Insurance annuities are expected to increase significantly in importance, with the growing need to supplement individual retirement nests as governments continue to build third-pillar pensions.
They are likely to remain the preferred route to retirement planning in the near term due to their payout features, with some providing lifelong payouts and guaranteed returns. Some Asian governments, such as those in Hong Kong and China in recent years, have leveraged retail investors’ familiarity with annuities and their long-standing track records, and introduced annuity-related initiatives to boost the third-pillar retirement segment.
In markets where life insurance penetration is high, annuities’ first-year premium income has grown over the past few years. In particular, Singapore and Hong Kong saw notable double-digit growth in 2018. On the other hand, Korea saw its first-year premium income dwindle over the same period, largely due to the shift in interest toward retirement pension policies offered by insurance companies under the Employment Retirement Security Act scheme.
China made a big push in developing its commercial annuity market when it introduced tax-deferred pension insurance in May 2018 as part of efforts to develop its third-pillar retirement system. The scheme allows plan holders to defer tax on their income used to buy pension insurance until they reach retirement age and start drawing money from the policy.
So far, more than 20 insurers have been allowed to offer pension insurance. More providers could be approved as the government rolls out the scheme across the country. Earlier, the government introduced enterprise annuities in 2004 and occupational annuities in 2016 to supplement statutory pensions.
In Taiwan, deferred annuities have been growing steadily in the past couple of years. Total deferred annuity premium income recorded a compound annual growth rate of 11.1% between 2014 and 2018, despite a slump in 2016. Investment-linked annuities is another promising segment, overtaking traditional annuities to achieve a 56.7% market share in 2018. Asset managers and insurance companies looking to gain a slice of the annuity pie in Taiwan could consider these as avenues to reach out to individuals.
“The importance of annuities is expected to increase significantly, as many markets continue to encourage personal retirement savings,” says Ye Kangting, research analyst with Cerulli Associates. “There is room for innovative funds and partnerships. Asset managers wanting to penetrate the market can consider positioning investment-linked products as instruments for retirement accumulation, while exploring investors’ preferred product features.”