, by offering defined benefit plans. Some people might say that during this period the government started to act in a parental capacity by offering Social Security. I would disagree with that characterization because when Social Security was introduced with an effective age of 65 the average life expectancy was below that. It was a great piece of political maneuvering, but realistically the average American wasn't going to live long enough to tap into it.
During the second 30 years after WWII, investment managers dominated. It was an era of personal responsibility for and personal control over retirement assets. We had the advent of 401k plans, IRAs, and 403bs, and employers moved to defined contribution plans. Mutual funds were popular. The buzzwords were rate of return and control.
We recently entered the third era, and the original three-way formula needs tweaking. Corporate pensions don't exist anymore, and we saw what just happened to the average American's largest investment, their home, and to their investment accounts.
This demonstrates that one party in this three-way formula needs to provide a guarantee. It can't be the government anymore. With Social Security, I think the ages will have to go up and benefits will go down because of our fiscal and demographic situation. We have so many more people entering retirement. As for employers, some of the same factors like demographics make it difficult to provide a plan, so it will come back to the individual.
We talk about asset location, versus asset allocation, which is to say the emphasis is on putting some money into a guaranteed-income product. We will see that trend really take off over the next 30-year period.
L&HA: What about annuity rates? How are they now?
GB: Fixed annuities, the shorter term three, five and 10-year products, are good alternatives to CDs, and they can offer very competitive rates. There are critics out there who say annuities cost too much. My response to that is annuities may seem like they aren't providing enough benefit during a raging bull market. But when you have a dip-down in the American economy like we have had over the last couple of years (and something like this happens every five to 10 years) then suddenly annuities look very worthwhile.
L&HA: How do you see the performance of variable annuities (VAs) and indexed annuities?
GB: The variable annuity has seen a significant shift over the last year. Some companies offered benefits that were far too rich, so we have seen a repositioning of the VA market. I think most of the players in the industry have done whatever repositioning they needed to do and are pretty comfortable about the long-term prospects of their products. Fixed indexed annuities, have also evolved. We have made a number of changes both to product design and the sales processes that go with the product. If you take the time to look closely at the way the indexed annuity is priced and regulated and the conditions of an indexed annuity and a VA, you will find they are increasingly getting closer in the way they work.
L&HA: Very few people actually annuitize their annuities, but do you expect that to change?
GB: Annuitization rates historically have been relatively low. I think those rates will go up for a couple of reasons, perceived instability in the economy and demographic changes. As the numbers of people entering retirement go up, you will see more people annuitizing.
L&HA: Are there new annuity products or features designed for today's economy?
GB: There are products that emphasize income and those that emphasize growth, equities, or bonds. We have some products that emphasize a five- or 10-year period and others that are shorter. Many products today have what are called "step-ups" in their annual income so people can offset the impact of inflation. But you will see some new products targeting that consumer who is really concerned about inflation.
L&HA: Are annuity sales mostly 1035 exchanges or are you seeing new money?
GB: We're seeing new money in both our indexed and VA business and we have a fair amount of 1035 exchanges.
L&HA: Hybrid autos are popular, but are there annuities that could be considered hybrid?
GB: We expect to debut some annuity products in 2010 that have different portions within them, some portions emphasizing guarantees and other portions, growth. They sit under one roof and money can move between the aspects pretty seamlessly. You can also expect some annuities that combine with other products such as long term care.
L&HA: What is an important message for the times, for agents as well as clients?
GB: I am always surprised by how often the average consumer doesn't understand the concept of pooling risk. Systematic withdrawal plans and other investment tools simply cannot do that. Only an insured product can make sure you don't outlive your income. It's not because insurance companies are smarter. I can't tell you when one person will die, but I can tell you on average when 100 people will die. That's what we bet on and how we make our living, making sure none of those 100 people run out of money; that is a huge difference between us and investment managers.
L&HA: What do you recommend to agents to thrive in the current economy?
GB: I believe there is a convergence coming between the insurance and the securities worlds. For those agents who plan to be in this business for another 10, 20, or 30 years, I would strongly encourage our distribution to get comfortable operating in the securities environment and to consider a securities license. There is a huge opportunity out there. The last statistics I saw said 90 percent of Americans' retirement assets are in non-insurance products. That means that nine out of 10 times you will be talking to consumers about money that is currently in a securities environment and to do that legally you need a securities license. The consumer needs this guidance and advice. The one who can explain these complexities cogently will be the one who succeeds.