A BRIGHT NEW DAY FOR FIXED ANNUITIES
November 15, 2013 by Kim O'Brien
by Kim O’Brien
MESSAGE FROM THE NAFA PRESIDENT
As we close out another year at NAFA and reflect on the activities and challenges of 2013, we can’t help but be amazed that this marked the end of NAFA’s 15th year. And what a year it was! 2013 was very good for fixed annuities and for establishing NAFA as the authority on fixed annuities. NAFA members can be very proud that your association only serves to promote and protect fixed annuities. The NAFA Board of Directors spends tireless hours ensuring that the Association engages in activities that benefit fixed annuities. We have many association partners who do incredible work for their members, but there is no other association that has this unique and targeted focus. When we meet with legislators and regulators, we can spend the entire time discussing issues that affect fixed annuities; we do not have to dilute our message with other products or issues. That is a GREAT OPPORTUNITY for influence. 2013 demonstrated the efficacy of our single-focused and passionate representation of fixed annuities.
Earlier this year, we were asked to testify at the NAIC on the potential effect the Department of Labor’s proposed Fiduciary Standards rule would have on our industry. We shared the stage with our partner associations, the American Council for Life Insurance (ACLI) and the Insured Retirement Institute (IRI). Each association was responsible to present on different issues the Rule impacts, and, of course, NAFA focused on the negative consequence to fixed annuities– specifically consumer accessibility and choice.
We discussed at length the Rule’s imposition of a duplicative and after-the-breach standard on top of the demonstrated effective standard of suitability and the negative affect it would have on the fixed annuity marketplace and consumer protection. In addition, we addressed the problem with the Rule’s overreaching extension into Individual Retirement Accounts (IRAs), which have long been under the jurisdiction of the Treasury Department, not Labor. ACLI and IRI appropriately and effectively focused on the Rule’s implications on the fiduciary obligation on the employer and long-needed updates to ERISA to allow employees more opportunity to save for retirement using both fixed and variable annuities.
At the close of the session, NAFA was immediately approached by Preston Rutledge, Tax and Benefits Counsel to Senator Orrin Hatch (R-Utah), to assist with a project the Senator was initiating. Mr. Rutledge expressed his desire to have NAFA help the Senator’s office understand fixed annuities, the fixed annuity marketplace, and the state regulation of fixed annuities.
As a result of this introduction, NAFA members visited with members of the Senator’s staff on a number of occasions as well as ongoing conversations between meetings supplying information to help the staff influence and position the initial draft of Senate Bill 1270. We brought membership representation from marketing, actuarial, and legal to help inform the staff and educate them on the value proposition of fixed annuities, the strength of the insurance industry, and the consumer security afforded by the guaranty fund. We discussed the robust consumer protection provided under the NAIC Suitability Model, the NAIC Disclosure Model, and the effective state laws and regulations governing fixed annuities.
On July 9, 2013, Senator Hatch introduced S. 1270, the “Secure Annuities for Employee Retirement Act of 2013, or the SAFE Retirement Act of 2013.” The Act would allow state and local governments to adopt a new type of pension plan that delivers lifetime, defined benefit retirement income for employees with stable, predictable costs for employers and taxpayers. Key features include:
- Employees receive secure monthly income at retirement for life.
- Employer pension costs are stable, predictable and affordable.
- Pension plan underfunding is not possible.
- The life insurance industry invests the assets, pays the retirement benefits and bears the risks.
- Retirement benefits are protected by a state life insurance guaranty association.
The new pension structure for state and local governments will solve the pension underfunding problem prospectively while delivering retirement income security, in the form of a deferred, fixed income life annuity, to public employees. Involvement by the federal government will be limited to certifying the tax qualified status of the plan.
NAFA sees S. 1270 as a huge NEW market opportunity for our fixed annuity carriers and distributors. Perhaps more importantly, it gives the fixed annuity product momentous national attention and credibility, as the product the nation relies upon to SAVE and INSURE Americans’ pension benefits. Imagine the annuity professional’s conversation… “Hello Mr. and Mrs. Smith, I would like to talk to you today about a fixed annuity. This is the retirement product that is used by your local school district to provide guaranteed pension benefits for its employees. Even though you don’t work for the school district, we can still guarantee an income for life with a fixed annuity. Let me show you how.”
Another major accomplishment by and for NAFA membership was to clear up the uncertainty on indexed annuities in Illinois. This accomplishment was achieved through the efforts and resolve of Fidelity & Guaranty Life in securing this favorable resolution of the matter along with NAFA’s engagement in an ongoing and open dialogue to help find an amicable resolution. The NO ACTION letter issued to Fidelity & Guaranty Life from the Illinois State Securities Department clarified that indexed annuity products and insurance agents who sell them are not subject to securities registration under Illinois law. The letter resolves uncertainty over the status of indexed annuities in Illinois arising out of the controversial Pinnacle enforcement action (In the Matter of Senior Financial Strategies, Inc. d/b/a Pinnacle Investment Advisors) in which an order of the Illinois Securities Department implied indexed annuities might be considered “investment plans” subject to state securities laws.
NAFA opposed such a conclusion and had engaged in legal channels and regulatory dialogue to clarify that indexed annuities were indeed not securities. While it is believed that the no-action statement puts to rest concerns about the status of fixed indexed annuities under Illinois Securities laws, companies and agents are cautioned that no-action statements contain caveats and limitations and should be reviewed carefully with their own legal counsel to determine how it applies to their own facts and circumstances. NAFA worked hard over the last 18 months with NAFA member Fidelity & Guaranty Life, as well as other NAFA members and industry representatives, to address this issue and keep members advised of important developments concerning the treatment of fixed indexed annuities under Illinois securities laws. This was a significant victory for fixed indexed annuities, not just in Illinois but in any other state who might have chosen to use the Illinois Securities Department order to seek enforcement in their own state. A copy of the no-action statement can be found at www.nafa.com.
Just this fall, the fixed annuity industry achieved another significant victory in a unanimous 3-0 decision by the Court of Appeal of the State of California, reversing Glenn Neasham’s 2011 felony theft conviction related to the 2008 sale of a fixed index annuity to then 83-year-old Fran Schuber, who was later diagnosed with dementia. The Society of Financial Service Professionals (FSP) has monitored this case since Neasham’s original conviction and, with the support of the NAFA and a number of other professional organizations (AALU, LIDMA, NAHU, and NAILBA), filed an amicus curiae brief related to underlying issues of concern to financial service practitioners in assessing the capacity of a client to understand a financial transaction and the role of surrender charges in fixed annuities. As a party to the Amicus Brief submitted to the Court, NAFA played a critical role in drafting the brief by assisting with annuity-specific language regarding the role of surrender charges and the sale of fixed indexed annuities.
According to the opinion written by Justice Stuart Pollak, the appeals court overturned Neasham’s conviction for three primary reasons: 1) There was no evidence that Neasham appropriated funds to his own use or to the benefit of anyone but Schuber herself; 2) There was no evidence showing the California-based insurance agent made misrepresentations or used deceptive tactics in connection with the annuity sale to Schuber; and 3) The jury had received incorrect instructions that prejudiced the outcome of the trial.
Further, the Court rejected the State’s argument that the annuity contract “deprived Schuber the enjoyment of her property,” stating that there was no evidence she intended to take withdrawals from the contract. Of particular import to NAFA members, the decision went on to say that the “standard term,” or surrender charge schedule, did not apply if Schubert were to be hospitalized or moved to a long-term care facility nor did it reduce the value of the annuity to less than she paid for it.
With some of these issues behind us and some still developing it is evident that the awareness and understanding of fixed annuities and their valuable role in retirement, longevity and financial planning is growing and prospering with regulators, legislators, journalists and with former naysayers now entering the fixed indexed and non-indexed annuity space. When January 1, 2014 dawns, it will be a bright and clear new day for fixed annuities.
