Ready to roll: in the next 10 years, baby boomers will accumulate huge retirement nest eggs and their draw on Social Security may spur the privatization of that American institution. Are insurers prepared to take advantage of these business opportunities?

For the past 18 months, John Ladley and colleagues at Ernst & Young's Philadelphia office have been studying opportunities lot organic growth in the life insurance industry. Specifically, they have been focusing on the "de-cumulation" or payout stage of retirement.

"We have thought for some time now that this is a major opportunity for the industry and a rare one," said Ladley, a partner with Ernst & Young, the business advisory firm. The oft-repeated adage in the insurance industry is that insurance products, especially life insurance, are sold not bought. "I think actually the reverse is true here," he said. "The services and the products for the retirement de-cumulation phase are in many cases going to tend to be bought, not sold. There is customer demand."

In discussions with large insurers, banks and mutual funds some months ago, Ladley's team heard agreement that baby boomers--the 76 million Americans born between 1946 and 1964--would bring about $15 trillion in retirement savings to the market over the next 10 years. "They all saw some sort of opportunity, but not a lot of them were doing anything about it," he said. "Timing and action plans were, for the most part, vague."

Lately, however, that appears to be changing as demand for these services and products picks up. "Insurers are really starting to formulate strategies," Ladley said. "They are seeing the opportunity--and it's got multiple facets--to get organic growth."

Some insurers are reviewing how they can make better use of existing products or refine the products, themselves, to better serve these customers, Ladley said. A few others are taking a more holistic view of the market and trying to devise distribution models that will enable them to help the different economic segments of this group of retirees with their retirement plans and offer products that will make them successful, he said.

In many cases, agents and advisers have been active in suggesting the new retirement income products that insurers could consider, Ladley said. "But I think this market is going to work somewhat differently, and some insurers are seeing that they need some planning capability, some ability to assess the value of a product or a service within the context of a bigger retirement plan," he said.

Some insurers are beginning to develop products that don't require the same level of distributor assistance--for example, payout annuities with greater liquidity features, death benefit features, inflation coverage and other attractive elements, Ladley said. "So you're seeing these companies take hold of more of the product and distribution strategies," he said.

There's also growing recognition among insurers that segmentation is called for in this market. Not all of an insurer's customers can afford the same type of planning services and the same level of sophistication in product, Ladley said. "There's some thought around that as well, maybe that they need some differing levels of delivery for the retirees," he said.

Ladley predicts that this trend is going to play its way out over many years, but the industry is already beginning to see "the movement that's necessary to get the job done," he said. For example, many insurers with large exposures to roll-overs in 401(k), 457 and 403 retirement plans as well as IRA business are looking at advisory services related to those roll-overs and products that meet the needs of those who are doing the roll-overs, Ladley said.

As for individual sales, some insurers are using systems that show how a particular product works in a retirement situation. "That's something a little new," Ladley said. "In the past, there generally has only been the sales discussion, the sales illustration. And it does not often show how the product fits into a larger context."

New Retirement Business Segment

One company that appears to be particularly proactive in the retirement income area is Nationwide Financial Services Inc. Although retirement income products are not a big market for the company today--Nationwide Financial's products are limited to either a fixed payout annuity or a variable payout annuity--it hopes to grow significantly in this area over the next five years, said Mark Thresher, newly named president and chief operating officer. In fact, Thresher has just presided over a reorganization of Nationwide Financial into four different business segments, including one called "In Retirement."

"This is a new focus in the organization," Thresher said. "We're doing a lot of customer research now to ask what people in retirement think they need and what are their biggest concerns." The obvious concerns that people are talking about now are out-living their money and the risks they may be exposed to if their financial plan doesn't provide for long-term-care costs, for example.

Nationwide Financial is also doing research with people in the 40 to 50 age range, asking them if they are thinking about retirement planning and, if so, how they would determine who is the right kind of adviser for them.

In the fall, company officials will review the findings and decide what Nationwide Financial's next step will be, Thresher said.

"It definitely will be new product design," he said. "We're going to need partners in this. We're not going to manufacture every product the consumer needs. We may not like the risk associated with some; we may not have scale in some of them." One of the company's objectives would be to become a packager of a suite of products, some manufactured by Nationwide Financial, some by other entities, to fit the consumer's needs in retirement, Thresher said.

The company also will take time to assess its distribution channels. Early feedback from Nationwide Financial's research has shown that consumers who have worked with an individual to accumulate assets aren't sure that same person has the right skills or knowledge to help them in the next phase.

"One of the strengths of Nationwide Financial has always been that we distribute products through almost all the channels that consumers buy financial services products through," Thresher said. "So I'm sure we'll spend some time taking a look at our distribution channels as to what makes sense."

Nationwide Financial, the holding company for the domestic retirement savings operations of Nationwide, is the largest administrator of 401(k) and 457 plans when added together. "We've got this huge base of customers who are accumulating assets in those kinds of qualified plans," Thresher said. "And it's really an opportunity to ask how we can position ourselves to retain some of those assets as they actually reach the retirement side."

>From Public to Private

On another front in the retirement income area, much attention has been paid in recent years to the Bush administration's proposal to privatize Social Security. In April, during a speech to a London conference, Frank Keating, president and chief executive officer of the American Council of Life Insurers, noted that the government-run Social Security system in the United States is facing insolvency within a few decades and needs to have a private component. "We need to encourage tax incentives so that people will save long term," he said.

Although no congressional action is expected to be taken on this proposal during this election year, Nationwide Financial is watching the situation closely, Thresher said. "To the extent that it goes in that direction, we want to be able to participate in it," he said. He assumes that a privatization approach could take the form of a payroll deduction and suggests that rather than taking 6% out of wages as is done now and targeting it all for Social Security, there could be a 4% deduction for FICA with the remaining 2% deposited in an account. "With payroll deduction processes in place around 401(k)s or 457s, we would be well positioned to do that," he said.

Ladley thinks that many life insurers would want to jump into this market should privatization come to pass. "They are uniquely qualified to understand, analyze and take on some of the risks there--most noticeably longevity--so that should be a big opportunity area," he said.

Key Points

* Baby boomers are expected to bring about $15 trillion in retirement savings to the market over the next 10 years.

* Many insurers see this influx of retirement savings as an important opportunity, but have yet to act on it.

* Nationwide Financial Services Inc. is proactively researching product development and assessing its distribution channels.

Learn More

Nationwide Life Group

A.M. Best Company # 70356

Distribution: Independent brokers/dealers; wirehouses and other regional financial firms; financial institutions; financial planners; Nationwide Life Insurance Company of America agents; and Nationwide's property/casualty agents.

John Hancock Financial Services

A.M. Best Company # 58176

Distribution: Multidistribution method including career agents, career brokers, managing general agents, brokerage general agents, brokers, broker/dealers, wirehouses, and banks.

For ratings and other financial strength information about these companies, visit www.ambest.com.

RELATED ARTICLE: Retirement survey: time's not on baby boomers' side.

Baby boomers have neglected their retirement plans, and as a result, dreams of retiring in their early 605 are gone, according to a national survey of defined contribution plan participants by John Hancock Financial Services.

The average age survey participants expect to retire jumped to 64.4, compared with age 60 as reported in the 1995 survey. In addition, nearly 70% of respondents are either somewhat or very concerned that they will not have enough money to live comfortably in retirement, up 11 percentage points from the 2002 survey.

"Beyond simply putting money in their 401(k) plan, most participants are almost entirely disengaged from the retirement planning process," survey author Wayne Gates, general director, Market Research and Development, said in a statement. "Even during the boom years, they essentially were leaving retirement security to luck. I think belatedly they may be coming to this realization and now tear they're running out of time--and luck," he said.

The national survey of 800 defined contribution plan participants, the ninth Hancock has conducted since 1991, examined their knowledge, attitudes and actions relating to retirement savings. The average age of respondents was 44.

Not only are respondents reporting they don't have time to manage investments, they are lacking investment knowledge as well. The survey revealed investment misconceptions such as participants thinking employer stock is less risky than domestic or international stock funds.

Since the results of the survey over the past 15 years have been consistent, Gates is convinced that participant behavior will not change and a new approach is needed. "We need to dramatically simplify the retirement planning process. The solution isn't more education, it's more simplification and more automation," he said.

Gates said plan sponsors would greatly assist participants if they provided them with the option of choosing:

* automatic enrollment upon eligibility;

* a default investment option that would automatically allocate their contributions into an appropriate equity and fixed income mix based on age and risk tolerance:

* automatic and periodic portfolio rebalancing; and

* automatic increases in their contribution rotes coincident with salary increases until the maximum contribution rate is reached.

--Lynna Goch

John Hancock Retirement Survey Results by the Numbers

20 MINUTES

The amount of time more than half of survey respondents spend each month on retirement or managing/monitoring investments.

ABOUT 50%

The percentage of survey respondents who have never made any changes at all to their investment contributions or asset allocations.

64.4

The average age survey respondents said they expect to retire.

$49,800

In nominal terms, the average retirement plan balance reported by 2003 survey respondents.

Source: John Hancock Financial Services

A Graying World

Several of the largest members of the American Council of Life Insurers think they are well positioned to gain a growing share of retirement security product business abroad, most notably in the large, emerging markets of China, India and Brazil. Like so much of the rest of the world, these countries are facing demographic and economic changes that are harbingers for crises down the road as fewer and fewer young workers become available to support the elderly populations.

Most countries fund their pension plans through a tax on wages. This, in fact, is the starting point for the traditional description of retirement products and pension systems as a three-pillar structure.

The first pillar is a government program--in the United States, this takes the form of the Social Security system--which is basically an old age pension, funded through a tax on wages, that is meant to be a safety net for retirees.

The second pillar is usually a voluntary or compulsory workplace-based retirement scheme where the worker plans for his or her own future and contributes a certain amount to a fund which may be matched by the employer. The voluntary 401(k) plan in the United States falls into this category.

The third pillar is private savings in the form of home ownership and investments in stocks, bonds and mutual funds.

In India, where the population exceeds 1 billion, the government has recently started drafting private pension laws. But there are "tremendous challenges because it's such a large population and such a high percentage of the population is in what they call the 'informal sector; meaning they don't pay taxes and are not part of the formal economy," said Brad Smith, ACLI's managing director for international relations.

China also has significant pension problems looming. Because of the government's one-child policy, and the subsequent reduction in the birth rate, there will be far fewer young workers in China 25 years from now, Smith said. "All those one-child children will be taking care of their two parents and quite possibly their four grandparents," he said. "Without reform,' notes a recent report by the Center for Strategic & International Studies, "China will soon have tens of millions of indigent elders who lack nearby families, pensions and access to health care."

To forestall this, China is pursuing pension system reform and is planning to shift publicly funded pensions to a mix of private and public provision. Currently, the country is working to release regulations on establishing a self-funded second pillar pension scheme, Smith said. "China has a tremendous problem of unfunded liabilities for former state-owned enterprises because most of its workers have historically worked for state-owned enterprises and a lot of those are going bankrupt as the government privatizes and allows consolidation," he said.

Lower Birth Rate in Brazil

Brazil's demographic situation is also problematic in the long run, like China's, Smith said. Right now, Brazil has a very young population, but its birth rates are slowing and about 30 years from now, it will face the same crunch. "Brazil really has no universal pension scheme or closed pension funds," Smith said. "They have compulsory pension schemes for state-owned enterprises, but a lot of these have been privatized over time. The problem is these plans are incredibly generous. You can retire if you're a Brazilian civil servant at age 30 if you have

put in 10 years on the job, and then you'll get something like 80% of your salary."

>From an economic viewpoint, Brazil's leaders recognize the need for reform but face political hurdles--government workers are a strong force in the country and they do not want to see their benefits cut. But Brazil has been working with the World Bank, the Inter-American Development Bank and the Organization for Economic Cooperation and Development to try to develop a voluntary second-pillar system that would transition the existing state-owned enterprises into that system and then make it available to the rest of the work force, Smith said.

Currently, ACLI companies are active providers of retirement products in these nations' voluntary pension schemes. China, for example, offers annuities that are part of a voluntary third-pillar system.

Brazil and India both have voluntary second-pillar systems for companies that want to offer a pension plan, which is not required under the law. "It's a supplemental financial services product that offers a choice of investment vehicles," Smith said.

Since India's market opened in 2001, a number of U.S. insurers have gone in and have managed to corner a 10% share of the market because of the array of products they offer, he said. Players in this market include New York Life, MetLife, American International Group Inc., Citigroup, Sun Life Assurance Co. of Canada, Prudential UK, ING and Aegon, Smith noted.

"India was a monopoly, China was a monopoly--there was little choice in products," Smith said. "When an American company comes in, it can offer an entire palette of products."

Moving to Self-Funded Accounts

In countries that move from a pay-as-you-go model to a self funded individual account model, fund managers have to be enlisted to handle the monies. ACLI's global objective is to offer encouragement that the private companies on its roster be able to serve as those fund managers, Smith said.

In 1982, Chile was the forerunner of this kind of pension system transition. Other nations have followed suit, tweaking the Chilean model by increasing tax incentives and the range of investment options. "Australia was a notable case in the early 1990s, and there was Hong Kong, Singapore, Colombia, Peru, Mexico--most of Eastern Europe in the last five years has moved to a self funded scheme," Smith said.

In Chile, Mexico and Australia, for example, the governments require everyone to have an individual account pension that has to be in an authorized pension fund. Smith said. There are many choices of funds to participate in and the funds are managed by private companies, mainly pension providers and insurance companies.

"Our goal is that as countries look at the privatization and the transition from pay-as-you-go systems into private self-funding systems that they make sure it is an open model where there is competition and strong oversight," Smith said.