When the dust settled on a tumultuous first quarter, the writing was on the wall for variable annuity issuers: adapt your product or continue to lose market share to safer, cheaper alternatives. According to LIMRA, U.S. variable annuity sales were down 27% compared to the first quarter of 2008. During the same period, fixed annuities outsold variable products by over four billion dollars, rising a startling 78% in contrast to Q1 2008 totals.

The response from firms was emphatic, resulting in sweeping changes to risky product features as well as the discontinuation of numerous VA products. Hit hardest were the popular VA living benefit riders whose gaudy guarantees became unsustainable as the economic downturn intensified.

Recently, we have seen the introduction of living benefit riders that lower risk on the firm’s end. Firms are banking on the fact that reducing the cost of the riders will make up for the smaller up front guarantees and keep the riders enticing to consumers.

Pacific Life’s recently released CoreIncome Advantage GMWB is an excellent example of this new breed of living benefit riders. The rider guarantees 4% withdrawals, as opposed to the industry average of 5%, and requires investors to hold off on withdrawing money until the age of 65. Normally, guaranteed withdrawals are made available at the age of 59 1/2. The rider comes at a significant discount to consumers (40 basis points) well below the average for GMWBs which is generally 85 basis points.

The rider’s extended accumulation period provides added cushioning against market downturns; however, it severely limits the investor’s liquidity and overall investment flexibility. From an advisor’s perspective, the conservative nature of the rider’s key features and delayed withdrawal period take away many of the product’s traditional selling points. Only time will tell if the significantly discounted price will provide consumers and advisors with enough incentive to make these riders a success.