Cathy Weatherford strode into the meeting room like a woman in a hurry and on a mission. That’s not surprising, considering her job is to spread the word about retirement options to an increasingly apprehensive public. Specifically, she wants to educate consumers, financial advisors and regulators about the importance of annuities in what she calls a “holistic” retirement plan.
And she is uniquely qualified to lead that charge. Weatherford is president and CEO of the Insured Retirement Institute (IRI), a position she has held since 2008. The Washington, D.C.-based nonprofit group advocates for proper retirement strategies and the use of annuities and variable life products in those plans.
But before she came to IRI Weatherford was no stranger to the insurance industry, after having served as CEO of the National Association of Insurance Commissioners and the first woman to head Oklahoma’s insurance commission.
LifeHealthPro.com caught up with Weatherford as she presided over the organization’s 2012 Marketing Summit in New York City in early April.
In the first part of the conversation, Weatherford discusses why annuities are gaining in popularity, how they can fit into an individual’s retirement blueprint, and how insurers are managing risk in today’s volatile market.
LHP: How do annuities fit into an overall retirement plan?
Cathy Weatherford: We have millions of Americans who suffered tremendous losses in their retirement portfolios in the economic downturn. After years and years of thinking, oh, these markets are always going to go up, they now have an acute awareness and knowledge that markets do go down, and we are going to have ongoing volatility in the marketplace. So what are people looking for? They are looking for guarantees. And they are looking for the ability, as I call it, to dip their toes back into the waters of market exposure, but protected against downside risks. I think that’s exactly why people are gravitating to variable annuities as a part of their holistic retirement plan.
People think, “I now have a foundation here, and with the living benefit riders I know I have guaranteed income in retirement. I’ve got a bit of exposure to the marketplace, protection against downside risk, and oh, by the way, this product also gives me that lifetime income piece that I so greatly need in retirement.”
LHP: But you mentioned annuities as a part of a retirement plan. So you wouldn’t tell a retiree or pre-retiree to put everything into an annuity? What other planning or financial vehicles should they use?
Weatherford: Absolutely not. Here’s what the analysis has to be and it’s an individual decision for every working American as they prepare for retirement. One, you evaluate what your fixed needs are in retirement that absolutely need to be covered. You have Social Security, but do you have a 401(k) pension plan? First and foremost, we tell everyone who has a workplace plan, if you’re a saver, save there first; it’s the only free money left. You’re going to get a match‑well, most people get matches. But you are going to get your match. That’s where you need to put your money if you have that. But remember, 50 percent of all Americans don’t have a workplace retirement plan. And so for those an annuity may be an option to provide for their own personal pension.
So you evaluate your fixed needs in retirement. And I believe that’s where an annuity can come in because Social Security is not going to cover fixed expenses for the majority of Americans in retirement. So an annuity can be that key piece that lays that foundation to get lifetime income that takes care of those fixed expenses.
I don’t think anybody should buy an annuity if they don’t retain liquidity for emergencies. So you do not take every bit of a person’s savings and put it into an annuity. They must have liquidity to be able to take care [of emergencies]. Is it right for every American? No, not necessarily. Because we know that you cannot take away the liquidity, you just don’t do that. But for millions of Americans who are either self-employed or trying to figure out how to get a personal pension in their savings plan to build lifetime income in retirement, yes. For people who have assets, but are looking to stack those assets to be sure they have a foundation of lifetime income, they can use their Social Security and annuity as their lifetime income, and then have investments to take care of inflation risk and those things, with cash layered on top of that. I think that’s how you build out a holistic retirement plan. And I think financial advisors need to sit down with their clients and have deep and meaningful conversations about the holistic way that you put together a plan for someone to have peace of mind and the ability to make sure they have taken care of all the risks they face in retirement.
LHP: Lifetime income guarantees seem to be very popular within annuities. What other features/product designs are coming to the fore today?
Weatherford: We are seeing annuities used in all kinds of ways. I think people are using fixed annuities as opposed to CDs as long-term saving vehicles because you are going to get a better interest rate in five years with a fixed annuity than you can in a five-year CD. There’s an opportunity for a fixed annuity to be used as your savings vehicle for money you don’t need for a while, and to get a better rate of return. So the whole span of fixed or fixed indexed annuities can be used in that way very easily. Immediate annuities provide that foundation of lifetime income to supplement Social Security. That’s another way.
The other thing we are starting to see is people finance, or I call it pre-finance, their long-term care through the use of an annuity. Rather than a long-term care product, they can use this annuity as almost pre-payment of those long-term care expenses in retirement.
LHP: Do you mean an annuity with a long-term care option?
Weatherford: There is a lot of innovation out there. We are seeing annuities with long-term care riders on them. But we are also seeing some innovative products where people are putting savings into an annuity as the vehicle to help finance long-term care. Necessity creates innovation. You have 79 million baby boomers who all have different needs, different levels of assets, and who have different requirements as to how they want that holistic retirement to look like. I think we are going to see more innovation. I think the CDA [contingent deferred annuity] is on the horizon in the next year or two.
Baby boomers are going to continue to redefine everything as we move forward. They are going to redefine what annuities look like, how they are deployed, how they are used, and what are the demands. So I think they are going to continue to push product innovation as they move through retirement. We know they want protections, guarantees and a savings vehicle. There’s a lot of innovation out there and there is going to be more.
LHP: On the carrier side, how can they manage risk in a low interest rate environment? How can they make sure they have the capital reserves to pay out these lifetime income commitments?
Weatherford: I think the crisis forced insurance companies to totally revamp all of their strategies. First they retooled all their products, with interest rates and guarantees brought down in the riders. We’ve seen the hedging strategies. The separate accounts have been altered so that they are more passive and less actively managed, thus you have less risk. The retooling and the product revamping have given them the ability to be able to manage these products in a long-term way.
I’ve been a regulator over this industry and a part of this industry for over 32 years, and we must remember that the life insurance industry always has the long view. Every product they develop, every strategy they have for how they deploy capital is around a long view and they are very good at it. And we need to give them credit. Remember, every life insurance company is still standing today. Some of them may have redone their business strategies. They may be multi-national and the foreign parents have made changes to their U.S. business models. But every last one of them is still standing.
Next week, Weatherford gives her take on companies exiting the annuity business and the current regulatory environment.