Aviva USA executive testifies on annuities
September 14, 2010 by Lynn Hicks
Rhonda Elming, a senior vice president of product management at Aviva USA, will testify today before a joint hearing of the departments of Treasury and Labor on retirement security.
The hearing will focus on lifetime income options, and include mutual fund companies, retirement experts, employee advocates and others. Elming is scheduled to testify at 2:45 p.m. Central. The hearing is live-streamed at http://www.dol.gov/ebsa
Elming will speak on the need to remove barriers so annuities could be offered in employer-sponsored retirement plans.
“If the obstacles to offering annuities in employer-sponsored plans were removed, Aviva USA and other insurers would be significantly more likely to enter the marketplace and provide consumers with products that meet their lifetime income needs. It’s important to remember that life insurers are the only private market solution that can truly provide lifetime income guarantees,” she said in remarks submitted to the joint committee.
Below is a copy of her remarks, provided by Aviva:
Rhonda Elming, Senior Vice President Product Management, Aviva USA
On behalf of Aviva USA, I thank you for allowing us to appear at today’s combined Department of Labor and Department of Treasury Public Hearing on Lifetime Income. I am Rhonda Elming, senior vice president of product management for Aviva USA. Aviva USA is part of U.K.-based Aviva plc – the sixth-largest insurance company in the world – and a sales leader of fixed indexed deferred annuities and fixed indexed life insurance in the
United States. Based in Iowa, and with offices in New York and Kansas, Aviva USA has approximately 1 million life insurance and annuity customers and we employ nearly 1,500 people across the country. We can trace the presence of our predecessor companies providing financial
services in the United States to the late 1800s. We understand the market downturn has created a shift in consumer attitudes toward
retirement savings. This underscores the importance of planning for retirement with financial tools that offer a lifetime income option. We have researched the marketplace and have spoken with our policy owners. As such, we know that consumer demand has increased for products that provide a safety feature of guaranteed lifetime income.
Aviva focuses on the sale of annuities through independent agents, and as such, we do not currently offer our products directly through employer-sponsored plans. However, about half of our sales come from qualified annuities, which are often rollovers from employersponsored plans. This indicates a high level of consumer need for the solutions that our
products offer and which cannot be obtained in an employer plan.
These products primarily provide access to lifetime income solutions. There are compelling reasons that access to these options within the plan would be efficient and valuable to consumers, however, very real barriers exist in offering annuities through these plans.
These barriers prompted the Request for Information issued earlier this year and the need for today’s hearing. Clarity on fiduciary standards, annuity portability and disclosure of potential income streams from an account balance are among the issues that need to be addressed. We leave specific proposals to our industry colleagues and support the comments made by the American Council of Life Insurers, the Committee of Annuity Insurers and the Financial Services Roundtable, all of which we are members.
If the obstacles to offering annuities in employer-sponsored plans were removed, Aviva USA and other insurers would be significantly more likely to enter the marketplace and provide consumers with products that meet their lifetime income needs. It’s important to remember that life insurers are the only private market solution that can truly provide lifetime income
As mentioned earlier, Aviva USA is a leader in fixed indexed annuities and is a major issuer of qualified annuities. From our experience, there are many reasons individuals are reluctant to elect receipt of their retirement benefits as a lifetime income option. The Role of SPIAs in Providing a Traditional Guaranteed Income Solution Despite being around for generations, Single Premium Immediate Annuities, or SPIAs, have
not gained widespread consumer acceptance. While a SPIA can offer a guaranteed lifetime income stream, it requires a large outlay of money while providing no account value in return. The consumer gets a promise of a future income stream, but effectively gives up their rights to their asset and no balance appears on a monthly statement.
In addition, a SPIA that guarantees income for life offers no death benefit if the consumer dies prematurely. A SPIA also provides no flexibility to alter the amount received. If a consumer’s circumstances change after purchasing the SPIA – for example, medical expenses increase, or they experience a loss of other income – they have no ability to access their annuity. This is critical to understand: many people do not annuitize because they lose access to their money. Going from a large accumulated savings balance to a stream of income with no visible balance or flexibility is a tough psychological prospect for consumers.
Consumer Financial Literacy
In addition to issues specific to SPIAs, all lifetime income options suffer from a general lack of consumer knowledge as to the amount of assets needed to support the consumer’s postretirement lifestyle. While financial experts generally accept a withdrawal rate of 4 percent per year from retirement assets to be sustainable for the length of one’s retirement, surveys show that people generally believe they can withdraw between 8 to 10 percent annually. The payout rates offered by lifetime income options, SPIA or otherwise, look unattractive against that overly optimistic belief. Further, consumers don’t fully grasp the long-term effects of inflation on their retirement assets and income streams and often don’t factor in
the erosion of both their wealth and income over time. Therefore, a huge need exists for educating the consumer about the reality of paying for
retirement – including both the length of time retirement assets must last – and the income stream a certain amount of assets can support. Traditionally, people underestimate how long they’ll live and overestimate the value of a large lump sum balance in providing an income stream in retirement.
While consumers have concerns with traditional guaranteed lifetime options, the insurance industry is proud to lead consumer awareness and to shape the sentiments people have toward lifetime income products. Our industry has developed – and continues to perfect – innovative products with proven customer appeal to address their concerns. These products
guarantee lifetime income while providing death benefits, flexibility of withdrawals, transparency of account values and the potential to keep pace with inflation.
Consider the Income Rider
Aviva USA’s fixed indexed annuities are soundly placed in the middle of the road of the market risk continuum. Like a traditional fixed annuity, an indexed annuity provides a guarantee of principal but with an interest crediting rate tied in part to the movement of an outside index such as the S&P 500. The benefit is a historically higher interest rate that provides a more effective hedge against inflation. Variable annuities, on the other hand, carry more risk. While the account value may appreciate more quickly, it is at risk. We believe indexed annuities to be the perfect
compromise for a consumer seeking stable appreciation and affirmation that the money is there in the long term.
Aviva USA has been a leader in developing and using unique features on its deferred fixed indexed annuities. For example, our optional income rider provides a viable solution to common consumer concerns. Over 80 percent of our new customers have elected to add an income rider on their policy. They see the benefit in its design as it offers safety and stability through:
• A guaranteed accumulation benefit to ensure the policy holder has a minimum, predictable base for his or her lifetime income payments, regardless of the underlying policy’s performance;
• Guaranteed lifetime income payout rates that can double if the policy owner is confined to a nursing home or other qualifying facility;
• A death benefit option based on the guaranteed accumulation benefit, if elected, to be paid over a five-year period;
• Flexibility to start and stop income payments;
And continued control over the underlying policy account value.
Income riders essentially allow customers to make periodic withdrawals while they retain access to their annuity’s principal. This ability provides the peace of mind of lifetime income while maintaining an account value that can be passed on to heirs in the event of premature death, or can be accessed for additional income should life circumstances change.
At Aviva USA, we are in close contact with our customers. Over the past 18 to 24 months, we have received hundreds of customer letters – some emphatically thanking us for offering annuities that were protected from the market crash. While many consumers lost an incredible amount of cash value in their plans, our products provided financial security and a
guaranteed income stream. We hear directly from our customers that this peace of mind is invaluable.
We believe that lifetime income security is a pressing issue in the U.S. and one that only financially sound life insurance companies like Aviva USA are qualified to administer. And, we feel that fixed annuities play a role in every consumer’s retirement portfolio, especially for those who cannot risk losing principal or cumulative returns.
A recent study by Towers Watson found that insurers are increasingly focused on offering retirement income products through retail channels. We are a good example of a company doing just that. However, while we currently focus on the retail marketplace, we do support regulatory changes that would allow consumers to have access through different distribution channels to the suite of valuable products with guarantees offered by us and other insurance companies.
In closing, we are encouraged by hearings like this one which serve to educate the marketplace and create an open forum for exchanging ideas to improve both our performance and our customer’s acceptance of the products we offer.