The predominant market for seg funds is still older investors who want to participate in the markets, protect their capital and take advantage of the speed and privacy of death benefit payouts.skynesher/iStockPhoto / Getty Images
After a few difficult years for segregated fund sales, there are signs of life in the space as product manufacturers adopt new tools to modernize their shelves.
Seg funds in Canada saw net redemptions the past three years, and product development slowed as manufacturers awaited the Office of the Superintendent of Financial Institutions’ (OSFI) new capital requirements.
However, a report from Toronto-based Investor Economics, an ISS Market Intelligence business, shows that 25 new seg fund products launched in 2024, up from 15 in 2023. And the new capital requirements could allow insurers to hold more exchange-traded funds (ETFs) in their portfolios to meet liabilities.
“What’s now coming very loudly from the insurance companies is that they want to modernize the shelf of products they offer … and for many of them modernizing [has] meant first looking at the potential to bring ETFs as underlying investments into fund policies,” says Carlos Cardone, managing director, Canada, with Investor Economics.
As with the rest of the investment fund industry, insurers that issue seg funds are facing pressure to lower fees, leading some to adopt passive investing options, the Investor Economics report says. Of the 25 new seg funds launched in Canada last year, more than a quarter invested in underlying ETFs.
One firm that has been integrating ETFs into seg funds is BMO Insurance, and lowering price points is one reason.
Daniel Walsh, senior vice-president and head of individual insurance and annuities at BMO Insurance, says it’s important for manufacturers to adopt ETFs and ensure that seg fund products “continue to offer new and exciting investment options and not just yesterday’s mutual funds.”
Empire Life has added 16 seg funds to its lineup over the past year, including ETF-based choices that provide access to higher-growth, higher-risk areas of the market, such as the Nasdaq 100.
It also became the first insurer to partner with Vanguard Investments Canada Inc. and use the fund giant’s asset allocation ETFs in a seg fund wrapper.
“We deliver those at an extremely low price point for the segregated fund markets that allows customers to get that index experience in a nice set it, forget it [format],” says Geoff Gibson, vice-president, investment product and marketing, at Empire Life.
The management expense ratios on the Empire Life Vanguard ETF Portfolio GIFs range from 1.17 per cent to 2.46 per cent, according to Investor Economics.
Mr. Cardone says some companies are also exploring the integration of liquid alternatives into seg funds.
Capital requirements and guarantee options
The new capital requirements won’t affect BMO Insurance’s portfolio of products or guarantee choices, Mr. Walsh says. Its most popular structure remains a 75 per cent maturity guarantee and 100 per cent death benefit, but he says there’s greater awareness that the 75 per cent/75 per cent option offers many of the same benefits at a more attractive price.
Mr. Cardone says there’s growing demand for income-generating products as more people retire after a pandemic pause. However, seg funds with guaranteed withdrawal benefits (GWBs), which seem tailor-made for income-seeking investors navigating volatile markets, are also the seg fund feature most constrained by OSFI’s capital requirements.
“The potential variability of the capital and the lifetime guarantee on income – all of that is difficult to balance [with] the capital requirements and the costs associated with that,” Mr. Cardone says, adding that several insurance companies offering GWBs took a hit after the 2008 global financial crisis.
At that point, products were redesigned and relaunched, and some firms abandoned GWBs altogether. Empire Life has stayed in the GWB market despite the challenges presented by the perfect storm of capital requirements, market volatility and trends in long-term interest rates.
“We’re a big believer in the idea that Canadians, especially nowadays with not everybody having access to a defined-benefit pension plan, … are looking for guaranteed income solutions,” Mr. Gibson of Empire Life says. “Clients and their financial advisors want that level of certainty.”
He also says there’s room to attract younger investors to seg funds. Empire Life launched a first home savings account (FHSA) in 2024 and plans to launch the seg fund industry’s first registered disability savings plan (RDSP) this fall. It hopes that opening up access to the RDSP through insurance-licensed advisors will increase uptake of a notoriously underused planning strategy for people who qualify for the disability tax credit.
Mr. Walsh says the predominant market for seg funds is still older investors who want to participate in the markets, protect their capital and take advantage of the speed and privacy of death benefit payouts.
Mr. Gibson agrees, saying he continues to see a strong market for peace of mind.
“It’s being able to get those payouts into the hands of the beneficiaries in a matter of weeks as opposed to 12 to 16 months when they go through the estate – that can be life-changing,” he says.
For that reason, Mr. Walsh says he would like to see advisors play up the products’ estate planning benefits, as many Canadians aren’t as aware of them.