Sun Life defends GMWB changes

Recent changes to fees and asset allocation requirements for the SunWise Elite guaranteed minimum withdrawal benefit (GMWB) product have sparked advisor anger, as the changes apply to in-force contracts as well as any new policies. But the carrier says these moves were necessary to ensure the long-term health of the program, and that the blowback from advisors has been in line with expectations.

“We’ve had a fair bit of feedback,” says Kevin Strain, senior vice-president, individual insurance and investments with Sun Life Financial Canada. “I think people knew there were changes coming — a number of journalists have written on what’s happened in other jurisdictions. The pressures on the product were well-known.

“I wouldn’t say people were saying that’s exactly what we wanted you to do, but I would say the feedback is largely as expected,” he adds. Some advisors have told him that they are using the announcement as an opportunity to discuss the benefits of segregated funds with their clients.

“For the actual guarantee benefits in this program, we’ve gone out and done a hedging program that, in essence, gives us 100% protection, because we’re not in the business of taking big equity market risks,” he explains. “The cost of that hedge program has gone up significantly in the last nine months. We’re in a different position than our competitors, because we’ve been actively hedging [exposure].”

The higher fees reflect a portion of that increased hedging cost being passed on to the client. The company, he says, felt it was fair to have in-force contracts pay for their share of that hedging protection, rather than putting the cost entirely on future contracts.

Strain says the company needed to strike the right balance between the interests of customers and shareholders, while ensuring that the product remained viable for the long term. Steering a minority of investors into larger fixed income allocations makes the overall portfolio more “hedgeable” and, therefore, makes risk management easier.

“We’ve seen upward pressure on this product right across the global industry,” he says. “We looked at the competitiveness of our product after the changes, and we feel very comfortable that the product still offers really good value, given the fund management in it.”

One advisor, who asked not to be named, sent Advisor.ca a copy of the letter he sent to his Sun Life marketing rep.

“The entire selling feature of this product is the ability for investors to have equity exposure with the comfort of bonuses and income guarantees,” the advisor wrote. “This move goes against the entire reason why I like such a product.”

He went on to point out that the company’s marketing material focuses on long-term planning, using 10- or 15-year time horizons. The changes have “left a bad taste” in the advisor’s mouth, as he would expect that assets invested in equities would be allowed to remain in equities.

“If you are going to offer a product that investors are putting their trust into as a part of their long-term plan, as an advisor, I need to have solid trust that the company I recommend is not going to change the rules after investors are in the door.”

Not only did the advisor consider Sun Life “done in my books,” but he went on to state that he would avoid placing client assets in CI Financial products.

“Sun/CI need to be a company of integrity,” he wrote. “Business integrity would allow for Sun/CI to change the product offering for new deposits, but not for deposits already made.”

There have been few complaints about the higher fees and raised minimum fixed income allocation on new contracts, but some advisors have rankled against the changes being applied to in-force contracts.

To have left in-force contracts out of the new rules and fees may have required even more drastic fees and allocation requirements for new clients, as the difference would have to be made up by new contracts.

The low 10% minimum fixed income allocation had been one of SunWise Elite’s major selling points. The primary competitor, Manulife’s IncomePlus, offers only a suite of balanced funds. With the option of a 90% equity allocation now gone, some say Sun has lost a competitive edge.

“Our book of business is [already] under 70% equity,” Strain says. “Many of our customers were not using that sort of weighting. If you really want that equity exposure, the retirement stream probably wasn’t the right place to be doing that.”

He emphasizes that in-force contracts do not need to rebalance their portfolios until December 2011. (On Monday, Advisor.ca erroneously stated that in-force portfolios needed to be reallocated to a minimum 30% fixed income allocation in June. Advisor.ca apologizes for that error.)

Another advisor wrote to Advisor.ca to point out that Sun Life was not alone in changing in-force guaranteed products. On May 29, Empire Life announced that it was eliminating resets on its Elite and Elite XL investment programs and Empire Class segregated funds. The changes apply only to policyholders over the age of 80.

While some of the changes Empire Life announced apply only to new policies, resets will not be permitted after December 31 of the year the annuitant turns 80 years old for in-force contracts.

“I put $1 million into an all-equity fund in the last five months with clients over the age of 80 on the promise of twice annual resets as allowed in the prospectus. Now they change this with no recourse,” wrote Angelo P. Vicere, CFA and senior financial advisor at Assante Capital Management’s Hamilton Mountain office. “It’s no wonder that investors have lost faith in financial institutions that are looking out just for themselves.”

He too wrote to his marketing rep, and forwarded a copy of his comments to Advisor.ca.

“This change will cause much emotional and possibly financial harm to the affected clients, which are frail and elderly already,” he wrote. “These people will view these changes with suspicion and mistrust, and I believe will undermine Empire’s goodwill in the marketplace.”

“Empire should immediately review these changes and grandfather all existing policies under the terms of the contract at the time of issue. To do otherwise is shameful and underhanded to a core group of loyal elderly clients.”

(06/04/09)