Kansas City, MOSome retirees and people nearing retirement who purchased variable annuities for retirement income were very surprised to receive letters informing them that their guaranteed variable annuity payment was not so guaranteed. Diane Nygaard, partner at Kenner Schmitt Nygaard, LLC, says insurance companies have been backing away from promises of lifetime income to people who put their money in variable annuities.
“What I’m seeing is a lot of people who have been sold variable annuities in the last three years. Interest rates have been very low,” Nygaard says, “but these annuities were sold with lifetime guarantees of a stream of income. Now my clients find that some insurance companies are walking away from their obligation to pay lifetime income.”
Nygaard says her clients have contacted her because they’ve received letters from their insurance companies either wanting people to put more cash into their annuity or requiring people to accept a higher value for the annuity, but at the same time promise that they would never annuitize their annuity (meaning they would never receive their monthly checks).
“This defeats the purpose of buying an annuity,” Nygaard says. “People purchase an annuity over a mutual fund because the insurance company promises them they can choose to start receiving a monthly check. Companies in the news lately as having taken too much market risk and potentially not being able to meet their annuitization obligations are Aviva, Transamerica, The Principal Financial Group, ING, MetLife, Prudential, and two smaller players, Guggenheim and Genworth. We think the variable annuities sold by these eight companies expose their customers to the risk that there will not be sufficient assets for people to annuitize. People are paying for a product that, given the capital situation of the companies, is at risk, and yet annuity buyers the last three years have not been told of these risks when sold the annuities.”
Of concern is that a lot of variable annuity buyers are people who are retired or approaching retirement. Nygaard says that many people she sees worked for phone or utility companies, or state and local government. When employees retire, many employers push retirees to accept a lump sum rather than a monthly payment to avoid administration expenses. Employees who take a lump sum might then put that money into a variable annuity through an IRA, which Nygaard says is also usually unsuitable.
“Some variable annuities are done through IRAs, but they are completely unsuitable for an IRA because an IRA already has a tax shelter, while variable annuities add a lot of fees and give no additional tax benefit,” Nygaard says. “If you can’t annuitize, you’re not buying what you think. Annuities are very fee heavy, that’s why they’re sold. Annuities are not bought, they’re sold. But without the financial strength to back them up, people’s retirement savings are going to be at risk. Aviva, Transamerica, The Principal Financial Group, ING, MetLife, Prudential, Guggenheim and Genworth have invested primarily in bonds, and those have not been paying the interest rates they used to, which is putting their variable annuity contracts at risk.
“The contract is only as good as the company because it is not backed by the US. It is just backed by insurance companies and they have not kept the safe, secure investment profiles that they used to have. They have averaged their assets, just as the banks and investment firms that failed, thus putting at risk their variable annuities.”
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