It is increasingly clear that the many companies in the financial services industry are making the transition from investigation and planning, to taking concrete action in pursuit of the retire-ment income market. To date, most of the sig-nificant efforts have revolved around the devel-opment of new product features and the intro-duction of new product types that have applica-tion as solutions for retirees' income needs. Many companies, for the first time, have devel-oped specific retirement income strategies and organized themselves to better implement those strategies. The impacts of these activities are apparent: more competition and a broader array of product options.

Recent Trends

We recently completed our 8th annual study of the retirement income products "industry." This study included a survey of 42 insurance and mu-tual fund companies, followed by interviews with 21 executives, all of whom are actively involved in the retirement income market.

During the eight years we’ve been conducting this study, there have been a number of signifi-cant changes, in terms of organizational shifts to better address retirement income needs, the num-ber of companies participating in this new oppor-tunity, and product evolution and innovation as a key factor in many company strategies.

There have been a few surprises. Despite the stated intentions and efforts of a number of firms, immediate variable annuities (IVAs) have not achieved the potential originally expected of them, and certainly have not grown along with the attention on the retirement income market. In fact, total IVA sales volume for the most recent full year (2006) was only $272 million, a modest increase over the previous year, but substantially lower than any of the annual periods from 1999 through 2004. Consistent with this history, the executives interviewed in our study have lowered their estimates of IVA future potential.

On the other hand, sales of variable annuities with GLB options have accelerated in the past few years at a rate few would have predicted even four or five years ago. GMWBs with lifetime in-come are now one of the primary product solu-tions offered among the companies that are active in the retirement income market.

Looking to the Future

The tidal wave of interest in retirement income issues is reflected in executive focus, company activities, advisor participation, and communica-tions to the consumer. Given the rate of change in this marketplace, it is perhaps a bit rash to make any predictions about the future of retire-ment income products, but we can make some logical projections based on trends in our survey results over the years as well as executive re-sponses in recent interviews. Here then, are four "predictions" about the near-term future of the retirement income products market.

1. SPIAs will capture a greater share of the retirement income market.
   Despite the growing popularity of variable annuities with GLB's, more companies have fixed immediate annuities in their portfolio of products than any other guaranteed payout product. In the past few years, companies that primarily focus on fixed products have stepped up to the plate to make their products more competitive. Specifically, they have added new features such as inflation adjust-ment options, liquidity features, and other im-provements.
   
   As these products become more flexible in their capabilities to offer guarantees, we ex-pect their share of this market will grow, par-ticularly among those retirees who are looking for certainty in their payouts, or who want to counter the absence of a corporate pension.
   
    
2. Variable annuities with guaranteed living benefits (GLBs) will show sales growth at a double-digit rate for the foreseeable future.
   Half of the companies in our survey that had variable annuities with GLB riders had selected this product category as their primary means for providing retirement income. We expect this significant usage and growth to continue:
    
• Our respondents agree that this will con-tinue: on average, they estimate their own firm’s GLB growth will be in double digit annual rates over the next three years.
• Innovation continues: 11 out of 15 execu-tives interviewed who offer a variable an-nuity with a GLB option are currently de-signing new guaranteed lifetime benefits for their variable annuities.
  
   
3. Mutual fund companies will become a grow-ing factor in the retirement income market.
   Mutual funds have built a well-established business model, allowing them to help manage substantial assets. Now, a growing number of mutual fund firms are coming to recognize the possible impact on their business as boomers advance into retirement and seek out income solutions. They also see that competition for their assets will come from annuities because these products alone can guarantee income for a person’s lifetime. The mutual fund companies, therefore, are concluding that to retain these assets, they will need to establish an income "guarantee" of some sort. Mutual fund companies are already investigating ways to solve this issue.
   
   Beyond offering systematic withdrawal pro-grams, these companies are generally consid-ering two approaches which are not mutually exclusive: developing income oriented funds and/or developing a means of providing some form of guarantee, perhaps with the assistance of an insurance partner.
   
    
4. Longevity insurance will be a difficult sale.
   "Longevity insurance" appears to be the next area where companies will focus, but there are significant differences of opinion over whether consumers will buy such a product. Among our survey of 42 companies, six firms already offer this product and another five are developing one. And, about half a dozen oth-ers are at least considering the possibility.
   
   At this point, however, with little to show in the form of results, a number of executives continue to be doubtful about the ultimate suc-cess of these products. It may be too soon to tell how successful this product will be among the baby boomer retirees, but it is fairly clear that selling the product will present some real challenges.

Looking Ahead —Some Key Questions

As products and solutions expand, both in terms of options as well as complexities, and as more companies enter the fray, executives who expect to succeed in capturing a profitable share of this market will be faced with a number of important issues and decisions. A sampling of the more significant questions is provided below:

• Can companies who have traditionally com-peted on the basis of product differentiation successfully make the transition to more of an advice-driven strategy?
• How many GLB features can be added with-out confusing the advisors and their clients? We are now beginning to hear comments that this market is approaching information over-load.
• Would the industry be well-served by creating more hybrid-type products that are designed to support multiple risks?
• For smaller companies, with limited product portfolios and lack of scale, how can they suc-cessfully participate in the retirement income market?
• How can companies satisfy the retirement in-come needs of the middle market, effectively and economically penetrating this market-place?
• Do mutual funds need to partner with insur-ance companies in order to provide income guarantees, or can they develop a satisfactory income solution on their own?

Ultimately, the successful competitors in the re-tirement income market will need to ask them-selves most, if not all, of these questions. How they are answered will not only determine the direction of the market but also perhaps a longer-term definition of success.DSG

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