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Deferred annuity sales reach $243 billion in 2021: Wink

Posted on March 17, 2022 by -

Total fourth quarter sales for all deferred annuities were $60.9 billion, up 1.7% from the previous quarter and an increase of 8.1% when compared to the same period last year, according to Wink’s Sales & Market Report for 4th Quarter 2021.

Total 2021 sales all deferred annuity sales were $243.6 billion, up from $209.1 billion in 2020. All deferred annuities include the variable annuity, structured annuity, indexed annuity, traditional fixed annuity, and MYGA product lines. 

Total sales for fixed or variable index-linked annuities in 2021 was $103.6 billion, or about 40% of all deferred annuity sales. Fixed indexed annuity (FIA) sales accounted for $65.5 billion. Sales of structured annuity (aka RILAs, or registered index-linked annuities) accounted for $38.1 billion. Traditional variable annuity (VA) sales were $87.7 billion.

[Note: Structured annuities can be thought of as variable annuities or as indexed annuities. They are registered and SEC-regulated, like variable annuities. But, like FIAs, they are general account products, not separate account products.]

Sixty-three indexed annuity providers, 46 fixed annuity providers, 69 multi-year guaranteed annuity (MYGA) providers, 15 structured annuity providers, and 45 variable annuity providers participated in the 98th quarterly edition of the report.  

Jackson National Life was the leading seller of deferred annuities with a market share of 8.1%. Equitable Financial moved into second place, followed by Massachusetts Mutual Life Companies, Allianz Life, and AIG. Jackson National’s Perspective II Flexible Premium Variable and Fixed Deferred Annuity, a variable annuity, was the top selling contract for the twelfth consecutive quarter. 

Total fourth quarter non-variable deferred annuity sales were $28.6 billion; down more than 1.9% from the previous quarter and down more than 0.4% from the same period last year.
Total 2021 non-variable deferred annuity sales were $117.7 billion. Non-variable deferred annuities include the indexed annuity, traditional fixed annuity, and MYGA product lines. 

Massachusetts Mutual Life Companies ranked as the top seller of non-variable deferred annuity sales, with a market share of 12.3%, followed by Athene USA,  AIG, Allianz Life, and Global Atlantic Financial Group. MassMutual’s Stable Voyage 3-Year, a MYGA, was the top-selling non-variable deferred annuity, for all channels combined. 

Total fourth quarter variable deferred annuity sales were $32.2 billion, up 5.2% from the previous quarter and up 17.2% from the same period last year. Total 2021 variable deferred annuity sales were $125.9 billion. Variable deferred annuities include the structured annuity and variable annuity product lines. 

Jackson National Life ranked as the top seller of variable deferred annuity sales, with a market share of 15.2%, followed by Equitable Financial, Lincoln National Life, Allianz Life, and Brighthouse Financial. Jackson National’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity, a variable annuity, was the top selling contract. 

Indexed annuity sales for the fourth quarter were $16.9 billion; down 2.3% from the previous quarter, and up 12.3% from the same period last year. Total 2021 indexed annuity sales were $65.5 billion. Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500. 

Athene USA ranked as the top seller of indexed annuities, with a market share of 14.1%, followed by Allianz Life, AIG, Sammons Financial Companies, and Fidelity & Guaranty Life. The Allianz Benefit Control Annuity was the top-selling indexed annuity, for all channels combined for the fifth consecutive quarter. 

“Indexed annuity sales are down, but don’t count them out. With the markets steadily rising and fixed interest rates so depressed, I anticipate that sales of this line will bounce back by the second quarter of the new year,” said Sheryl Moore, CEO of Wink, Inc., and Moore Market Intelligence.

Traditional fixed annuity sales in the fourth quarter were $486.9 million. Sales were up 34.9% from the previous quarter, and up about 2.6 % from the same period last year. Total 2021 traditional fixed annuity sales were $1.7 billion. Traditional fixed annuities have a fixed rate that is guaranteed for one year only. 

Global Atlantic Financial Group ranked as the top seller of fixed annuities, with a market share of 20.6%, followed by Modern Woodmen of America, American National, EquiTrust, and Brighthouse Financial. Forethought Life’s ForeCare Fixed Annuity was the top-selling fixed annuity, for all channels combined, for the sixth consecutive quarter. 

Multi-year guaranteed annuity (MYGA) sales in the fourth quarter were $11.2 billion; down 2.5% from the previous quarter, and down 15.1% from the same period last year. Total 2021 MYGA sales were $50.4 billion. MYGAs have a fixed rate that is guaranteed for more than one year. 

MassMutual ranked as the top carrier, with a market share of 23.3%, followed by New York Life, AIG, Pacific Life Companies, and Western-Southern Life Assurance Company. MassMutual’s Stable Voyage 3-Year was the top-selling multi-year guaranteed annuity for all channels combined for the third consecutive quarter. 

Structured annuity sales in the fourth quarter were $10.1 billion; up more than 10.9% from the previous quarter, and up 20.2% from the previous year. Total 2021 structured annuity sales were $38.1 billion. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccounts. 

Allianz Life ranked as the top seller of structured annuity sales, with a market share of 20.7%, followed by Equitable Financial, Brighthouse Financial, Prudential, and Lincoln National Life. Pruco Life’s Prudential FlexGuard Indexed VA was the top-selling structured annuity for all channels combined, for the second consecutive quarter. 

“This was both a record-setting quarter and a record-setting year for structured annuity sales,” said Moore. “The 2021 sales topped the prior year’s record by nearly 59%! And soon, more companies will enter this growing market.” 

Variable annuity sales in the fourth quarter were $22.1 billion, up 2.8% from the previous quarter and up 15.9% from the same period last year. Total 2021 variable annuity sales were $87.7 billion. Variable annuities have no floor, and potential for gains/losses that are determined by the performance of the subaccounts that may be invested in an external index, stocks, bonds, commodities, or other investments. 

Jackson National Life was the top seller of variable annuities, with a market share of 21.7%, followed by Equitable Financial, Nationwide, Lincoln National Life, and Pacific Life Companies. Jackson National’s Perspective II was the top-selling variable annuity for the twelfth consecutive quarter, for all channels combined. 

© 2022 RIJ Publishing LLC.

‘Private equity’s insurance innovation needs a risk check’: Risk. net

Posted on March 17, 2022 by -

All innovations have their downsides. From the bicycle to social media, inventions that provide great benefits to their users can leave others behind. Private equity’s new brainwave for the insurance industry – reinsure everything in Bermuda, boost allocations to structured credit and discount liabilities – is no different. [This article appeared today at Risk.net.]

Private equity money is flowing into insurance, bringing with it new ideas and new risks. Last year saw a slew of deals, including the purchase of Global Atlantic by KKR, and the acquisition of Allstate’s life unit by Blackstone, which also took a 9.9% stake in AIG’s life and retirement business. A subsidiary of Ares Management acquired F&G Reinsurance at the end of 2020, renaming it Aspida Re. 

These firms are following a path blazed by Apollo, which has turned Athene, the insurance platform it established in 2009, into a profit engine for its credit business. Apollo’s big idea was to allocate a larger share of fixed income investments to higher-yielding asset-backed securities (ABS), and away from corporate bonds, which account for the bulk of traditional insurers’ assets. Athene had 20% of its portfolio in ABS as of June 2021, with more than half of this in collateralised loan obligations (CLOs). The average insurer allocates 7% to ABS, with 2.6% in CLOs. 

Athene’s assets are reinsured in Bermuda, where corporate bonds and CLOs with the same credit rating receive similar capital treatment. In the US, they receive the same capital treatment. But Bermuda also allows excess spread to be booked as up-front profit. This reduces an insurer’s liabilities and required reserves and boosts available capital. 

The capital benefits can be substantial. In recent years, CLOs have generated 175 basis points of additional spread compared with similarly rated corporate bonds. Athene holds $17 billion of CLOs, which could translate to nearly $1.5 billion of excess yield over five years. One veteran insurance risk manager describes this as “manufacturing capital.” 

That’s not all. Athene sources a large share of its private credit investments from Apollo and its affiliates, generating additional fees for its owner. CLOs are stuffed with levered loans originated by private equity sponsors, such as Apollo. Apollo’s strategy is, in many ways, brilliant. Rock-bottom rates hurt insurers and made them vulnerable to takeovers. Apollo gave the sector new life. But its emphasis on alternative assets and offshoring risk has also split the industry. 

There are two ways of viewing the new entrants, according to the chief risk officer at a large US insurer: the private equity firms are doing something that is in some way unsustainable, or they are providing a useful jolt of competition into a sector that had run out of new ideas. “We should get on with it,” he says. 

Others are more wary of piling into CLOs. Regulators have been sounding the alarm about leveraged loans for years. The National Association of Insurance Commissioners, which sets capital standards for US insurers, is now taking a closer look. Last month, it released a list of 13 “regulatory considerations” related to private equity-owned insurers. 

These include “material increases in privately structured securities” and “potential conflicts of interest and excessive and/or hidden fees” in investment products – “for example, a CLO which is managed or structured by a related party.” The regulator is also reviewing “insurers’ use of offshore reinsurers (including captives) and complex affiliated sidecar vehicles to maximize capital efficiency, reduce reserves, increase investment risk, and introduce complexities into the group structure.”

Private equity-owned insurers now manage more than $500 billion of US life and retirement assets. There is little doubt they have brought innovation to a sector that was struggling to meet return goals in an era of low interest rates. But not every innovation is appropriate for financial institutions with long-term liabilities. Insurance regulators need to properly assess the private equity model, preferably before the next credit crisis hits.

Copyright Infopro Digital Limited. Used by permission.

Consumer Groups Urge DOL to Tighten “Reg BI”

Posted on March 17, 2022 by -

A coalition of three dozen consumer advocacy groups is urging the Department of Labor to “update and eliminate loopholes in the current definition of ‘fiduciary investment advice’ …and protect retirement savers who are predominantly covered by individual account plans.” 

In a press release and letter, the groups asked Acting Assistant Secretary of Labor Ali Khawar—a place holder for Lisa M. Gomez, whose nomination to lead the DOL’s Employee Benefit Security Administration has met opposition in the Senate—to, in effect, reject the more investment industry-friendly “Reg BI” that was developed by the Securities and Exchange Commission during the Trump Administration for use by both insurance and investment product distributors.  

The rule has special implications for insurance agents. It will determine whether they are eligible for a “prohibited transaction exemption” (PTE) from a law that would otherwise prevent them from advising prospective clients to “roll over” savings from a 401(k) account to an IRA—to an annuity in an IRA, for instance—when getting paid a commission by a life insurer to sell the annuity. It also involves the life/annuity companies that issue the annuities, and their potential responsibility for representations made by those who sell their products.

Does that commission payment represent a fatal conflict of interest for the agent—a conflict between the client’s welfare and the agent’s financial welfare? Reasonable people have been disagreeing for years.

The advocacy groups’ letter comes as the Biden DOL is still working on a proposal to change the rule back to the Obama administration’s version (PTE 84-24)—more consumer-protective—or leave it in the Trump administration’s version (PTE 2020-02), which was open to interpretation.

Like most pension-related regulations, the regulations under debate here are complex, opaque to outsiders, but fraught with commercial implications for the sale of financial products that involve the exchange of tax-deferred, DOL-regulated savings accounts, like 401(k)s and IRAs. 

The following description of the current state of affairs, written by the ERISA law firm of Faegre Drinker for a recent webinar, is plainer than most:

The Department of Labor’s (DOL) expanded interpretation of fiduciary status for recommending Plan-to-IRA rollovers and IRA-to-IRA transfers means that many more insurance agents will be fiduciaries for making those recommendations — and, as such, will need the protections of a prohibited transaction exemption (PTE) due to their compensation, both cash and non-cash. PTE 2020-02 provides the most flexibility, but requires that insurance companies be “co-fiduciaries.” PTE 84-24 is more limited, but imposes less of a burden on insurance companies. 

Countless billions of dollars are at stake, because 401(k) participants collectively hold trillions of dollars of assets in their accounts. The rules under question here have been in play—in the DOL bureaucracy and in the federal courts—for at least six years. Issuers of fixed indexed annuities (FIAs) and variable annuities (VAs) are among the most interested parties. Insurance agents compete with financial advisers for rollovers, and don’t want to face special restrictions merely because they take commissions from annuity issuers. In the race for rollover dollars, the advisers and their brokerages have been winning. (Organizations signing the letter are listed below.)

A long and winding paper trail

In 2016, the Obama DOL, after years of study, passed a “best interest” rule that narrowed the ability of insurance agents to recommend rollover annuities to participants and get paid commissions by annuity companies for doing so. 

In the competition for rollover dollars, this would have put agents at a disadvantage relative to financial advisers, such as Registered Investment Advisors, who do not take commissions from product manufacturers. 

The debate over this hung on a long-standing “five-part test” that determines whether a financial intermediary can conduct him- or herself like a mere broker toward the client (and clearly a sales representative with only a passing relationship to the client) or must meet the high ethical standards of trusted “fiduciaries” who must acts “solely” in the “best interest” of their clients.  

After the Trump administration froze the Obama rule, a bevy of financial services industry lobbying groups filed a lawsuit to have the rule vacated and a Texas federal appeals court judge ruled in their favor. (The lead plaintiffs’ attorney, Eugene Scalia, was appointed Secretary of Labor in 2019.) Subsequently, the Securities and Exchange Commission, established a vague compromise rule, called “Reg BI.” It established that advisers or agents are equally free to pitch rollovers to participants as long as they don’t put their own pocket-book interests ahead of the participant’s financial well-being.

Investment and insurance companies can live with this compromise; it gives them flexibility in marketing rollovers to participants. Consumer advocates believe that it allows agents to make sales recommendations in the guise of unbiased investment advice. 

As their new letter to Acting Assistant DOL Secretary Khawar noted, the current rule:

frames the retirement advice provider’s basic obligation in comparatively weak terms. It provides that advice is in the retirement investor’s “best interest” as long as it does not place the retirement advice provider’s financial or other interests “ahead” of the retirement investor’s interests, or “subordinate” the retirement investor’s interests to those of the advice provider. 

This formulation of ‘best interest,’ which establishes a kind of parity between the interests of the two parties, because neither interest is placed ahead of the other, is contrary to the statutory mandate that fiduciaries must discharge their duties “solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries.”

There are lots of side issues that add nuance to this controversy. The Obama-era Employee Benefit Security Administration, led by Phyllis Borzi, preferred, all things being equal, that more retirees would leave their money in 401(k)s, where they enjoy the low fees and consumer protections encoded in the federal Employee Retirement Income Security Act of 1974 (ERISA), which governs retirement plans and pensions. 

But they were fighting the tide of history. Defined contribution 401(k) plans were never designed to hold employee savings after the employees retire; they were created as profit-sharing plans, not as pensions. So participants often have no incentive to keep their money there—especially if their particular plan offers few investment options and/or has high costs. Only recently have employers expressed a desire to keep retiree money in their plans, mainly to preserve the economies of scale that keep costs down.

In addition, consumer groups have an abiding suspicion of deferred annuities and the commissioned agents who sell them. Twice in the past 20 years, they’ve urged the federal government to regulate annuities more closely. Both times, they failed. In 2007, the SEC tried to reclassify FIAs as securities, and therefore subject to federal regulation (instead of as state-regulated insurance products).

In 2016, the Obama DOL’s rule which would have required agents selling FIAs and VAs to pledge that they were acting  solely in their prospective clients’ best interests when recommending those products to retired plan participants. It made agents subject to class-action federal lawsuits if they violated the pledge. 

As noted above, the annuity industry sued to overturn this rule, and a Fifth District Circuit Court of Appeals judge vacated it, ruling against the DOL. The Trump DOL—then led by Secretary Scalia—chose not to contest the ruling. 

© 2022 RIJ Publishing LLC. All rights reserved.

New MassMutual VA features RetirePay, an income rider

Posted on March 16, 2022 by -

MassMutual has launched a new variable annuity (VA) contract with an optional guaranteed lifetime withdrawal benefit. The contract is called Envision. The income benefit, exclusive to the Envision contract, is called RetirePay.   

“RetirePay offers guaranteed income in the form of the Annual Lifetime Benefit Amount that will never lose value due to negative market performance and that offers opportunities for higher income through step-ups and higher withdrawal rates by age and years of deferral, according to a MassMutual release. 

MassMutual had $11.7 billion in variable annuity assets under management as of September 30, 2021, according to Morningstar. It was ranked 20th in VA AUM, with a market share of less than six-tenths of one percent. By comparison, TIAA had group VA assets of $547 billion and Jackson National had individual VA assets of about $246.9 billion at the end of the third quarter of 2021. Industry-wide, the market value of VA assets under management exceeds $2 trillion.

Envision is aimed at individuals “nearing or in retirement including when they are approaching key retirement and milestone ages of 62, 67 and 72,” the release said. Under the RetirePay option, 62-year-olds who bought this product and delayed income until age 72 would be able to withdraw 7.35% (6.45% for married couples) of their benefit base (premium plus growth) per year. There are two versions of the option.

The premium version, for an annual fee of 1.60% of the benefit base, would step up the benefit base every quarter to capture new high-water marks (if any) in the values of the separate accounts that the client has invested in. For 1.45% of the benefit base per year, there’s a step-up on each account anniversary. The insurer can adjust the rider fee up to 2.50% per year. The cost of the step-up benefit is the same for one or two persons.

There are investment restrictions for the RetirePay GLWB. The contract’s mortality and expense risk charge (typically used to cover distribution costs) is 1.15%. There’s an administration charge of 0.15%. The surrender fee is 7% for the first three years, gradually dropping to zero in the eighth year. Fund expenses range from 52 basis points to 165 basis points per year. If the account value ever drops to zero while the annuitant(s) are living, the issuer may adjust the withdrawal rates. According to the current rate sheet, withdrawal rates do not change when the account value drops to zero.

© 2022 RIJ Publishing LLC. All rights reserved.

Life/annuity industry moving toward equilibrium: AM Best

Posted on March 11, 2022 by -

US life insurance and annuity writers achieved record levels of capitalization, maintained strong liquidity and posted improved earnings in 2021 despite historically low interest rates, inflationary headwinds and continued pandemic uncertainty, according to a new AM Best report.

The annual Review & Preview Best’s Market Segment Report, “U.S. Life/Annuity: Record Capitalization, Strong Liquidity, and Improved Earnings in 2021,” notes that although initial fears about the effects of the pandemic on the life/annuity industry have subsided, COVID-19 cases and death claims continued in 2021, further impacting the mortality book of business that is core to life insurers. At the same time, according to the report, many companies benefited from their prior investments in enterprise risk management, took advantage of the opportunity to shed legacy businesses and saw realized and unrealized gains from strong financial markets.

The industry’s capital and surplus showed solid growth through third-quarter 2021, up $26.2 billion to $480.9 billion, and is likely to continue to grow for full-year 2021. The life/annuity segment recorded net income of $27.0 billion in the nine-month period, up 105% from the same prior-year period, with overall sales of life insurance and annuities seeing strong growth.

“The pandemic drove home the importance of life insurance and consumers adjusted to life during a pandemic,” said Michael Porcelli, senior director, AM Best. “Companies also became acclimated to the remote work and sales environment, which was needed to compete during COVID-19.”

Other highlights in the report include:

Schedule BA assets continued to grow, to 8.4% of total invested assets at third-quarter 2021, compared with 6.2% in 2016, although some insurers have securitized Schedule BA assets and sold them to institutional investors as a way to diminish exposure and capital risk charges.

Although the commercial mortgage loan market has seen increases in delinquencies, exacerbated by the pandemic, life/annuity insurers’ allocations still grew, albeit with a modest shift to industrial properties and multifamily housing from office and retail.

Overall headwinds from the low interest rate environment, as evidenced by an investment yield that has declined each year of the past decade and was 4.1% in 2020, are likely to continue to create drag on margins until longer-term interest rates and credit spreads return to more-historical levels.

New capital continues to enter the life/annuity market, driven by private equity firms with an ability to source and manage fixed-income assets and greater interest in the pension risk transfer market. Additionally, with insurers willing to shed certain blocks of business, merger and acquisition activity ramped up in 2021.

AM Best expects the life/annuity industry to reach an equilibrium between companies seeking opportunities to build a less capital-intensive business, minimize the pressure of persistent low interest rates on profitability and diversify earnings; and companies with fixed-income asset management sourcing, evaluation capabilities and a capital-intensive business appetite.

“As 2021 has shown, life/annuity insurers will seek to unload interest-sensitive lines of business, including variable and fixed annuities, as well as capital-intensive lines of business, such as long-term care and universal life with secondary guarantees,” said Porcelli. “Also, given consumers’ growing awareness of the need for financial security, companies looking for scale and efficiency may make investments in and partnerships with insurtechs a higher priority.”

© 2022 AM Best. 

AIG, Innovator, and Reliance Standard announce new products

Posted on March 11, 2022 by -

New AIG/Annexus indexed annuity offers gaudy bonuses for those who stay the course

AIG Life & Retirement and Annexus, a designer and marketer of indexed annuities, have partnered to issue and distribute a new fixed indexed annuity (FIA), the “X5 Accelerator Annuity.” The contracts will be issued by American General Life Insurance Company and marketed through the Annexus network of independent distributors.

The product features a bonus that immediately increases the benefit base (the notional amount on which retirement income payments would be based) to 135% of the initial premium. There’s also a “multiplier” that can “increase lifetime income by 250% of net interest earned every year during the accumulation phase,” an AIG release said.

The lifetime income rider is available for a fee of 1% of the benefit base. That fee includes the potential for an enhanced death benefit and a disability benefit that doubles the annual payout, contingent on the policyholder becoming confined to a nursing home or other qualified facility. The minimum initial premium is $25,000. The contract runs for 10 years; the surrender fee starts at 10% in the first year. 

In the brochure’s hypothetical illustration, a client invests $100,000 at age 60. By age 70, the hypothetical premium has grown to $171,000 (at an assumed annual compound rate of about 5.5%) and the income base has grown to about $480,000. At age 70, the payout percentage would be 4.85% a year for one life and 4.35% a year for a joint and survivor contract. The starting annual income for one person would be $23,280. Money would stay invested after income begins, and the income level can rise after income begins. On the $480,000 income base in the illustration, the rider fee at age 70 would be $4,800. 

The product’s market performance depends mainly on how the premium is allocated among the available indices, and how the indices perform. The index choices include the Morgan Stanley Expanded Horizons Index, the PIMCO Global Elite Markets Index, and the S&P 500 Daily Risk Control 7% US Excess Return Index. All three are “Excess Return indexes,” which means their returns are net of short-term interest rates.

Innovator ‘Step-Up’ ETFs may adapt to rising markets

Innovator Capital Management, LLC (Innovator) the creator of Defined Outcome ETFs, this week launched the Innovator Buffer Step-Up Strategy ETF (BSTP) and the Innovator Power Buffer Step-Up Strategy ETF (PSTP) on NYSE Arca. 

The new “Step-Up” Strategy ETFs will seek tax-efficient upside in “directionally positive markets while continuously refreshing buffers against loss in the SPDR S&P 500 ETF Trust (SPY) during down markets,” Innovator said in a release. 

Using a rules-based methodology, a Step-Up Strategy ETF will reset its options portfolio; it will sell the existing contracts and enter into new 12-month contracts if the Fund’s NAV rises or falls within a pre-determined range.

The planned ETFs are intended for advisors who would like professional management of the process of evaluating return parameters and investing in buffered equity strategies.

“As we completed monthly issuance on our flagship US Equity Buffer ETF lineup in May 2020, ‘stepping-up’—selling one Buffer ETF for another monthly series—became a popular strategy amongst some advisors who used the Defined Outcome ETFs in non-taxable retirement accounts,” said Bruce Bond, CEO of Innovators ETFs, in a release.

“These new funds in our Managed Outcome ETF lineup will seek to provide advisors with tax-efficient strategies that manage the process of ‘trading up’ from the set of return parameters of one monthly series of US Equity Buffer ETF to the current month’s opportunity set, depending on market movements and conditions,” he said.

The Step-Up Strategy ETFs will consist of three layers of customized 12-month FLEX Options contracts that seek upside participation to SPY, to a cap, with downside buffers against SPY losses of 9% (in the BSTP) or 15% (in the Power version). It is similar to Innovator’s flagship US Equity Buffer and US Equity Power Buffer ETFs.

The Step-Up Strategy ETFs are designed to continuously seek market gains in positive markets, or provide potential outperformance relative to SPY in down markets, while refreshing buffers against the market’s downside and resetting the Funds’ upside caps to capture more of the market’s potential upside. The ETF’s step-up investment strategies may offset the timing risks inherent in owning an options package for one year.

Investors can purchase shares of a previously listed Defined Outcome ETF throughout the entire Outcome Period, obtaining a current set of defined outcome parameters, which are disclosed daily through a web tool.

Reliance Standard launches Accumulator, a new FIA

Reliance Standard Life Insurance Company has introduced the Reliance Accumulator, a fixed indexed annuity product. It joins Reliance Standard’s legacy Keystone Index annuity, which will continue to remain available, a Reliance release said.

The Reliance Accumulator offers five-, seven- and ten-year durations, a fixed interest strategy and five index interest strategies based on two specific indices from Standard and Poor’s. Similar to the Keystone, the product will offer three index interest strategies tied to the S&P 500:

  • Annual Point to Point Capped
  • Annual Point to Point Participation Rate 
  • Annual Monthly Average Capped

The  Accumulator will also offer two index strategies tied to the S&P MARC (Multi-Asset Risk Control) 5% Excess Return index: an Annual Point to Point Participation Rate and an Annual Point to Point Spread Strategy.

“The increase in S&P 500 index volatility over the last few years has been challenging for many of our clients and partners,” said David Whitehead, senior vice president of sales and marketing for Reliance Standard’s Retirement Services business, in the release. “So we added a volatility control index to our menu of index interest strategies.”

The S&P MARC 5% ER Index uses a volatility control strategy to ensure more predictable hedge costs and offers diversification through exposure to equities, gold, and 10-year Treasury bonds.  

In addition to offering a participation rate index interest strategy, Reliance Standard will offer a higher participation rate strategy with a spread that will then be deducted to calculate the index interest amount. Because the index manages volatility to 5% daily, Reliance Standard said it will rate-lock the MARC 5% participation rate and spread strategies for exchanges and transfers.

© 2022 RIJ Publishing LLC. All rights reserved.

For Jackson National Life, 2021 was a pivotal year

Posted on March 11, 2022 by -

Jackson National Life reported net income of $585 million, or $6.19 per diluted share for the three months ended December 31, 2021, compared to net income of $76 million, or $0.80 per diluted share for the three months ended December 31, 2020, according to the company’s earnings release. 

Adjusted operating earnings for the three months ended December 31, 2021 were $707 million, or $7.48 per diluted share, compared to $645 million or $6.83 per diluted share for the three months ended December 31, 2020. 

The increase in adjusted operating earnings was primarily the result of increased fee income due to higher average separate account balances and lower death and other policyholder benefits, partially offset by higher operating expenses and a higher effective tax rate in the current quarter.

The Company reported net income for the full year 2021 of $3,183 million, or $33.69 per diluted share, compared to a net loss of $(1,634) million, or $(24.14) per diluted share for the full year of 2020. 

The change was primarily due to improved net hedging results from higher interest rates in 2021 compared to 2020, as well as the $2,082 million loss on the Athene reinsurance transaction in 2020.

Full year 2021 adjusted operating earnings were $2,398 million, or $25.38 per diluted share, compared to $1,880 million or $27.79 per diluted share for the full year of 2020. The change was primarily due to increased fee income from a higher average separate account balance, partially offset by higher operating expenses and a higher effective tax rate in 2021 compared to 2020.

Retail annuities

Retail Annuities segment reported pretax adjusted operating earnings of $750 million in the fourth quarter of 2021 compared to $601 million in the fourth quarter of 2020. The current quarter benefited from improved fee income resulting from higher average variable annuity account values, as well as the benefit of the recovery of claims on previously reinsured policies. The current quarter also benefited from DAC deceleration resulting from a 5.9% separate account return in the quarter, though this benefit was smaller than the deceleration benefit realized in the fourth quarter of 2020, when the separate account return was approximately 13.1%. In periods where separate account returns are higher than our long-term assumption, amortization is shifted to future years driving deceleration of DAC amortization in the current period.

Full year 2021 pretax adjusted operating earnings for the segment were $2,528 million, compared to $2,006 million in full year 2020. The full year results were driven by the higher fee income and recapture adjustments noted above, partially offset by higher operating expenses.

Total annuity sales of $5.0 billion were up 1% from the fourth quarter of 2020. Variable annuity sales were flat compared to the fourth quarter of 2020, with higher sales of variable annuities without lifetime benefit guarantees offset by lower sales of variable annuities with lifetime benefit guarantees. The current quarter also reflects $108 million of sales of RILA products, which were launched in October 2021. In total, annuity sales without lifetime benefit guarantees represented 37% of total annuity sales, up from 27% in the fourth quarter of 2020. We continue to expand our fee-based sales, with current quarter advisory annuity sales up 19% from the fourth quarter of 2020 to $358 million.

For the full year 2021, annuity sales of $19.3 billion were up 8% from the full year 2020, reflecting higher sales of variable annuities, partially offset by lower sales of fixed and fixed indexed annuities.

Closed life and annuity blocks

Closed Life and Annuity Blocks reported pretax adjusted operating earnings of $21 million in the fourth quarter of 2021 compared to $(35) million in the fourth quarter of 2020. The current quarter benefited from lower death and other policyholder benefits resulting from the continued decrease in the size of the closed blocks.

For the full year 2021, pretax adjusted operating earnings of $224 million were up from the full year 2020 earnings of $0, with the difference primarily due to higher death and other policyholder benefits and lower net investment income in the prior year. Net outflows totaled $57 million in the fourth quarter of 2021 and $267 million in the full year 2021.

Total shareholders’ equity was $10.4 billion or $114.78 per diluted share as of December 31, 2021, up from $9.4 billion or $99.81 per diluted share as of year-end 2020. Adjusted book value2 was $8.9 billion or $98.69 per diluted share as of December 31, 2021, up from $6.8 billion or $72.21 per diluted share as of year-end 2020. 

© 2022 RIJ Publishing LLC. All rights reserved.

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.