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Beware the Risks of ‘Pension Risk Transfer’

Posted on March 11, 2022 by -

Connecticut Senator Chris Murphy took a bold first step to protect retirees impacted by pension risk transfer deals by introducing the Pension Risk Transfer Accountability Act of 2021 this week.

The Act directs the Secretary of Labor to review its guidance on fiduciary standards under the Employee Retirement Income Security Act of 1974 (ERISA) when selecting an annuity provider and to report to Congress on the findings of such review, including an assessment of risk to participants. 

Since 2012, more than $200 billion in retiree liabilities have been transferred to insurance companies in pension de-risking transactions, also referred to as a pension risk transfer (PRT). Once a PRT is complete, retirees lose all of the uniform protections intended by Congress under ERISA and become subject to non-uniform state laws. 

Meanwhile, insurance companies are selling off blocks of business to private equity firms at an unprecedented pace. Apollo owns 100% of Athene. Prudential Financial recently sold off $31 billion in variable annuity contracts to Fortitude Re. Blackstone Group recently acquired most of Allstate’s life insurance business. History suggests that private equity firms are more concerned about generating a return for their investors than policyholder security.

Given the fact that retirees lose so much in terms of ERISA protections post-PRT, it is critically important that pension plan sponsors undertake rigorous and thorough evaluations of both the claims paying ability and financial security of any insurer being considered for a PRT in a manner that is consistent with ERISA’s fiduciary requirements. 

Defined Benefit Plan Sponsors should consider the following:

  • Is the selected insurer is properly reserved under Statutory Accounting Principles (SAP) in all States where the insurer does business, taking into consideration the extent to which the selected insurer has taken credit for reinsurance with wholly owned captive reinsurers or affiliates that do not file annual statements in accordance with SAP?
  • Does the selected insurer have significant exposure to affiliated reinsurers located outside of the United States?
  • Has the selected insurer segregated assets into a separate account that is managed solely for the benefit of the retirees?
  • Does the selected insurer maintain an appropriate level of capital and surplus that is not dependent in any way upon conditional letters of credit, surplus notes or circular parental guarantees? 
  • Is the selected insurer is rated A or better by two or more nationally recognized rating agencies?

Retiree earned benefits are not handouts. Many of today’s retirees worked for decades based upon promises made by their employers about their benefits packages, often trading higher salaries for pensions, life insurance and health care for life. These benefits need to be protected consistent with ERISA’s original protective purpose. With literally hundreds of billions in pension liabilities at stake, retirees and their families who did not choose a pension risk transfer need to know that the chosen insurer was fully and completely vetted by a defined benefit plan sponsor that is held to ERISA’s highest fiduciary standards. Thank you, Senator Murphy, for introducing this important legislation.

Edward Stone is the Executive Director of Retirees for Justice, Inc., a 501(c)(4) dedicated to protecting and preserving the earned benefits of America’s retirees.

What’s the Deal with (Annuity) Reinsurance?

Posted on March 10, 2022 by -

What is annuity reinsurance, and how did it become one leg of the three-legged Bermuda Triangle strategy, as we call it? 

To put it another way, how did an esoteric tool for repairing the balance sheets of life insurance companies evolve, especially when big buyout firms apply it, into a nearly essential ingredient for sales leadership in the half-trillion-dollar fixed indexed annuity business?

Attempts to explain this arcane phenomenon are complicated by the fact that several versions of annuity reinsurance exist. It is used by different kinds of life/annuity companies, with different kinds of counter-parties, for different reasons, across domiciles with different accounting standards. 

But you can’t understand the direction of the annuity business today without understanding a certain type of annuity reinsurance, especially modified coinsurance, or “modco.” 

Back when most life insurers were policyholder-owned, mutual companies, a life insurer sold life insurance or annuities, collected installment or single premiums from policyholders, invested the premiums mainly in corporate bonds on public markets. The company paid out either a lifetime income (to an annuity owner) or a lump sum benefit (to a life insurance policyholder’s beneficiaries). 

If the life insurer invests the premiums conservatively and predicts mortality rates and life expectancies more or less accurately, then the premiums themselves, plus the earnings they yield when invested, will cover all claims and costs and generate a profit for owners of the life insurance company. The company’s owners or shareholders add their own capital to the premiums as a buffer against losses, or against the mere threat of potential losses.

The risky part, for the life insurer, is that the investments might lose money, and require the life insurer to add more capital to the pot as a buffer against losses. The insurer experiences a kind of margin call. Regulators react by requiring the life insurer’s owners to put up more capital.

The Great Financial Crisis made this situation a reality—suddenly, when stocks crashed, and slowly, when the Fed lowered interest rates. To raise new capital, a life insurer’s owners can reach deeper into their own pockets. Or they can solicit capital from new investors. They could also try to increase sales and attract more premiums, or invest in riskier investments in hopes of greater returns. But they can dig even deeper holes for themselves if they do those things.

Another solution is to contact a reinsurer—an insurance company for insurance companies—that can provide capital in return for full or partial ownership of the assets and liabilities that comprise blocks of annuity contracts. This form of refinancing in effect returns some or all of the owner’s capital—the buffer against losses—backing the annuities to the pockets of the life insurer’s owners. 

During and after the financial crisis, some life/annuity companies worked with third-party reinsurers. Some larger firms practiced a kind of self-reinsurance with internal, “captive” reinsurers. Some sold their annuity businesses and repositioned themselves. Some sought buyers for the whole life insurance company—at attractive discounts.

Large, deep-pocketed “alternative” asset managers saw an opportunity here to enter the life/annuity business. The fixed indexed annuity business, the most vigorous part of the annuity business, requires the management of more than $500 billion in Americans’ retirement savings. Asset managers believed they could manage those assets to better returns than insurers could. 

In addition, the sale of indexed annuities is a source of leverage—the incoming premiums don’t have to be paid back for up to 10 years, in some cases, and can be invested in the kinds of high-yielding private, illiquid real estate and loan securitizations that the alternative asset managers themselves create and sell. 

It was also clear that reinsurance could be used to reduce the amount of capital needed to run the annuity business. That strategy could be especially effective if the reinsurer was based in jurisdiction—Bermuda, for example, where it could use Generally Accepted Accounting Principles (GAAP) instead of the more stringent Statutory Account Principles (SAP) required of life insurers in US. Bermuda is also less strict about the types of assets that a reinsurer can hold.

Some alternative asset managers created “Insurance Solutions” departments to show life insurers how to use private credit to increase their yields, how to reduce or shift their capital burdens, and how to increase their profits (a factor of huge importance to publicly traded life insurers). And some alternative asset managers decided to go all in: buying their own life/annuity companies, issuing their own annuities, setting up their own reinsurers in a GAAP jurisdiction, and managing all the assets.

RIJ  calls this three-way business model the “Bermuda Triangle.” 

A Bermuda Triangle strategy involves:

  • A US-domiciled life insurer with a focus on the sale of fixed-rate and/or fixed indexed annuities as a way to gather five-figure, six-figure or even seven-figure lump sums from savers—annuity premiums—for subsequent investment.  
  • A global asset management company with expertise in the origination of “leveraged loans” to borrowers with predictable revenue streams (think subscription businesses like Spotify, or cell tower leasing companies), as well as the bundling of those loans into opaque and illiquid securities.    
  • A reinsurer that has expertise in complex types of reinsurance called modified coinsurance or funds withheld reinsurance. The insurer needs to be based in Bermuda, the Cayman Islands, or one of the US states that allow the use of Generally Accepted Accounting Principles (GAAP).  
  • The exercise of “regulatory arbitrage” between the tight capital requirements of SAP and the relatively flexible requirements of GAAP.  

These ingredients can be used for financial alchemy. The “modco” or “funds withheld” reinsurance reduces the life insurer’s liabilities and releases some of its excess capital—but without reducing the life insurer’s assets or shrinking its business. The life insurer becomes more profitable, the asset manager gets billions of new dollars to manage and/or lend, and the reinsurer solicits outside capital to back the liabilities that the original life insurer no longer holds. 

But is it proper? Is the Bermuda Triangle an insurance business-model or an investment business-model masquerading as insurance, in which selling annuities is simply a way to gather “permanent capital,” as Triangle practitioners call it, for translation into loans that are subsequently bundled into illiquid collateralized loan obligations (CLOs)? 

Or is this a case where alternative asset managers are in effect declaring to US state regulators, by employing complex offshore reinsurance strategies, that SAP accounting standards are obsolete—that they are too strict for regulating fixed indexed annuities? Either way, it may be time for regulators to act, or to revisit the regulations.    

© 2022 RIJ Publishing LLC. All rights reserved.

Meet MassMutual’s Bermuda Reinsurer

Posted on March 10, 2022 by -

“If you’re going to be in the annuity space, you will need a reinsurance strategy in order to be competitive,” Dennis Ho told RIJ recently. Ho is the CEO of Martello Re, a new Bermuda-based reinsurer that just reinsured $14 billion worth of fixed-rate and fixed indexed annuities (FIAs) for Massachusetts Mutual Life Insurance Company.

Competing with the likes of FIA industry leaders Athene Life & Annuity, F&G Guaranty Life, American Equity, Global Atlantic and others for a bigger share of leadership in the fixed indexed annuity market appears to be what MassMutual intends. Athene led the industry with FIA sales of $7.8 billion last year.

In early 2021, MassMutual bought FIA-issuer Great American Life, helped finance Martello Re and recruited Ho to run it. MassMutual and other investors capitalized the reinsurer with $1.65 billion. In 2021, MassMutual ranked 11th in FIA sales in 2021, according to WinkIntel, with $2.45 billion. 

“MassMutual is an investor in Martello Re and helped set us up,” Ho said during a call from his US headquarters in New Jersey. “But we’re wholly independent. They wanted a real company with whom they could do an arms-length transaction. None of our managers are from MassMutual.” 

Last week, MassMutual announced that, in addition to reinsuring $14 billion worth of annuities in Bermuda, it has engaged the services of $25 billion private credit expert Centerbridge Partners to help MassMutual’s in-house asset manager, Barings, sharpen the life insurer’s investment game. 

MassMutual has now assembled all three elements of what RIJ calls the “Bermuda Triangle” business strategy. The triangle’s three corners are a US-based life insurer that issues or has issued FIAs, a global asset manager with expertise in private credit and alternative asset management, and a reinsurer domiciled in a jurisdiction where the reinsurer can use GAAP instead of SAP accounting; GAAP offers life insurers opportunities to estimate liabilities at lower values and conserve capital. 

“Reinsurance helps you manage your risk. It can also give you access to broader investing and underwriting capabilities,” Ho told RIJ. “When I look at the FIA or FA space, if you’re working on your own [without reinsurance], you won’t have as broad a toolkit as others, and you may not have the capital you need to grow at the rate you want. The annuities can also overtake the other business on your books and make you overweight. Reinsurance helps you address both of those issues.”

Dennis Ho

Annuity issuers that can orchestrate the financial, accounting, regulatory, and legal subtleties of this complex strategy have steadily climbed the annuity sales leaderboard over the past decade. As traditional annuity issuers have retreated from or exited annuity sales, Bermuda Triangle practitioners have filled the vacuum they left behind.   

Apollo Asset Management was a pioneer in this strategy, using life insurers Athene Annuity and Life in Iowa, Athene Annuity and Life Assurance in Delaware, and reinsurer Athene Re in Bermuda. Since 2013, other asset managers—notably KKR, Blackstone, Carlyle Group, Brookfield, Ares—have followed Athene into this space, acquiring, creating or partnering with life insurers and reinsurers. A few smaller companies have tried to emulate the strategy, with mixed success. 

“In some cases, insurers use reinsurance to partner with somebody who has investing capabilities they don’t have,” Ho told RIJ. “They might be able to invest in things you can’t source. In most cases, even though the liability is reinsured, the original insurer still wants to make sure that the reinsurer isn’t taking too much risk. So the insurer and reinsurer will set investment guidelines that the insurer’s state regulator is comfortable with.”

Ho’s career and the evolution of the Bermuda Triangle strategy have grown almost in lockstep. An actuary with a degree from the University of Manitoba (1999), he was the life insurance solutions team leader at Deutsche Bank, then head of North America Insurance Strategy for BlackRock’s Client Solutions Team. In 2015, he was recruited by Willis Towers Watson to be CEO of WTW’s Longitude Re in Bermuda.

In 2018, Ho departed Longitude Re to start and run Saturday Insurance, an online insurance agent. “We sold all kinds of income annuities. We had eight insurers on the platform. But we didn’t have enough capital to grow quickly. That’s when MassMutual said, ‘Will you come work with us?’ I was a consultant for MassMutual last year, and once we launched Martello Re in January, I became CEO.”

Martello Re Limited is a licensed Class E Bermuda-based life and annuity reinsurance company. Its initial equity of $1.65 billion was provided by MassMutual, Centerbridge Partners, Brown Brothers Harriman, and HSCM Bermuda (the re/insurance business of Hudson Structured Capital Management Ltd.), and a group of institutional investors and family offices.

Barings, which is part of MassMutual, and Centerbridge will manage the assets within the strategy. Centerbridge will provide access to “public and private asset origination and underwriting capabilities across all asset classes,” according to MassMutual’s press release.

MassMutual didn’t report the amount of excess capital that the reinsurance deal with Martello Re would release, or how MassMutual would use the cash. Many insurers use released capital to buy back stock from shareholders. As a mutual insurer, MassMutual has no equity shareholders. It is owned by its policyholders.

In addition to their current reinsurance deal, MassMutual and its life insurer subsidiaries will also enter into a “flow arrangement” with Martello Re to reinsure new annuity business, according to MassMutual’s release.  

Martello Re plans to serve a wider client. It will initially focus on providing MassMutual and its subsidiaries with reinsurance capacity on current product offerings, after which it will offer its services selectively to other top insurers in the life and annuity space, the release said.

In addition to Ho, Martello Re’s leadership team includes

  • Jeremy Coquinco, Head of Investment Strategy
  • Justin Mosbo, Chief Actuary 
  • Alana Rathbun, Chief Risk Officer
  • Gregory Tyers, Chief Financial Officer 

The initial members of the Martello Re board of directors include Chairwoman Ellen Conlin from MassMutual and Michael Baumstein of Barings, Matthew Kabaker and Eric Hoffman from Centerbridge, Jeff Meskin and Taylor Bodman from Brown Brothers Harriman, and Mr. Ho.

“It’s an attractive space for a lot of folks,” Ho told RIJ, but “you need a certain amount of scale to be good. We’re building a reinsurer that can stand the test to time.”

© 2022 RIJ Publishing LLC. All rights reserved.

How RIAs can stay ahead of the competition: Cerulli

Posted on March 3, 2022 by -

A confluence of competitive threats is eroding the registered investment adviser (RIA) channels’ key differentiating factors, according to the latest report from consulting firm Cerulli Associates: US RIA Marketplace 2021: Meeting the Demand for Advice. 

The threats to RIAs include an industry-wide shift away from brokerage, broader adoption of financial planning, and the popularity of independent business models. In response, more RIAs are considering whether to extend their service offerings to deepen their impact with existing and prospective clients. 

“To unlock the RIA channels’ success formula and protect against adviser movement to independence, broker/dealers (B/Ds) are increasingly developing independent affiliation options, promoting financial planning, and creating more opportunities for advisers to conduct fee-based or fee-only business,” a Cerull release said.

By 2023, 93% of advisers across all channels expect to generate at least 50% of their revenue from advisory fees. Likewise, over the past five years, the number of financial planning practices across all channels grew at a 5.3% compound annual growth rate (CAGR). As a result, B/Ds are impinging on what has historically been viewed as largely unique to the RIA channels—an independent, fee-based business centered on financial planning. 

In addition to this convergence of business models, investor influence, democratization of services, and client acquisition challenges are encouraging RIAs to reevaluate their position in the marketplace. For some, this means expanding their service offerings to combat value differentiation concerns and capture emerging opportunities.

According to the research, trust services (19%), digital advice platforms (17%), and concierge/lifestyle services (16%) rank as the top-three areas of anticipated service expansion for RIAs within the next two years. 

“While implementing these additional services may help RIA firms move upmarket and generate greater revenue, RIAs will need to reinvest in the business by hiring more staff, adding technology tools, producing marketing materials, or paying a third-party provider for outsourced support,” said Marina Shtyrkov, associate director, in a release. “These expenses typically lower the firm’s profit margins, so by expanding their purview, RIAs find themselves at risk of profit margin compression unless they are able to offset expenses with higher fees, new client acquisition, or additional revenue streams.”

To preserve profitability levels as they add services, advisers can either adjust their fees upward or implement alternative pricing structures. These nontraditional fees (e.g., fixed financial planning fees, monthly subscription fees) are not correlated to portfolio performance and can help RIAs offset the increased costs of delivering additional services, thereby reducing profit margin pressure. 

For RIAs that offer financial planning, nontraditional fees also ensure that the firm’s pricing is more closely aligned with its value proposition.

Ultimately, value differentiation challenges will become a question of firm economics—one that RIAs must be ready to answer. While Cerulli does not believe that all RIAs must expand their service set to remain competitive, under the right circumstances, additional offerings can help firms capture new opportunities and tackle competitive challenges. 

“Like any business decision, the addition of a service should allow advisers to better address their target market and achieve stronger alignment between that segment’s needs and the firm’s offerings,” wrote Shtyrkov. “RIAs will need to consult their strategic partners (e.g., RIA custodians, asset managers, service providers) to help them navigate these choices, weigh the tradeoffs of service expansion, and mitigate the risks of thinning profit margins.”

© 2022 RIJ Publishing LLC.  

Raising Social Security age may be necessary, actuaries say

Posted on March 3, 2022 by -

Raising the age at which Social Security recipients become eligible to receive unreduced retirement benefits—Social Security’s “normal retirement age”—will likely be among the reforms Congress considers for addressing the program’s long-term financial challenges, the American Academy of Actuaries explains in a new issue brief.

“Raising the normal retirement age may be considered as part of a reform package in addressing the increased costs to Social Security as a result of greater longevity,” said Amy Kemp, chairperson of the Academy’s Social Security Committee, which developed the issue brief, Raising the Social Security Retirement Age. 

The report says: 

“The fact that increased longevity is among the root causes of Social Security’s financial problems suggests that raising the normal retirement age is a likely—perhaps even necessary—component of any package of program changes that addresses them. The American Academy of Actuaries issued a public policy statement in 200810 advocating for an increase in Social Security’s normal retirement age as part of a package of reforms designed to restore the system’s long-term financial health.

“The Academy provides a necessary actuarial perspective for public policymakers in evaluating such an option, including discussion of important considerations when developing a reform package, such as variations in longevity increases across socioeconomic status.”

An increase in the normal retirement age would reduce benefits payable at any given claiming age while providing an incentive for delayed retirement and longer working lifetimes. It also has significant precedent as a public policy approach. 

In 1983, Congress enacted a series of phased increases in the normal retirement age, recognizing that life expectancy had increased substantially since the program’s inception. But while the age for collecting unreduced benefits thus increased by two years since Social Security began paying monthly benefits to retired workers in 1940, life expectancy at age 65 has increased by roughly 6½ years in that time. Social Security is currently projected to be able to pay only about 75% of scheduled benefits starting in 2034.

“This issue brief allows the unique expertise of the actuarial profession to assist in addressing Social Security’s financial condition, so the financial health of this vital public program is preserved for future generations,” said Kemp.

The Academy’s objective analysis presents actuarial rationales and potential approaches and challenges to raising the normal retirement age, including assessing a differential impact on lower-income beneficiaries whose longevity expectations differ from higher-income beneficiaries.

© 2022 RIJ Publishing. 

Our retirement system needs work: Morningstar

Posted on March 3, 2022 by -

The newly launched Morningstar Center for Retirement and Policy Studies has released a “Retirement Plan Landscape Report,” the first in a planned series of original reports on the status of the US defined contribution (DC) retirement plan system and the US retirement system as a whole.

The content and tone of Morningstar’s new Retirement Plan Landscape Report, from a new Morningstar retirement research group, reflects a crisp, business-like approach to the topic–one well-suited to Morningstar’s broad audience. Other resources in this space include the Employee Benefit Research Institute and the Vanguard, the Investment Company Institute, and Vanguard’s annual “How America Saves” reports.

The executive summary of the new report says quite bluntly that the domestic DC system needs help. It hemorrhages assets, and not all plans are equal. If you work at a big, profitable company, your DC plan is likely cheap and generous. The implication is that semi-skilled worker at small companies have expensive plans or none at all.  

The report explores four aspects of the US retirement system, including: trends across coverage, assets, and numbers of defined-contribution plans; costs to workers and retirees within these plans, as well as their investments; the kinds of investments held by these plans; and the continued role of defined-benefit plans for today’s retirees. Key takeaways include: 

  • Almost $5 trillion flowed out of defined-contribution plans from 2011 to 2020. These constant outflows, due mostly to rollovers and cash-outs, reduce plan assets. The US DC system relies on new employers to offer retirement plans every year to compensate for the more than 380,000 plans that closed over the period from 2011 to 2020. New contributions and strong returns have masked outflows of more than $400 billion a year since 2015. The decline reduces the leverage that plan sponsors might otherwise have to bargain for lower fees from asset managers and lower costs for participants.
  • The largest plans in the US today hold nearly 45% of their assets in collective investment trusts (CITs). These pooled vehicles resemble mutual funds but are less regulated and can be much less expensive for participants. Small and mid-sized plans continue to invest the majority of their assets in actively managed funds, with more assets in active strategies among smaller plans. 
  • People who work for smaller employers and participate in small plans pay around double the cost to invest as participants at larger plans, around 88 basis points (bps) in total compared with 41 bps, respectively. Small plans also feature a much wider range of fees between plans, with more than 30% of plans costing participants more than 100 bps in total.  
  • Defined benefit pension plans accounted for more than 30% of distributions paid to participants in 2019. About 12.8 million people, between family beneficiaries and retired participants, are collecting traditional pension benefits today. About 8.8 million people who are no longer working are still entitled to future benefits, and 11.7 million people who are still working will eventually receive benefits. 
  • US defined-contribution system in the aggregate tilted toward investments with more ESG risk—which is the degree to which companies fail to manage ESG risks, potentially imperiling their long-term economic value. Plan sponsors may wish to reexamine their investment choices using an ESG lens.

The Center’s primary research team includes Aron Szapiro, head of retirement studies and public policy at Morningstar, Jack VanDerhei, director of retirement studies for Morningstar Investment Management LLC, and Lia Mitchell, senior analyst of policy research for Morningstar, Inc.

VanDerhei joined Morningstar Investment Management LLC on March 1, 2022, after many years as research director of the Employee Benefit Research Institute. He’ll be responsible for modeling the impact policy changes and proposals might have on US retirement preparedness, as well as the effects of plan sponsors’ decisions on participants.  

The Center is planning to shed light on a range of topics in the coming year, including lifetime income in defined-contribution plans, the new anticipated fiduciary package, and the state of overall retirement preparedness among older workers. For more information about the Morningstar Center for Retirement and Policy Studies, please visit

© 2022 RIJ Publishing. 

Investment, Pension, or Annuity? This Fund Is a Hybrid

Posted on March 3, 2022 by -

Bob is 65 and wife Doreen is 66. They have $3 million in mutual funds and a home worth about $1.7 million. They’ll need an income of $140,000 a year or so in retirement. Social Security will provide about $28,000 of that. Where will the other $110,000 come from?

Their financial adviser, Sarah, suggests moving $1 million into a “Longevity Pension Fund.” It’s a kind of mutual fund that will pay Bob and Doreen $61,500 a year. If they squeeze $50,000 a year (2.5%) from their other $2 million in investments, they’ll have the desired $140,000. 

One more thing about Bob, Doreen and Sarah, besides the fact that they’re fictional: They live in Canada, where regulators have approved the Longevity Pension Fund. The fund was brought to market by Purpose Investments, a nine-year-old Toronto-based fintech that dabbles in several financial services. 

Sales of this tontine-like fund are still embryonic, and limited to Canada. But Purpose Investments has eyes on the US market. It has engaged an unnamed Chicago law firm to help hurdle regulatory barriers in the US.

The product is designed to work like a mutual fund and a pension fund and an individual annuity.

Fraser Stark

“We manage it like a defined benefit plan rather than an annuity,” Purpose Investments’ Fraser Stark told RIJ. He’s president of the firm’s Longevity Retirement Platform. “It’s an investment fund that offers longevity risk protection. Nothing is guaranteed, but there’s an options strategy to reduce risk. Annuities can be brilliant but at today’s interest rates, many investors struggle to justify annuitizing.”

Grandchild of CREF

Pension funds that act like annuities have been available in the US since 1952. That’s when TIAA created CREF, a big centralized equities fund that pays out a rising, sustainable, but not necessarily guaranteed lifetime income stream, mainly to professionals at ivy-clad colleges and universities. 

As RIJ reported last week, the basic DNA of the CREF variable income product resurfaced decades ago in the University of British Columbia’s Variable Payment Life Annuity (VPLA), and beats at the heart of Canada’s still-in-progress Dynamic Pension Pools. Purpose Unlimited’s Longevity Pension Fund brings the concept to a wider audience, but still in Canada.

“People have done it,” said Simon Barcelon, vice president to Stark. “It just hasn’t been done within a retail product. We have put the work in to make that happen. We’ve ‘democratized’ the solution to the income problem.”

If you buy and hold shares in this fund through retirement, you get the growth potential of investing in equities and alternative assets. You also get the “survivorship credits” that come from pooling longevity risk.

But what about liquidity? Investors have always balked at tying up big chunks of their money in illiquid income annuities. The variable annuity with guaranteed lifetime withdrawal benefit, so popular between 2005 and 2015, solved that problem, but not elegantly or cheaply. 

Current allocation of Longevity Pension Fund

The Purpose Unlimited mutual fund offers a compromise. Investors can cash out at any time. If they leave before retirement, they get their principal back, with earnings. If they leave after retirement, they get their principal  at 65 minus the income payments they’ve already received, effectively leaving their earnings post 65 in the pool as survivorship credits.

US securities law requires mutual funds to allow investors to cash out at the fund’s current price (the net asset value, or NAV, which is calculated each day after the market closes). That’s a legal obstacle to offering the Longevity Pension Fund as a mutual fund in the US. 

“If an investor wants to redeem shares, we can redeem the client at less than market value. That’s how we preserve the risk-pooling structure that’s embedded in the product,” Barcelon said.  Another obstacle to US distribution is more operational in nature. It involves capturing the date of birth (DOB) of the investors.

 “With annuities, a contract’s price is based on the individual’s life expectancy, and the issuer has to capture the DOB. But with a mutual fund, there’s no specific contract, so you don’t necessarily capture the information,” Barcelon added. “The challenge was to capture the right age. That was something we really needed operationally to provide the [longevity] risk-pooling structure.”

Law of large numbers 

As the Bob-and-Doreen example at the top of this story shows, Purpose Unlimited intends the Longevity Pension Fund to produce an initial retirement income of 6.15% in the first year, or $6,150 per $100,000 invested. 

The income won’t be fixed and is not guaranteed to hold at that level for their lifetime, because no insurance company is assuming that risk—or charges for it. Instead, the income rate will fluctuate, based on the performance and redemptions (mortality and voluntary) of the fund. Since the initial lifetime income rates are calculated using conservative assumptions for investment returns, mortality and redemptions, the income has a good chance of rising over time. 

What you get from the Longevity Pension Fund that you couldn’t have gotten from, say, one of the payout mutual funds that Vanguard and Fidelity offered in the first decade of this century, is “survivorship credits.” That’s the dividend that accrues to the surviving members of each of the fund’s age-cohorts when one of the members dies or redeems voluntarily. In old-fashioned tontines, the inevitable acceleration mortality rates at older ages meant that the payments usually grew huge toward the end. In this product, as in a fixed income annuity, the survivorship credits are anticipated; they’re spread more or less over the entire payout period. 

Simon Barcelon

Here’s how Barcelon put it:

In addition, similar to how a pension plan is managed, Purpose takes a funding-level approach that compares the Fund’s assets with the present value of all expected future liabilities. The long-term funding-level target is 100%; however, this may be higher in the earlier years of a cohort to provide additional stability in distribution levels. The distribution levels are adjusted annually to bring the funding level to its target, which ensures the cohorts are adequately funded to provide income for life.

Longevity risk pooling requires help from the law-of-large-numbers—but the numbers don’t have to be huge. “You need a group of people to do this, but what’s surprising is how low the number can go before there’s any negative effect on pooling,” said Barcelon. “We’ve modeled this extensively, and you can go down to as few as 100 to 300 people, which can be built over time. In building out a cohort, we take people within three years of a given age. The difference in life expectancies is small enough for the product design to work as intended. We accept new investment until the 80th birthday.” There’s no joint-and-survivor version of the fund, so couples planning retirement will want to split their investment in both their names.

Purpose Investments, a subsidiary of Purpose Unlimited, is the asset manager of the fund. There’s an annual management fee of 60 basis points, plus whatever advice fee an adviser charges his or client. In Canada, there’s also an Adviser series with an annual management fee of 1.10% to the investor; that includes the investment fee and a trailing commission of 50 basis points paid by the fund to the adviser’s broker-dealer.

“The fund can be sold through a bank, independent wealth adviser, or online account. Or we can put it on the platforms of companies that manage DC plans, as an option for employees. It can’t be sold as an ETF given the unique elements of the redemption structure,” Stark told RIJ.

Three pots of money

Purpose Unlimited appears to have the resources necessary to make this work. Last year, Allianz X, the venture capital arm of Allianz SA of Germany (parent of Allianz Life of North America), invested the equivalent of $38.37 million in the Toronto fintech, which has about 300 employees and manages about C$14 billion ($11 billion). Toronto-based CIBC Mellon Global Securities Services Company is the registrar and transfer agent for the units of the fund. 

Som Seif

The founder and CEO of Purpose Unlimited, Purpose Investments’ parent, is Som Seif, 46. An engineer by training who started his financial career at the Royal Bank of Canada, Seif made his first fortune founding Claymore Investments, building it to $7.5 billion in assets and selling it to BlackRock. 

The company has been endorsed by the Canadian Association of Retired Persons (C.A.R.P.), which offers investors a 15% fee discount. It currently distributes the Longevity Pension Fund through the Bank of Montreal and National Bank, but not yet through Canada’s four other major banks.

Advisers to Purpose Investments include Keith Ambachtsheer, emeritus director of Canada’s International Centre for Pension Management, Bonnie-Jeanne MacDonald, Director of Financial Security Research at Ryerson University’s National Institute on Aging, Fred Vettese, Former Chief Actuary of Morneau Shepell and personal finance author, and Jim Leech, Former President & CEO of Ontario Teachers’ Pension Plan and Chancellor of Queen’s University.   

“When we showed the Canadian regulators, they helped champion the concept. In Canada, the regulatory changes were in the retail investment product space, but also made the fund available to defined contribution (DC) plans. In the US we’re also hoping to put this product on the shelf inside DC plans. It will let DC plan sponsors offer their employees an income for life option,” Stark said.

Last week, Purpose Investments announced that the Toronto-based global human resource consultant LifeWorks (formerly Morneau Shepell) validated Purpose’s assertion that the Longevity Pension Fund “could achieve initial lifetime income rates starting at 6.15% for 65-year-old investors, and that Longevity’s distribution levels should increase over time in the majority of cases as a result of the Fund’s risk pooling structure and the conservative assumptions used to set the initial rates.”

So far, Longevity Pension Fund has fewer than 100 investors and assets in the “low millions,” Stark said. But Purpose Investments thinks the concept—already proven by TIAA in the 403(b) plan space—is an idea whose time has come.

“If the average investor thinks of three categories, balanced portfolio of traditional investments, annuities, and longevity risk pooling…this is money you’re not going to leave to your estate,” Stark said. “No one should totally move away from traditional investments. But many investors will believe that some money should go into the longevity risk pooling sleeve.”

© 2022 RIJ Publishing LLC. All rights reserved.

‘I Can’t Believe This’

Posted on March 3, 2022 by -

By now we’ve all see satellite pictures of the leaf-cutter file of green Russian trucks, tanks and Tygr armored cars crawling along Ukraine’s empty roads and highways toward Kyiv. We’ve also seen images of frantic Ukrainian women clutching toddlers and clawing their way toward Poland and safety. 

But, long before this war started, millions of able-bodied Ukrainians had already left the country and its black, distinctly fertile “chernozem” soil. Ukraine’s population was about 41 million when Russia invaded last week—down from about 52 million in 1991.  

The exodus drained Ukraine of many of the workers it needed to raise its standard of living closer to European Union levels. The loss of workers also drove up the “dependency ratio” of old people to working-age people, and wrecked an already threadbare state pension system. (My great-grandfather left western Ukraine, then Eastern Galicia, in the 1880s.)

A pensioner in Ukraine aims an assault rifle.

Ukraine’s traditional pay-as-you-go basic national pension operated on the “solidarity” principle. Young people supported their parents and grandparents. Of the ~11 million retirees in Ukraine (as of mid-2021), 65% received a pension below 3,000 hryvnia (€95, $105) per month. Only high-ranking former public officials (2.7% of the population) received a pension of over 10,000 hryvnia (€317, $351) a month. In one interview, a Ukrainian told a reporter that many men volunteered for dangerous industrial jobs in order to qualify for an earlier, larger pension.

After Ukraine declared independence from the Russian Federation in 1991, it tried to establish a three-legged pension system on the OECD (Organization of Economically Developed Countries) model. In addition to the Solidarity pension, a defined contribution plan with individual accounts funded by 7% of pay contributions, as well as private pensions, were proposed. They were either insufficient or incomplete. A period of high inflation in the 1990s didn’t help. Neither did the financial crisis of 2009.

But Ukraine’s fundamental pension problem is demographic. The population has been shrinking by an average of over 300,000 annually since 1993. As of 2007, the country’s rate of population decline was the fourth highest in the world. Environmental pollution (Ukraine is home to the 1986 Chernobyl reactor disaster), poor diets, smoking, alcoholism and deteriorating medical care also give Ukraine a high mortality rate. 

And Ukraine is impoverished. Despite the photographs we see on TV of historic Lviv (a time capsule of 19th century architecture, and a World Heritage preservation site) and the modern subway in Kyiv, Ukraine is the poorest country in Europe. It’s not only poorer than the countries of western Europe. It’s also poorer than the Balkan states of Albania, Serbia, Kosovo and Montenegro.

“With a per capita gross national income (GNI) of $3,540, Ukraine is the poorest country in Europe as of 2020. Ukraine once had the second-largest economy in the USSR. However, when the USSR collapsed, Ukraine had difficulty transitioning into a market economy, which sent much of the population into poverty. Some of Ukraine’s continuing issues contributing to its poverty are government corruption, Russian aggression (specifically Russia’s illegal seizure of Crimea in 2014), and weak infrastructure,” one source said.

In the vacuum after the fall of Communism, Ukraine seems to have retained the worst vestiges of the socialist era—with its centralized controls and stifling of enterprise—and entertained the most piratical strain of capitalism. As in Russia after 1991, a handful of insiders (the “red directors” who became “oligarchs”) took personal control of the former state monopolies on agriculture, natural gas, and other resources. They vastly enriched themselves at the expense of the nation.

Ordinary Ukrainians have been living in a kind of hell. But most of the urban Ukrainians we see on TV or online don’t seem very different from us. We’ve all seen interviews with rumpled but clearly 21st-century Ukrainian men and women who look and sound like Westerners—wearing bluejeans and parkas, holding cellphones or lidded go-cups of cold coffee, and speaking accented but flawless English—and who say the words that we would say if we were in their shoes: “I can’t believe this.”   

© 2020 RIJ Publishing LLC. All rights reserved. 

Lawsuits against DOL won’t change client strategy: Reish

Posted on February 24, 2022 by -

In a webinar this week, attorney Fred Reish of the law firm of Faegre-Drinker noted that his corporate clients are aware of the two federal lawsuits in Texas that are challenging the Biden Department of Labor’s efforts to regulate the way financial advisers can talk to 401(k) participants about rollovers.

Reish said his clients are proceeding with their compliance efforts on the assumption that the suits will not change the course of DOL policy.

“No one is ignoring the lawsuits,” Reish wrote in an email to RIJ. “And no outcomes are predictable regardless of where the lawsuits are filed. The insurance company clients I talked to believe the risk is too great to justify stopping compliance efforts with PTE 2020-02 and the fiduciary interpretation. 

“If they ‘bet’ that the plaintiffs will prevail in the litigation, but they lose, those companies could have enormous amounts at risk. Compliance takes that risk away. I am not aware of any major financial services company that is not fully committed to complying with these rules.”

On February 2, 2022, the Federation of Americans for Consumer Choice (“FACC”) filed suit against the US Department of Labor (“DOL”) in the United States District Court for the Northern District of Texas seeking to set aside the DOL’s latest attempt to define “investment advice fiduciary.”

In the second suit, filed in the Middle District of Florida, the American Securities Association objected to the Biden Labor Department’s “frequently asked questions,” issued in April 2021, because it said the guidance interpreted the Trump-era rule to mean that first-time advice to transfer retirement assets can constitute fiduciary advice, which the rule subjects to a strict standard of care.

Here are the Groom Law Group’s comments on the first suit:

FACC’s complaint seeks the court to declare that the DOL’s interpretation of the investment advice fiduciary regulation “five part test” articulated in the preamble to Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”) exceeded the DOL’s statutory jurisdiction, authority, or limitations and is arbitrary, capricious, and contrary to law.  In addition, the FACC asked the district court to vacate the DOL’s interpretation in its entirety.  If the FACC’s complaint is ultimately successful some potential positive outcomes include: overturning some of the more controversial elements of the preamble to PTE 2020-02 including the DOL’s relatively new views on the regular basis prong and the mutual agreement prongs of the five part test; and overturning the DOL’s position that the advice to take a rollover is likely to be fiduciary advice.

For now, however, resolution of the case is a long way off.  It is anticipated that the DOL will move to dismiss the lawsuit, and even if the lawsuit survives dismissal, the DOL is expected to vigorously defend against it.

The FACC’s complaint is part of a larger trend of plaintiffs challenging regulators and legislation in federal courts in Texas prior to any governmental enforcement.  In 2016, for instance, in Chamber of Commerce v. US DOL, the Chamber successfully convinced the Fifth Circuit Court of Appeals to vacate the DOL’s 2016 fiduciary rulemaking package.  In 2020, Data Marketing Partnership convinced a district court judge in the Northern District of Texas to vacate a DOL Advisory Opinion in Data Marketing Partnership v. US Department of Labor.  Similarly, the US Supreme Court allowed a pre-enforcement review of legislation in Whole Woman’s Health v. Jackson.  These holdings show some willingness of federal courts to become involved in adjudicating challenges to laws, regulations, and other agency action before a government actor begins enforcement.

Substantively, the FACC’s complaint largely mirrors the Fifth Circuit’s reasoning in its decision in Chamber of Commerce v. US DOL.  It essentially argues that DOL has sought to avoid the court’s mandate by doing through the preamble of PTE 2020-02 what it was told it could not do through formal notice and comment rulemaking.  Again, the plaintiffs assert that DOL has sought to expand the scope of who is an ERISA fiduciary beyond those who have a “relationship of trust and confidence” with an ERISA plan or IRA holder, thereby sweeping back in functions like regular sales activities.

We expect the DOL to push back on the trend towards pre-enforcement judicial review and to argue that the plaintiffs should not be permitted to sue at this time.  The DOL will likely argue that until there is enforcement action by it or by a private litigant against someone for violating the preamble, the preamble has not caused the FACC and its members to have suffer judicable harm.  As described above, the trend towards pre-enforcement judicial review is new and there are strong arguments on both sides.  It will be important to watch the district court and ultimately whatever other courts weigh in on this dispute.  The outcome of the scope of pre-enforcement judicial review will likely have an impact, one way or the other, on the opportunity for members of the regulated community to challenge FAQs, Advisory Opinions, Prohibited Transaction Exemptions, preambles, and other formal and informal guidance that is issued by the DOL.

Should the FACC prevail in its effort to have a federal court resolve the case, the case will remain a blockbuster as it will either provide an opportunity for courts to decide that the DOL’s interpretation is consistent with the Fifth Circuit’s “relationship of trust and confidence” requirement or close off another route that the DOL had taken to attempt to further expand its regulatory authority.  While a victory for FACC in the case would not invalidate PTE 2020-02, it would likely mean the exemption wouldn’t be necessary for many transactions, including rollovers.  Should the DOL engage in any further “fiduciary” rulemaking, this case demonstrates that additional litigation would be likely to ensue.

Here are comments on the second suit, from Bloomberg Law:

Guidance the US Department of Labor issued last year clarifying its stance on investment advice under a 2020 fiduciary rule violates the Administrative Procedure Act, a trade organization calling itself the American Securities Association, representing financial services firms, said in a federal lawsuit filed Wednesday.

The group filed suit in the US District Court for the Middle District of Florida, marking the second time this month the Labor Department was sued over the fiduciary rule.

In what are known as “rollovers,” federally regulated retirement assets are transferred into self-directed retirement vehicles, and financial advisers usually earn a commission on such transactions. The department’s updated guidance threatens to sap those resources from the industry, because a fiduciary under the rule is legally obligated to act solely in a client’s interest and can’t receive increased compensation because of their advice.

The Trump rule broadened the kinds of retirement plan investments from which financial advisers can profit by reinstating a five-part test establishing the definition of a fiduciary. The test includes a caveat limiting fiduciary advice to the kind made “on a regular basis to the plan.” The Biden Labor Department allowed parts of the rule to take effect, using the guidance to flesh out the regulation.

The department said in the guidance that first-time advice can qualify as fiduciary advice if the financial professional and investor later establish an “ongoing advice relationship” or intend to do so.

In its suit, the American Securities Association alleged that the department’s guidance “rewrote” the rule altogether. In so doing, the group said, the department imposed burdensome documentation and investigation requirements on businesses—changes that it believes should have been subject to public comment according to the regulatory process outlined in the Administrative Procedure Act.

“If the Department wanted to change its rules, it needed to do so through the required notice-and-comment process—not through guidance documents,” the suit states.

Earlier this month, the Federation of Americans for Consumer Choice Inc. filed a similar suit against the DOL, arguing the fiduciary rule itself was a violation of the Administrative Procedure Act for expanding the definition of a fiduciary in violation of federal law. The group, which represents insurance and annuity distributors, said Congress never gave the department the authority to change the definition of a fiduciary under the Employee Retirement Income Security Act of 1974.

© 2022 RIJ Publishing LLC. 

Will Buy-Out Firms Buy Out Medicare?

Posted on February 24, 2022 by -

A friend recently sent me a heads-up about the “direct contracting” of Medicare services. Some Medicare recipients had been auto-enrolled into a federally sponsored pilot program, he said. The program was testing a new approach to privatizing Medicare. 

As a Medicare beneficiary, he was concerned. And not without reason. “Direct Contracting,” as the new approach is called, could put private equity (PE) firms between doctors and patients.  

I had assumed that Medicare Advantage plans represented the future of health insurance for older Americans. (Bernie Sanders’ Medicare-for-All idea notwithstanding). By the end of 2022, more than half of all Americans over age 65 are expected to use Medicare Advantage plans instead of traditional Medicare. 

But some health care policy experts don’t think that Medicare Advantage plans—HMOs and Preferred Provider Organizations that bundle traditional Medicare with non-Medicare services like dental and vision insurance for the aged—have delivered on their promises to “contain costs” and produce better “patient outcomes.”

So the government has been entertaining alternative ideas for slowing the growth of Medicare and Medicaid expenditures as Boomers begin to line up for more hip replacements, more dialysis  treatments, more MRIs and more nursing home beds as they age into their 80s, 90s, and 100s.

A Center for Medicare and Medicaid Innovation (CMMI) was created by the Obama administration. It was tasked with finding ways to bend the upward curve of medical costs, especially as Boomers age. A five-year pilot program to test one of the models, Direct Contracting Entities (DCE), was launched in 2020 by the Trump administration, and the Biden administration is letting it run. Fifty-three companies are participating. 

A DCE might be a group of physician practices or a managed care company, owned perhaps by investors. The DCE would receive a steady stream of money from the government; it would accept—but manage—the chance that costs would be more or less than revenue. If they took all the risk, they could get all the upside.

That’s a scenario that investors in private equity funds love, and PE firms are showing interest in aggregating physician groups and other health care providers that could become DCEs. The same appetite for higher yields and large asset pools that attracted PE firms to the life insurance/annuity business in recent years also attracts them to the health insurance business.

Here’s what health policy experts wrote in HealthAffairs magazine last September:

Four main business realities drive the interest in Medicare-related acquisitions. First is the expected doubling of Medicare spending from $800 billion in 2019 to $1.6 trillion in 2028 as Baby Boomers age. Second is the reality that Medicare Advantage (MA)  harbors an arbitrage game in which [Medicare] consistently overpays MA Plans with no demonstrable clinical benefit to patients. Third is the heavily subsidized and distorted market dynamics that result from these overpayments. Fourth is the Trump administration’s creation of the Direct Contracting Model as a vehicle for privatizing Medicare’s projected 2028 $1.6 trillion spend. 

One of the authors of that article (and a follow-up article) was Donald Berwick, MD, a Harvard lecturer and former administrator of the Center for Medicare and Medicaid Services. Berwick told RIJ this week, “The auto enrollment under Direct Contracting was part of proposal under the Trump administration. We haven’t seen the next generation of rules from the Biden administration yet, but I doubt that there will be auto-enrollment. There’s a lot of debate on the future of that project.”  

I asked Berwick which was true: the research showing that MedicareAdvantage plans saves the government money or the research that shows that it drives up the cost of health care for all Americans.  

“It has a lot to do with how you assess the costs,” Berwick said. “But research by MedPAC (Medicare Payment Advisory Committee) has found over and over that when you adjust for the severity of the illness, that the cost goes up under MedicareAdvantage plans, not down. The research is solid on that point.”

As the Direct Contracting pilot program reaches its conclusion and the results become public, we’re bound to hear PE companies promise that they will make the delivery of health care less expensive for the government, more responsive to elderly patients, and highly profitable for their risk-hungry investors.  

To me, hiring for-profit foxes to guard the health insurance henhouse may look good on paper, but it hasn’t worked in practice. My friend has reason to be concerned. 

© 2022 RIJ Publishing LLC. All rights reserved.

A Policy Dynamo Touts ‘Dynamic Pensions’

Posted on February 24, 2022 by -

We first met Bonnie-Jeanne MacDonald four years ago in Manhattan. The Canadian actuary was in New York to tell the gathered members of the Defined Contribution Institutional Investors Association about her retirement research and, in a sidebar, we talked about her “LIFE” plans.  

LIFE, in this case, stood for Lifetime Income for the Elderly, a type of personal pension that MacDonald and others had developed for the Canadian market. Retirees would invest in an irrevocable LIFE contract at age 65. At age 85, they would draw a variable stream of income that was managed, though not guaranteed, to last until they died. 

If LIFE sounds familiar, it should. It has elements of tontines, of TIAA’s CREF variable income annuity, and of deferred income annuities (DIAs). Those are niche products; the positive reception that LIFE got from Canada’s regulators and legislators gave MacDonald a feeling that her version of an old idea could find a bigger audience.

Bonnie-Jeanne MacDonald

“Everybody bought into the idea that Canadian retirees needed something more than annuities and drawdowns (i.e., system withdrawals) to produce retirement income,” she told RIJ. “They needed a third option.”

Prodded by MacDonald and others, the Canadian government eventually revised its tax laws, opening the door to something larger than LIFE. Now Canada’s defined contribution (DC) plan sponsors and Pooled Registered Pension Plans—savings plans for those without DC plan coverage—can offer income starting at age 65 and lasting for life. 

As the lead actuary on the project, MacDonald picked out a name for the latest iteration of the program: Dynamic Pensions. “We put a new white paper out, it’s been fully circulated, and we just did presentations on Dynamic Pensions across Canada,” she said in an interview. “This time, we hit the bull’s eye.”

Two nations, similar challenges

Canada’s retirement industry, like that of the US, is playing catch-up with demographic imperatives. Canadian boomers are retiring from DC plans with big chunks of tax-deferred savings but with no direct mechanism for turning the nest eggs into what most people say they want: a pension-like income.

Like Americans, Canada’s DC participants tend to roll their money into tax-deferred brokerage accounts at retirement. But Canadian plan sponsors and asset managers, like their American counterparts, would like to retain more of those fee-generating assets and maintain economies of scale.

In the US, insurers are trying to integrate annuities into DC plans, and Congress, with its SECURE Act, has helped. Just last week, it was announced that Morningstar would link its 401(k) managed accounts to Hueler’s online annuity platform. But few Americans buy income annuities. 

MacDonald’s Dynamic Pensions would be cheaper than annuities, which means they’d produce bigger monthly checks for retirees. They’d be cheaper because, as in the LIFE program, participants would bear their own investment and longevity risks instead of hiring life insurers to do it for them.  

How Dynamic Pensions work

Like Americans, most Canadians who aren’t covered by defined benefit pensions save for retirement in a variety of tax-deferred savings vehicles. These include employer-sponsored defined contribution plans and, for individuals, Registered Retirement Savings Plans (RRSPs), which resemble IRAs.

At retirement, Canadians who want lifetime income can buy a life annuity from an insurance company or move their tax-deferred savings into a Registered Retirement Income Fund (RRIF), or a Life Income Fund (LIF), from which they can draw down a taxable income. (Distribution rules can vary from one province to another.)
Under MacDonald’s plan, at retirement Canadians could roll all or part of their tax-deferred savings into a large, professionally managed fund composed of stocks, bonds, and sophisticated alternatives. Depending on their age and the amount of their contribution, they’d be credited with a certain number of income units. 

Participants would receive a guaranteed number of units of income each year. But the dollar-value of the units would not be guaranteed. Instead, the units would fluctuate in value from year to year, depending on the performance of the underlying fund. As years go by and participants die, their assets would stay in the fund. 

Like an annuity, a Dynamic Pension would have to be illiquid and irrevocable. That’s the only way to maximize income. An optional death benefit or guaranteed period might be added, but payouts would be smaller. But illiquidity might be more palatable in a Dynamic Pension than in an annuity because—without the expense of a life insurer guarantee— the income would be significantly higher.  

Sounds familiar

The DP idea isn’t new. In fact, it will turn 70 years old this year. In 1952, the leaders of TIAA, then the not-for-profit Teachers Insurance and Annuity Association, invented CREF, the College Retirement Equities Fund. CREF was the first deferred variable annuity and, at retirement, it can be converted to a variable income annuity.  

CREF is still a pillar of TIAA’s offering, available at colleges and universities in the US and abroad. It has even been cloned. The University of British Columbia has replicated a CREF-like plan since it broke with TIAA some 40 years ago. UBC calls its version of CREF a Variable Payment Life Annuity. 

The CREF/DP idea was adopted in 2021 by QSuper, a former non-profit public employee’s retirement savings plan that was opened in 2017 to all Australians. At retirement, participants can put all or part of their savings into the QSuper Lifetime Pension, which works just like CREF or a Dynamic Pension. 

Dynamic Pensions are a lot like tontines, which were investment pools that paid out income to their members for as long as members were alive—or as long as a designated annuitant was alive. A Dynamic Pension would produce a more level income than a tontine, because early payments would anticipate the impact of future mortality. Moshe Milevsky, a tontine expert and professor at York University in Toronto, has advised MacDonald on Dynamic Pensions. 

Not quite there yet

Even though some of the legal barriers to Dynamic Pensions have been cleared away, hurdles remain. DC plans can offer Dynamic Pensions, but DC plans cover only a small minority of Canadians. Also, there aren’t many DC plans in Canada that, by themselves, have large enough participant pools to make Dynamic Pensions work. 

Insurance companies could use their recordkeeping and asset management skills to run Dynamic Pensions, but at the risk of undercutting their retail annuity businesses. MacDonald herself would like to see stand-alone not-for-profit entities offer Dynamic Pensions to any Canadian who wants one. 

“Canadians won’t buy into something like this without trust,” MacDonald told RIJ. She thinks it’s just a matter of time before her vision for Canadian retirees comes true. “A lot of thought leaders in government and industry believe Dynamic Pensions are the right thing to do. There’s a lot of good will toward making it work.”

© 2022 RIJ Publishing LLC. All rights reserved.

Assets in TIAA’s custom RetirePlus TDFs cross $10 billion milestone 

Posted on February 24, 2022 by -

TIAA’s RetirePlus Series of customizable target date funds (TDFs) has surpassed $10 billion in assets, with year over year growth of 45%, thanks to “dozens of new institutional clients, additional individual client contributions, and consistent investment performance,” TIAA announced this week.

“Over 40% of all US households are expected to run out of money in retirement with an average shortfall projected at $100,000 per household,” said Bill Griesser, head of Institutional Managed Solutions at TIAA, in a release.

“TIAA RetirePlus Series helps plan sponsors better prepare their employees for a confident retirement by allowing them to create a ‘personal pension.’ It brings the lifetime income provisions of the Secure Act into practical reality for plan participants.”

© 2022 RIJ Publishing LLC. All rights reserved.

Breaking News

Posted on February 24, 2022 by -

Labor Department investigates Alight, a major recordkeeper

On July 30, 2019, the department’s Employee Benefits Security Administration opened an investigation of Alight, a healthcare and retirement benefits administration and cloud-based human resources services company. 

Alight appealed to the Seventh Circuit, and the Solicitor of Labor’s Office, Plan Benefits Security Division, filed an appellee brief on February 18, 2022, responding to Alight’s brief.

Alight provides recordkeeping service to over 750 ERISA-covered employee benefits plans that serve over 20.3 million plan participants. EBSA began investigating Alight, which provides cybersecurity services to Employee Retirement Income Security Act plans, when EBSA discovered that Alight processed unauthorized distributions of ERISA plan benefits due to cybersecurity breaches in its ERISA plan clients’ accounts and failed to disclose those breaches and unauthorized distributions to those plan clients for months. 

Alight failed to produce most documents sought by EBSA’s subpoena, and after attempting to negotiate, EBSA moved for subpoena enforcement in the Northern District of Illinois. The district court granted subpoena enforcement and denied Alight’s request for a protective order.

Timber Operators transfer $245 million in pension risks to Prudential 

Prudential Financial, Inc., announced a new pension risk transfer (PRT) this week. Timber Operators Council Retirement Plan (TOCRP) purchased a $245 million group annuity from Prudential, replacing its pension obligations to about 3,000 retirees, beneficiaries and deferred participants.

A unit of Prudential, the Prudential Insurance Company of America (PICA) is expected to assume responsibility for paying these benefits beginning April 1, 2022. The TOCRP is a defined-benefit pension plan that was established by a group of Western wood products employers in 1961 to provide retirement benefits for their non-union employees. 

Brentwood Companies is the plan fiduciary for the TOCRP and served as consultant for the transaction. Stoel Rives LLP represents TOCRP and served as legal counsel in connection with the termination of the TOCRP and the related pension risk transfer transaction.

Prudential’s PRT business began in 2012 when it bought out General Motors and Verizon’s defined benefit plan assets and liabilities. Other PRTs following, including the buy-out of HP, Inc.’s pension in 2021, the fourth largest PRT recorded.

Lincoln enhances its flagship FIA

Lincoln Financial Group is expanding its flagship fixed indexed annuity, Lincoln OptiBlend, to include the 1-Year BlackRock Dynamic Allocation Participation Plus account. By paying an added fee, investors will be eligible for higher potential year-over-year returns. 

Two of OptiBlend’s indexed accounts will link to the BlackRock Dynamic Allocation Index, which launched in August 2021. The index gives  investors exposure to global and diversified multi-asset securities. Lincoln’s new Participation Plus account enable investors a chance to, in effect, buy more upside potential.

Fixed indexed annuities (FIAs) involve the purchase of options on an equity index. If the options have appreciated by a certain strike date, the contract owner can lock in gains. The index might be a pure equity index, like the S&P 500. It could also be a balanced stock/bond index, a customized hybrid index, or a volatility-controlled index. 

“The new Participation Plus account in Lincoln OptiBlend is yet another option that can empower clients to tailor-fit their financial strategy, with the opportunity to boost their long-term return,” said Tad Fifer, VP and head of Fixed Annuity Sales, Lincoln Financial Distributors, in a release.

Price of pension risk transfer is 99.9% of liabilities: Milliman

Milliman, Inc., the global consulting and actuarial firm, today announced the latest results of its Milliman Pension Buyout Index (MPBI). “As the Pension Risk Transfer (PRT) market continues to grow, it has become increasingly important to monitor the annuity market for plan sponsors that are considering transferring retiree pension obligations to an insurer,” a Milliman release said.

During January, the estimated cost to transfer retiree pension risk to an insurer in a competitive bidding process increased from 99.3% of a plan’s total liabilities to 99.9% of those liabilities. For these plan sponsors, the estimated retiree PRT cost is roughly the same as plans’ retiree accumulated benefit obligation (ABO). 

Meanwhile, the average annuity purchase costs across all insurers also increased, from 102.8% to 103.5%. This means that the competitive bidding process is estimated to save plan sponsors on average around 3.6% of PRT costs as of January 31.

“The US pension risk transfer market set records in 2021, with nearly $40 billion in transactions,” said Mary Leong, a consulting actuary with Milliman and co-author of the MPBI. “We’re expecting to see similar high volume in 2022 given recent funded status improvements and the potential for interest rates to rise as the year progresses.”

The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from eight insurers, to estimate the competitive and average costs of a PRT annuity de-risking strategy. Individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape.

© 2022 RIJ Publishing LLC. All rights reserved.

RetireOne partners with DFA, Midland National Life on stand-alone living benefit

Posted on February 17, 2022 by -

RetireOne, an independent distribution platform for fee-based annuities and other insurance products, is partnering with Dimensional Fund Advisors (DFA) and Midland National Life Insurance Company to offer three asset allocation models and 38 institutional-class mutual funds and exchange-traded funds (ETFs) covered by “Constance,” a zero-commission contingent deferred annuity (CDA) designed for RIAs.

Launched in October of 2021, Constance allows RIAs to protect client brokerage accounts, IRAs, or Roth IRAs with a lifetime income rider. As clients enter retirement and begin the “decumulation phase,” RIAs would still oversee client assets. 

“In working with DFA and gaining access to its asset allocation models and funds, advisors can benefit from value added fund and investment options that can be protected by an annuity, providing greater flexibility and choice for advisors and clients alike,” a RetireOne release said.

“A good retirement is a comfortable standard of living, which is measured by the amount of sustainable lifetime income received, and not by the size of the accumulated ‘pot.’ Significant numbers of Americans retire today without the reassurance of an adequate pension,” said Robert C. Merton, Nobel Laureate in Economic Sciences and Resident Scientist at Dimensional Holdings. 

“New and innovative lifetime-income solutions will be critical for addressing the looming retirement planning crisis. A well-designed Contingent Deferred Annuity offers new and flexible ways to create guaranteed lifetime income directly from IRAs, Roth IRAs, and brokerage accounts.”

DFA identifies securities based on a set of proven shared characteristics, or “dimensions.” To be considered a dimension, the characteristics must be sensible, persistent over time, pervasive across markets, and cost-effective to capture.

Through Constance, exclusive to the RetireOne platform clients, investors can access DFA mutual funds and ETFs with a lifetime income guarantee powered by a CDA.

© 2022 RIJ Publishing LLC. All rights reserved.

It’s Back: The Norcross-Walberg Bill to Make Annuities a 401(k) Default

Posted on February 17, 2022 by -

Bipartisan legislation has been reintroduced that would allow retirement plan sponsors to default participants into annuities, either for guaranteed returns during the accumulation period or for lifetime income in retirement.  

The legislation, which was first introduced in December 2020, endorses annuities without specifying any particular type of annuity. Any deferred annuity includes the option to convert the contract assets to a lifetime income stream. But only certain annuities are sold or used specifically for lifetime income. The legislation doesn’t appear to recognize that distinction. 

Also it remains to be seen whether plan sponsors will be comfortable defaulting their clients into an irrevocable or illiquid product. So far, they have not been, despite their general inclination to show participants a path to pension-izing their savings.

The Lifetime Income for Employees Act, introduced by Rep. Donald Norcross (D-N.J.) and Rep. Tim Walberg (R-Mich.), would allow retirement plan sponsors to use lifetime income solutions as qualified default investment alternatives (QDIA) for a portion of contributions made by participants who have not made investment selections. The Insured Retirement Institute (IRI) supports the legislation.

QDIAs, created by the Pension Protection Act of 2006, have proven to be an essential tool to enhance retirement security by providing retirement savers with the ability to accumulate assets without needing to make underlying investment selections inside of their workplace retirement savings plan.

Under the bill, the current QDIA safe harbor regulations would be amended to allow, but not require, a QDIA to include a limited investment in a non-liquid annuity component, which provides a guaranteed return on investment. Plan sponsors would not need to make any changes to their current QDIA.

The Department of Labor issued an information letter in 2016 that makes clear an investment with an annuity component can be offered consistent with a plan sponsor’s fiduciary duty. However, the current QDIA safe harbor regulation would not allow the investment to serve as a QDIA.

“This legislation would simply update regulations to reflect innovations in retirement security investment products,” Richman added. “The solution provided by the Lifetime Income for Employees Act will significantly increase access to and the use of protected lifetime income products to help retirement savers produce sustainable income during their retirement years.”

The legislation

Here is an edited text of the bill:

This Act may be cited as the “Lifetime Income For Employees Act”.

Section 404(c)(5) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104(c) is amended by adding at the end the following: “Default investments made under this subparagraph may include a covered annuity contract.”

The term ‘covered annuity contract’ means an investment in an annuity contract that meets the following requirements:

The annuity contract does not impose a liquidity restriction on the transfer of invested amounts during the 180-day period beginning on the date of the initial investment in such contract by the participant or beneficiary.

The fiduciary ensures that each participant or beneficiary is provided (not later than 30 days before the date of the imposition of a liquidity restriction described above) written notice in a manner that is reasonably designed to be understood by the average plan participant, that includes:

  • An explanation of the circumstances under which assets in the account may be invested on behalf of the participant or beneficiary in the annuity contract, including an explanation of the targeted range and maximum amount or percentage of such assets to be invested
  • An explanation of the rights, and any limitations or restrictions thereon, of a participant or beneficiary to direct or transfer amounts invested, or to be invested, in an annuity contract to other investment alternatives available under the plan
  • A general description of the annuity contract, including the duration of guaranteed payments and identification of the insurer
    An explanation of how a participant or beneficiary may obtain additional information, in writing or electronically, about their investment alternatives
  • A copy of the annuity contract

The fiduciary cannot allocate more than 50% of any periodic contribution or, immediately after a rebalancing of account investments, 50% of the value of the assets of the account, to the annuity contract (or, as applicable, to the portion thereof to which a liquidity restriction applies after the 180-day period mentioned above.

The term ‘annuity contract’ means a contract (or provision or feature thereof) that is issued by an insurer qualified to do business in a State; and provides for the payment of guaranteed benefits annually (or more frequently) for a fixed term or for the remainder of the life of the participant or beneficiary or the joint lives of the participant and the participant’s designated beneficiary.

The amendments made by subsection (a) shall take effect on the date of the enactment of the Lifetime Income For Employees Act.

© 2022 RIJ Publishing LLC. All rights reserved.

‘Creeping inflation’ could hurt life insurers: AM Best

Posted on February 17, 2022 by -

Life/annuity insurance companies are actively implementing improvements in distribution techniques given changing customer expectations and an evolving distribution landscape exacerbated by the COVID-19 pandemic, an AM Best survey shows.

Highlights of the survey of 78 U.S life/annuity companies rated by AM Best are detailed in the Best’s Special Report, titled, Life/Annuity Insurers Adjust Distribution Strategies to Reach Consumers. 

Life insurers are focusing on the “elusive middle market,” the report says. More than 80% of survey respondents said they believe the middle market is extremely or very important to future growth. In a similar 2018 AM Best survey, 70% agreed with that statement.

But questions remain about the potential for sales in that segment. “Creeping inflation could increase skepticism of a potential customer’s ability to afford life and annuity products, especially in the middle market,” said Jason Hopper, associate director, industry research and analytics, AM Best, in this week’s release.

Other survey highlights include:

  • Nearly 60% of life/annuity companies surveyed believe that reducing the time it takes to apply for a life insurance policy, underwrite the application and issue a contract is the key to penetrating the middle market.
  • As the pandemic reduced in-person interaction and created internal process and communication hurdles, managing general agents (MGA) have attained more authority.
  • A majority of surveyed companies are moderately satisfied with innovation efforts related to distribution, while 10% are very satisfied and 4% are not satisfied.
  • Top-line growth has challenged the life/annuity segment for a number of years, the report states, particularly amid the pandemic, as punctuated by declines in 2020 direct premiums written across all lines except group annuities. 
  • Digitalization and technological investments required to improve the customer experience are among the biggest challenges to modernizing distribution and growing sales, according to the survey results; however, new customer approaches are being tested for growth opportunities.

Despite the pandemic’s drain on life/annuity insurers’ budgets, “many still found ways to invest in their distribution capabilities to keep up with the changing environment,” said Michael Adams, associate director, AM Best. 

“A significant majority of respondents said that they are at least midway to reaching their goals and are moderately or very satisfied with innovation efforts related to distribution,” Adams added, suggesting that carriers are reassessing and refining their overall distribution strategies.  

© 2022 RIJ Publishing LLC. All rights reserved.

Athene launches new RILA: Amplify 2.0

Posted on February 17, 2022 by -

Athene USA has introduced a new registered index-linked annuity (RILA). It’s called Athene Amplify 2.0 and will be issued by Athene Annuity and Life Company, a subsidiary of Athene, which is part of the Apollo Global Management.

“By offering participation rate strategies in addition to the cap rate strategies offered on most RILA products, Amplify 2.0 gives investors the potential for index-linked interest earnings that may even exceed index returns,” the release said.

Currently, investors choosing the product’s six-year term and a 10% downside buffer with a 0.95% annual segment fee can earn uncapped returns equal to 140% of any growth in the S&P 500, an Athene release said. 

Amplify 2.0 includes these features:

  • Two buffer options that protect contract owners from the first 10% or 20% of index losses 
  • Three term periods to manage market volatility
  • Five indices to track and two unique crediting options to select, Milestone Lock and Performance Blend.
  • An additional product option, Athene Amplify 2.0 NF, offers the same features with competitive rates and no annual segment fee.

RILAs, also called registered index-linked variable annuities, buffered annuities or structured annuities, are frequently described as a cross between fixed indexed annuities and variable annuities.

Like fixed indexed annuities, registered index-linked annuities provide the opportunity for growth based on the performance of a stock market index. Unlike variable annuities are not stock market investments and do not directly participate in any stock or equity investments. RILAs differ from fixed indexed annuities in that investors are eligible for higher growth potential but do assume responsibility for a portion of any index decline.

© 2022 RIJ Publishing LLC. All rights reserved.