Archives: Articles

IssueM Articles

Monthly Medicare Part B Premium by Income (IRMAA)

Posted on February 10, 2022 by No Author -

More Sources of ‘Bermuda Triangle’ Information

Posted on February 3, 2022 by Editorial Staff -

Anyone following what RIJ calls the “Bermuda Triangle” strategy might be interested in three recent reports. One comes from the consulting firm Cerulli Associates, another from McKinsey & Co., and a third appeared in the National Law Review last December. I provide links to the full texts and excerpts from them below.

This migration to private equity and private credit is troubling. Too many investors seem to be rushing to the same side of the boat at once. Private equity firms claim that, with securitization and patience, they can achieve higher returns without going up in risk. I’m not so confident. I think the boat might tip.

Why private equity sees life and annuities as an enticing form of permanent capital

McKinsey & Co., February 2, 2022.

Permanent capital—investment funds that do not have to be returned to investors on a timetable, or at all—is, according to some, the “holy grail” of private investing. Permanent capital owes its exalted status to the time and effort that managers can save on fundraising, and the flexibility it provides to invest at times, like a crisis, when other forms of capital can become scarce.

Permanent capital can take many forms, including long-dated and open-ended fund vehicles. The balance sheet of a life and annuities company is one form of permanent capital that has drawn much attention.

In 2021, private investors announced deals to acquire or reinsure more than $200 billion of liabilities in the United States. Such investors now own over $900 billion of life and annuity assets in Western Europe and North America.

Assuming the pending deals close successfully, private investors will own 12% of life and annuity assets in the United States, totaling $620 billion, and represent more than a third of US net written premiums of indexed annuities.

All five of the largest private equity (PE) firms by assets have holdings in life insurance, representing 15 to 50% of their total assets under management. By our count, 15 alternative asset managers have entered the market, or stated their intent to do so.

Insurance carriers are also benefiting from all the attention: many of the largest insurers have sold legacy books to private buyers, typically to improve their return on equity and to free up capital for reinvestment or return to shareholders. For some public carriers, these transactions have generated near-instantaneous expansion of their price–earnings multiple.

Shrinking Market Opportunity Spurs Interest in Private Investments for Enhanced Returns

Cerulli Associates, February 3, 2022

Institutional investors with existing allocations to private markets are looking to expand from traditional private equity into growth and venture capital. “The current investing environment is characterized by complexity and shrinking opportunity,” states James Tamposi, associate director, Cerulli Associates. “With rates at all-time lows and valuations at all-time highs, institutional investors are faced with a complex decision of where to deploy their portfolios. Private investments offer an avenue through which investors can, to an extent, maintain return targets,” he comments.

In parallel, asset managers anticipate that mandates will change. According to Cerulli research, 80% of asset managers expect increased demand for private equity mandates and 75% expect demand for other private investment mandates. Current income (92%), diversification (85%), growth/enhanced returns (77%), and volatility dampening (54%) are the top objectives managers of private investment strategies seek to fulfill for investors.

Superior performance of private investments is credited toward illiquidity premiums. Research participants explained that illiquidity falls short as a descriptor for private investments’ source of outperformance, with one saying that premiums derived from private investments would be better described as “complexity” and “access” premiums. Participants further expanded on differentiating characteristics of private investment strategies, saying that they offer investors the chance to add value at an early stage, provide potential tax benefits, and shield against volatility. “Many portfolios benefit from the smoothing effects of private investments. Because these investments are not marked to market but are instead marked at book value, having them in a portfolio helps limit volatility,” says Tamposi. However, liquidity has drawbacks for different types of investors. Several participants agreed with this notion, while others said that private investments’ stability made the asset class “artificially attractive,” noting that private equity is subject to many of the same market risks as public equity.

Despite the relatively strong growth in recent years, research participants believe private investments are not exempt from the lower-return outlook of other asset classes. Increased industry competition (93%), increased volatility of valuations (92%), and a lack of exit environment (75%) were cited as significant risks by firms participating in a 2021 Cerulli survey. Several research participants asserted that as investors continue to seek returns and increase allocations to private investments, the space has become more crowded and managers in the space will be forced to accept lower-yielding investments. In other words, because there is so much committed capital and firms must continuously look for ways to put this capital to work, firms may have to make deals with lower payouts.

Turning Up the Magnification: Regulators Have Pe-Controlled Insurers Under the Microscope (Again)

National Law Review, December 9, 2021

For much of the past 10 years, the National Association of Insurance Commissioners (NAIC) and individual state insurance regulators have highlighted their awareness of the increasing number of insurers controlled by private equity (PE) funds. The NAIC’s Capital Markets Bureau publishes an annual report about those insurers it considers to be controlled by PE funds, and the year-end 2020 report can be found here.

Earlier this week, during a meeting of the Financial Stability (E) Task Force (the Task Force), it became apparent that the NAIC and state regulators are about to take a deeper look, assigning the task of coordinating said project to the Task Force’s subsidiary committee, the Macroprudential (E) Working Group. The Task Force is not the only NAIC committee that is looking at PE funds’ ownership or the control of insurers as the list of “regulatory considerations” below indicates. While PE funds control both property-casualty and life-annuity insurers, based on discussions during recent Task Force meetings, as well as several of the regulatory considerations below, it appears that regulators are most concerned with life and annuity insurers. Regardless, any and all types of re/insurers owned or controlled by PE funds should be paying attention.

At the same meeting, Superintendent of the Maine Bureau of Insurance Eric Cioppa (the Financial Stability Oversight Council’s (FSOC) insurance regulator representative) indicated in his report to the NAIC committee that the FSOC is aware that both state and federal regulators are monitoring PE fund investments in, and control of, life insurers.

The Federal Insurance Office’s (FIO) Annual Report on the Insurance Industry (September 2021) confirms that the FIO has been monitoring—and will continue to monitor—the impact that PE fund control has on investment policies and practices of certain life and annuity insurers, as well as considering various management agreements with advisors of all kinds (including advisors that are fellow portfolio companies) and fee structures involved in these relationships.

A New Alt-Asset Manager Enters the ‘Bermuda Triangle’

Posted on February 3, 2022 by Kerry Pechter -

Meet the newest high-roller in the “Bermuda Triangle” world.

Since last July, Sixth Street, a fast-growing asset manager, acquired The Hartford’s old life/annuity business, established reinsurers in Bermuda and the Cayman Islands, and executed big capital relief deals with three large life/annuity companies.

In September, Lincoln Financial Group closed an ongoing “flow reinsurance” deal with Sixth Street’s insurers. On December 30, 2021, Allianz Life reinsured $20 billion worth of fixed indexed annuity contracts with the firm. This week, Principal Financial Group closed a $25 billion reinsurance deal with Sixth Street entities.

AM Best reported this week that Sixth Street and its insurance affiliates now manage $111 billion in insurance liabilities and surplus.

The flurry of 10- and 11-digit deals vaults Sixth Street, founded in 2009 and led by Michael Muscolino and Alan Waxman, two former Goldman Sachs executives, into the elite group of large asset managers, including Apollo/Athene, Ares, Blackstone, Brookfield, Carlyle, Eldridge, and KKR who now play an unprecedented role in supplying life insurers with capital and wringing higher returns out of their assets.

Michael Muscolino

These firms have mastered what RIJ calls the “Bermuda Triangle” strategy. The strategy generally involves three financial entities: a US life insurer that holds or manufactures annuity contracts, a Bermuda or Cayman firm that reinsures the annuity liabilities, and an alternative-asset manager.

In contrast to other Bermuda Triangle firms, Sixth Street is known as an “aggregator” of annuity contracts that life insurers would like to divest or reinsure. It differs from Athene and KKR, which have purchased life insurers and issue and reinsure their own annuities. It also differs from Blackstone, which manages money for insurers as a strategic partner. These businesses often position themselves as “Insurance Solutions” providers.

The three-way strategy

And the annuity industry certainly needs solutions.

As a whole, the life/annuity industry holds hundreds of billions of dollars worth of annuity and life insurance contracts, funded by policyholder savings and locked into various financial guarantees to those policyholders. Those contracts are high maintenance for the insurers; regulations require them to hold large amounts of semi-idle surplus capital against potential losses. Surplus capital requirements tend to rise when insurers earn less on the investments that finance their guarantees.

The life/annuity companies have turned to the Insurance Solutions teams at Bermuda Triangle practitioners for help. The firm’s Bermuda or Cayman reinsurer can use favorable local accounting rules to shrink the estimated cost of the annuity liabilities. This lowers the insurer’s surplus capital requirement—instantly “unlocking,” in some cases, tens or hundreds of millions of dollars for the insurer to use in new ways. Many publicly traded insurers use these windfalls to buy back shares of their stock. Others use it to invest in new lines of business.

RIJ asked one life/annuity executive, whose company has been through a Bermuda Triangle deal, to rate, on a scale of one to 10, the importance of the reinsurance/capital-relief component as a driver of these deals for life/annuity companies. “10,” he wrote back from his iPhone.

That insight applies to the recent Sixth Street deals. “For Allianz, Principal, and Lincoln, the capital release from the reinsurance is a key aspect. However, equally important is the impact on reserves by shifting the investment risk to reinsurer. For annuity insurers, reserve swings have significantly affected operating results,” said Scott Hawkins, an analyst at Conning.

Meanwhile, the life insurer hires the asset management or insurance-linked securities teams of the Bermuda Triangle companies to find higher-yielding investments. These asset managers–at Sixth Street or Blackstone or KKR–tout their ability to raise the investment returns of life insurers by selling them tranches of collateralized loan obligations or real estate-backed securities. These securities are often tailored to meet the life insurer’s risk/return requirements.

There are many variations to the Bermuda Triangle strategy. Sometimes a single holding company owns the life insurer, reinsurer, and the asset manager, as Athene does. As a source of incoming cash, the asset managers prefer fixed indexed annuity (FIA) assets. The lengthy terms of FIA contracts—up to 10 years—allow the asset managers to invest money in higher-yielding, longer-term investments.

Besides being “sticky” and predictable, existing FIAs are also relatively resistant to a rising interest rate environment; they rely on the appreciation of equity options for yield. That’s one reason why they began to replace fixed-rate annuity contracts two decades ago; Investors tended to break their existing fixed-rate annuity contracts when new annuities offered higher rates.

The Bermuda Triangle strategy has put hundreds of billions of dollars in motion. Principal said this week that its reinsurance deal with Sixth Street, which covers $16 billion worth of fixed annuity assets and $9 billion worth of ULSG ( universal life secondary guarantee) contracts, will release about $800 million in capital. “The company plans to return the proceeds to shareholders through share repurchases,” a Principal release said.

Sixth Street’s genealogy

Sixth Street jumped into the Bermuda Triangle strategy in 2021 by buying Talcott Reinsurance Life (the former Hartford Life Insurance Company) from Hopmeadow Holdings for $2.25 billion. It also set up the reinsurer Sutton Life Re in Hamilton, Bermuda (rated A- or Excellent by AM Best) and a similar reinsurer in Georgetown, Cayman Islands. It then executed the Lincoln, Allianz Life and Principal deals in quick succession.

After being acquired by Sixth Street, Talcott’s first reinsurance deal was with Lincoln National, last September. It was the “first flow variable annuity reinsurance transaction in recent years for a product actively sold in the market,” a Talcott release said. In flow reinsurance, annuity contracts are reinsured directly after they are written.

Talcott agreed to co-insure business written on Lincoln’s flagship variable annuity (VA) living benefit rider, which can give policyholders income for life. Exercising those riders may be optional for the policyholder, which means that the issuers have difficulty predicting how they will be used. The nagging presence of that risk drives up capital requirements.

The Lincoln-Talcott reinsurance treaty covers business written from April 1, 2021, through June 30, 2022, to a maximum of $1.5 billion. Lincoln will continue to service and administer the policies it reinsured.

Alan Waxman

On Dec. 3, 2021, according to a news report, Allianz Life Insurance Company of North America announced reinsurance agreements with Sixth Street’s Talcott unit and with a separate firm, Resolution Re, part of Resolution Life Group Holdings LP.

Under the transaction, Resolution Re agreed to reinsure $26 billion of Allianz Life’s FIA liabilities; it then “retroceded” $12 billion of the liabilities to Talcott’s Sutton Life Re affiliate in Bermuda. Separately, Sutton agreed to reinsure $8 billion of Allianz Life FIA liabilities. Like Lincoln, Allianz Life said it will continue to service the contracts it reinsured.

The dealmakers

Before going independent in 2009, Sixth Street was the former credit arm of TPG, a $109 billion private equity firm, according to the Wall Street Journal. The TPG Sixth Street Partners (TSSP) Adjacent Opportunities funds became Sixth Street’s “TAO” Investment funds. In 2020, Sixth Street caught the attention of Wall Street when it raised $24.7 billion through the TAO funds—an impressive sum, even by buyout-firm standards. In 2021, Sixth Street bought 20% of the San Antonio Spurs basketball team and a controlling interest in Legends Hospitality, a sports and live entertainment company co-founded by affiliates of the New York Yankees and Dallas Cowboys.

Muscolino told Institutional Investor magazine last December that Sixth Street began to explore the insurance business about five years ago. “We got to know the business, working within the regulatory framework, and understanding how to look out for policyholders,” he told the reporter.

In regulatory filings, Muscolino estimated his own net worth at $60 million and Waxman’s at $20 million. With a 1999 MBA from the University of Chicago Booth School, he spent time at Accenture, Goldman Sachs, and FG Companies. Waxman, a Penn graduate, was a group chief executive at Goldman Sachs and a vice-president at TPG before cofounding Sixth Street.

In one of its regulatory filings, Sixth Street indicated that it has the luxury of being able to invest in long-term deals without fear that its investors will panic and run. Annuity contract owners, for instance, can’t pull their money out of their contracts before the end of their terms without facing surrender charges.

As for its other stakeholders, Sixth Street told Connecticut insurance regulators last year, “The evergreen structure of the TAO Funds means they have no fixed term, and no liquidity requirement for individual investors or investments—investors cannot redeem their investments in the TAO Funds or otherwise cause the sale of underlying investments of the TAO Funds to generate liquidity.”

Percentage of Households with Retirement Accounts (by income)

Posted on February 3, 2022 by No Author -

Energize a SPIA with Equities: Cannex

Posted on February 1, 2022 by Kerry Pechter -

If common sense were more common, most people would easily recognize that if they bought a lifelong income annuity with a chunk of their savings, they’d be less likely ever to run out of money.

But some people are from Missouri, or other skeptical regions where you have to “Show Me.” So scholars like Moshe Milevsky of York University and Wade Pfau of The American College have demonstrated, with mathematical precision that people who add income-generating annuities to their retirement portfolios will reduce their “longevity risk”—their chance of running short of their target income before they die.

Now, in a recent white paper, Tamiko Toland of Cannex, the source of current annuity rates and other retirement resources, has reiterated the logic of income annuities. She uses the Cannex PrARI (Product Allocation for Retirement Income) modeling tool to show how an annuity can improve the Retirement Sustainability Quotient (RSQ, or probability of maintaining the target income for life) of a typical equities-and-fixed income retirement portfolio.

Tamiko Toland

Cannex hypothesized the RSQ and residual wealth of a 65-year-old man with $1 million in savings and a target annual income of $50,000 (in addition to Social Security benefits). With zero to $300,000, he buys a single premium immediate annuity (SPIA) with a 2% annual inflation rider that pays out an initial $4,950 per year per $100,000.

By my count, Cannex tested 42 possible allocations. Seven different amounts are allocated to the annuity (zero to $300,000) and the annuity is either paired with a balanced fund of $1 million (allocated 30%, 60% or 70% equities and the rest allocated to bonds) or it replaces part of the bond allocation in a $1 million portfolio.

You can see all the details in the report. It suggests that a portfolio of $700,000 in equities and a $300,000 annuity would optimize the portfolio’s likelihood (about 85%) of generating a $50,000 annual income over the man’s lifetime while providing the largest possible legacy ($265,000 ) to his heirs or beneficiaries when he died.

In every simulation, adding the annuity to a blend of stocks and bonds reduced the man’s legacy but, as expected, raised his RSQ. To use a sailing metaphor, a ship carrying extra ballast in the hull (the annuity), sails faster when you add extra canvas (equities).

Toland favors SPIAs over variable annuities (VA) or fixed indexed annuities (FIA) with living benefit riders. “The FIA has a shady history and often uses esoteric indexes that are difficult to understand and impossible to compare,” she writes.

“The VA is expensive and the guarantee is complicated… the client ends up paying for the cost of a benefit (even when [the cost] is not explicit, as is the case with many FIAs) whether they end up using it for its intended purpose or not.”

In saying, “The FIA has a shady history,” I assume Toland is referring to the reasons why state attorney generals, the Securities and Exchange Commission and the Department of Labor each tried to regulate FIAs at some point during the past 20 years. Annuity industry opposition stopped the SEC’s and the DoL’s attempts in 2007 and 2018, respectively, to regulate FIAs more closely.

If SPIAs are so great, why don’t more people buy them? Some observers blame low interest rates, which reduce the payout rates of SPIAs. But SPIAs were no more popular when interest rates were higher than they are today. A big part of the answer is that SPIAs aren’t lucrative enough for most insurance agents or for most life insurance companies.

SPIAs don’t pay very high commissions to independent agents and brokers. And, as a product category, they don’t yield the double-digit profit levels that shareholders of publicly traded life insurance companies demand.

That’s why mutual insurance companies like New York Life and MassMutual—owned by their policyholders—sell the most SPIAs, especially through their employee-agent force. While mutual companies need to be profitable (and pay a consistent dividend to policyholders), their business models allow them to sell modest products like SPIAs.

Wink opens annuity data library to its subscribers

Posted on February 1, 2022 by Editorial Staff -

Wink, Inc., announced this week that subscribers to its AnnuitySpecs service, which gathers and distributes annuity and life insurance contract data and competitive intelligence, will have access to a new library of product-related resources on the firm’s WinkIntel.com site.

Sheryl J. Moore

“Our subscribers can access the data we’ve collected for decades and use it for their marketing, sales and competitive intelligence needs,” said Sheryl J. Moore, CEO of Wink, Inc., in a release.

The library will store product and rider specifications, product rates, and side-by-side product comparisons for each annuity covered by Wink’s AnnuitySpecs. It will also include regulatory filings, product marketing materials, and rates/states sheets, and a dashboard of recent product changes.

Also available will be historical rates on:

Multi-Year Guaranteed Annuities
Traditional Fixed Annuities
Indexed Annuities
Structured Annuities
Variable Annuities

The new documents library allows Wink subscribers access to:

Agent Guides
Consumer Brochures
Disclosures
Policy Filings
Prospectuses
Rate Sheets and
State Approvals

“As product experts, we have always retrieved the policy filings and collateral for each product to create the product specifications on the site,” said Moore. “This new enhancement lets our subscribers obtain these documents all in one library.”

‘Eagle’ gold coins in a self-directed IRA? That bird won’t fly.

Posted on February 1, 2022 by Wagner Law Group -

In recent years, the IRS has paid increased attention to what it regards as impermissible uses or operation of individual retirement accounts (IRAs). The recent Tax Court case of McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021), is an illustration of the type of IRA strategy that the IRS has been challenging, in this instance successfully.

Ms. McNulty was the owner of a self-directed IRA. As such, she was entitled to direct how her IRA assets would be invested without forfeiting the tax benefits of an IRA, unless the investment constitutes a “prohibited transaction”. If there is a prohibited transaction, Section 408(e) of the Internal Revenue Code (the “Code”) provides that the account loses its IRA status and is considered distributed at the beginning of the taxable year.

A permissible investment in a self-directed IRA is an investment in a single-member limited liability company (LLC). Such an investment is not regarded as a prohibited transaction, because the LLC does not have any members at the time the initial investment is made and therefore is not a disqualified person at that time.

In the McNulty case, the LLC purchased American Eagle (AE) coins, intended to be titled in the name of the LLC, although there was no evidence in the record establishing who had legal title. While IRAs are prohibited from holding collectibles, Code Section 408(m)(3) provides an exception for certain coins, and the AE coins may have satisfied the conditions of that statutory exemption, an issue the Tax Court did not need to address in view of its holding. Up to this point, no issues under Code Section 408 were presented.

But Ms. McNulty then took physical possession of the AE coins and placed them in a home safe with non-IRA assets—other coins that she had purchased. In so doing, she relied on a statement on the LLC vendor’s website that advertised that an LLC owned by an IRA could invest in AE coins, and IRA owners could hold the coins at their homes, without tax consequences or penalties so long as the coins were titled to the LLC. The LLC marketers believed they had found a proverbial tax loophole, but the Tax Court disagreed.

Double Eagle Coins, about $2,000 each

There were two problems with taking possession of the AE coins and placing them in a safe in the taxpayer’s residence. First, Section 408(a)(5) of the Code provides that IRA assets may not be commingled with other property except in a common trust fund or common investment fund. The IRS’s position was that the taxpayer violated this provision when she stored the coins in her safe with non-IRA assets.

Her response was that there was no commingling of assets because the AE coins were labelled as IRA assets before being placed in the safe. The Tax Court was skeptical as to whether labelling an asset was sufficient to avoid the commingling of assets. Second, the Tax Court questioned whether storage in a safe satisfies the IRA requirement that assets requiring safekeeping be kept in an adequate vault.

This infrequently discussed provision of the IRS regulations will likely need to be considered in connection with IRA investments in crypto currency. Here, however, the Tax Court did not address the commingling issue, or other issues of disagreement between IRS and the taxpayer, because it held that her physical possession of the AE coins resulted in a taxable distribution to her.

The taxpayer argued that, by disregarding the purported ownership of the AE coins by the LLC, the IRS was seeking to elevate substance over form, an issue on which the IRS’s view has recently been rejected by four Circuit Courts in connection with investments by Roth IRAs.

The Tax Court questioned whether that was an issue in this case, since the LLC was a disregarded entity.

Nonetheless, to make clear that this was not a basis on which this case could be distinguished by future coin holders in self-directed IRAs, it stated that resolution of the issues did not depend on the LLC’s status as a disregarded entity or a separate legal entity.

According to the Tax Court, independent oversight by an IRA trustee or custodian to track and monitor an IRA’s assets is one of the key aspects of the statutory scheme under Code Section 408. It explained that an owner of a self-directed IRA may not take actual and unfettered possession of the IRA assets.

“It is a basic axiom of tax law that taxpayers have income when they exercise complete dominion over it. Constructive receipt occurs where funds are subject to the taxpayer’s unfettered command and she is free to enjoy them as she sees fit.”

Finally, the Tax Court rejected taxpayer’s argument that the flush language of Code Section 408(m)(3), which requires physical possession, only applies to bullion, and that AE coins are not bullion. It found no evidence of legislative intent to discontinue the fiduciary requirements generally applicable to IRAs for IRA investments in coin or bullion, and referred to statements in the legislative history supporting its conclusion.

To add insult to injury to the taxpayer, in upholding IRS’s assessment of the Code’s accuracy-related penalty, the Tax Court questioned whether the LLC’s website could constitute reasonable cause. It stated that, “Check Book’s website is an advertisement of its products and services, and a reasonable person would recognize it as such and would understand the difference between professional advice and marketing materials for the sale of products or services.”

Breaking News

Posted on January 27, 2022 by Editorial Staff -

Voya to keep records for new pooled employer plan (PEP)

National Professional Planning Group Inc. (NPPG) has launched a new pooled employer plan (PEP) in collaboration with flexPATH and Voya Financial. NPPG will serve as the pooled plan provider (and PPP). NFP, a large insurance broker and consultant, will serve as the consultant firm for plan sponsors who want to join the PEP, to be called “Your 401(k) Plan.”

NPPG will also serves as the ERISA 3(16) plan administrator and will oversee the plan from day-to-day and ensure compliance with ERISA and IRS regulations. As the 3(38) fiduciary, flexPATH Strategies is the is responsible for fund selection and monitoring.

PEPs became available in the marketplace at the start of January 2021, as a result of the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act).

NPF will serve as the consultant firm for adopting plan sponsors of the new PEP. NFP assisted NPPG with the search and ultimate selection of Voya as the plan’s recordkeeper, and will serve as the consultant firm for plan sponsors who join the new PEP.

Under the SECURE Act, small businesses that want to offer their managers and employees a 401(k) defined contribution plan no longer need to establish and maintain their own plan. Now they can join other companies in a single large plan.

Within a PEP, participants enjoy the low costs associated with large plans while employers eliminate many of the administrative chores and risks usually associated with plan sponsorship. The federal government expects the widespread use of PEPs by small businesses to help extend retirement savings plan coverage to more small-company employees.

MetLife announces ‘significant’ pension risk transfer deal in UK

Metropolitan Tower Life Insurance Company, a subsidiary of MetLife, Inc., announced today it has completed a significant longevity reinsurance transaction involving an unnamed U.K. pension scheme, using an independent U.K. regulated insurer, Zurich Assurance Ltd. as intermediary.

The transaction, which was completed in Q4 2021, was MetLife’s first longevity swap of U.K. pension scheme liabilities. Aon was the lead adviser to the scheme for the transaction. Under the terms of the agreement, Metropolitan Tower Life Insurance Company will provide reinsurance for longevity risk associated with approximately $3.5 billion of pension liabilities.

“As MetLife’s first pension scheme longevity swap transaction, this marks an important milestone in the evolution of our UK longevity reinsurance business,” said Jay Wang, senior vice president and head of Risk Solutions with MetLife’s Retirement & Income Solutions business, in a release.

SEC bolsters oversight of private funds

The Securities and Exchange Commission today voted to propose amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. The proposed amendments are designed to enhance the Financial Stability Oversight Council’s (FSOC) ability to assess systemic risk as well as to bolster the Commission’s regulatory oversight of private fund advisers and its investor protection efforts in light of the growth of the private fund industry.

“Since the adoption of Form PF in 2011, a lot has changed,” said SEC Chair Gary Gensler. “The private fund industry has grown in size to $11 trillion and evolved in terms of business practices, complexity of fund structures, and investment strategies and exposures. The Commission and Financial Stability Oversight Council now have almost a decade of experience analyzing the information collected on Form PF. We have identified significant information gaps and situations where we would benefit from additional information.

Among other things, today’s proposal would require certain advisers to hedge funds and private equity funds to provide current reporting of events that could be relevant to financial stability and investor protection, such as extraordinary investment losses or significant margin and counterparty default events. I am pleased to support it.”

The proposed amendments would require current reporting for large hedge fund advisers and advisers to private equity funds. These advisers would file reports within one business day of events that indicate significant stress at a fund that could harm investors or signal risk in the broader financial system. The proposed amendments would provide the Commission and FSOC with more timely information to analyze and assess risks to investors and the markets more broadly.

The proposal also would decrease the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management. Lowering the threshold would result in reporting on Form PF that continues to provide robust data on a sizable portion of the private equity industry. Finally, the proposal would require more information regarding large private equity funds and large liquidity funds to enhance the information used for risk assessment and the Commission’s regulatory programs.

The proposal will be published on SEC.gov and in the Federal Register. The public comment period will remain open for 30 days after publication in the Federal Register.

Public pensions are 85.5% funded: Milliman

Milliman released the fourth quarter (Q4) 2021 results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans.

Public pensions closed out 2021 with a funded status of 85.5%, up from 83.9% in Q3 and the highest recorded funded status since Milliman began tracking the PPFI in 2016. In aggregate, these plans experienced an investment return of 3.21% for the quarter, though individual plans’ estimated returns ranged from 0.57% to 6.80%. Nearly half of the plans in our study (46) are now funded over 90%, while 18 plans are funded below 60% – down from 21 plans in Q3.

“Over the past two years, public pension funding has climbed from a low of 66% funded to a high of 85.5% – a jump that can be largely attributed to positive investment returns during almost every quarter since Q2 2020,” said Becky Sielman, author of Milliman’s Public Pension Funding Index. “Looking to 2022, however, declines in the stock market coupled with predicted rising interest rates could result in asset values falling from their Q4 heights.”

Annuity sales in 2021 were highest since 2008: LIMRA SRI

Posted on January 27, 2022 by Editorial Staff -

Total US annuity sales were $254.8 billion in 2021, up 16% from 2020. This represents the highest annual annuity sales since 2008, and the third highest sales recorded in history, according to preliminary results from the Secure Retirement Institute (SRI) US Individual Annuity Sales Survey.

Total annuity sales were $63.4 billion in the fourth quarter, 8% higher than fourth quarter 2020.

“Strong equity market growth in the fourth quarter and in 2021 propelled double-digit growth in both traditional variable annuity and registered index-linked annuity sales, resulting in strong year-over-year results,” said Todd Giesing, assistant vice president, SRI Annuity Research.

Total variable annuity (VA) sales were $32.3 billion in the fourth quarter, up 17% from prior year. In 2021, total VA sales were $125.6 billion, 27% higher than prior year.

Traditional VA sales were $21.7 billion in the fourth quarter, a 13% increase from fourth quarter 2020. For the year, traditional VA sales totaled $86.6 billion, up 16% from prior year. This ends nine years of declines for traditional VA sales.

“We have not seen traditional VA sales growth at this level in over a decade. Heightened concern about potential changes to the tax code drove growth in investment-focused, non-qualified product sales,” said Giesing. “In 2021, fee-based products experienced the largest gains as registered investment advisors and broker-dealers sought out tax-deferral solutions for their clients.”

Registered index-linked annuity (RILA) sales broke records in the fourth quarter and for the year. Fourth quarter RILA sales were $10.6 billion, 26% higher than prior year. In 2021, RILA sales were $39 billion, 62% higher than prior year.

“In 2021, RILA sales benefited from current economic conditions and expanded competition as new carriers enter the market,” noted Giesing. “SRI predicts investors will continue to seek solutions that offer a balance of protection and growth — which these products offer — in 2022, continuing RILA sales’ upward trajectory.”

Total fixed annuity sales were $31.1 billion, level with fourth quarter 2020 results. For the year, total fixed annuities increased 7% to $129.2 billion.

Fixed indexed annuity (FIA) sales were $16.6 billion, an 18% increase from fourth quarter 2020. FIA sales were $63.7 billion in 2021, up 15% from prior year. This marks the largest annual growth for FIA products in three years.

“Improved interest rates and product innovation around cap rates helped address the pricing challenges FIA carriers faced early in 2021, making the products more attractive to investors,” Giesing said. “In addition, we see growing interest in accumulation-focused FIA products, as investors seek principal protection with greater investment growth to offset rising inflation.”

Fixed-rate deferred annuity sales were $11.3 billion in the fourth quarter, an 18% drop from fourth quarter 2020 results. For the year, fixed-rate deferred sales totaled $53.4 billion, 2% higher than prior year.

“Today, short-duration fixed-rate deferred products offer, on average, three times the return of CDs, making them much more attractive to investors,” Giesing said. “As a result, fixed-rate deferred sales were at their highest level since the Great Recession, despite the low interest rate environment.”

Immediate income annuity sales were $1.6 billion in the fourth quarter, the same as fourth quarter 2020. For the year, immediate income annuity sales fell 5% to $6 billion.

Deferred income annuity sales increased 6% to $480 million in the fourth quarter. In 2021, total deferred income annuity sales were $1.9 billion, up 14% from prior year but well below the $2.5 billion in sales achieved in 2019.

“Despite improving interest rates, payout levels have not increased for income annuities in 2021,” Giesing noted. “It is unlikely under current market conditions that this market will rebound to levels seen in 2018 and 2019.”

Preliminary fourth quarter 2021 annuity industry estimates are based on monthly reporting, representing 85% of the total market. A summary of the results can be found in LIMRA’s Fact Tank.

The 2021 top 20 rankings of total, variable and fixed annuity writers will be available in March, following the last of the earnings calls for the participating carriers.

Higher Rates Won’t Quell This Kind of Inflation: BlackRock

Posted on January 27, 2022 by No Author -

We are in a new and unusual market regime, underpinned by a new macro landscape where inflation is shaped by supply constraints. Limits on supply have driven the surge in inflation over the past year: a profound change from the decades-long dominance of demand drivers.

This fundamentally changes how we should think about the macro environment and the market implications. The key to understanding the muted response of central banks to inflation is not the timeframe but its cause: supply. Much of the 2021 debate overlooked this.

Two broad types of supply constraint are at play in the economic restart. First, it is easier to bring back demand than production, which is constrained by the weakest link in the supply chain. But another important constraint is the reallocation across sectors due to Covid restrictions: consumer spending has shifted massively towards goods and away from contact-intense services.

This has meant severe bottlenecks in some places and spare capacity in others. Prices tend to rise faster in response to bottlenecks than they tend to fall in response to spare capacity, so this has pushed inflation higher, even though overall economic activity has not fully recovered. Developments at the sector level are shaping the macro picture.

The restart gives a glimpse of how the transition to net-zero emissions will play out: it will be akin to a drawn-out restart. Economy-wide supply limits will bind as energy costs rise. Big shifts across sectors will create supply bottlenecks. Both will add to inflation, as in the restart. A gradual, orderly transition is the least inflationary path, in our view. Whether or not carbon emissions are reduced, we believe climate change will increase inflation.

A rewiring of globalization and population aging in China are reducing the supply of cheap imports from China to developed markets. This will raise costs and force resources to be reallocated in those markets, making supply constraints more common. In addition, geopolitical risks threaten to disrupt energy supply.

A world shaped by supply constraints will bring more macro volatility. Monetary policy cannot stabilize both inflation and growth: it has to choose between them. This is a marked shift in the macro landscape. When inflation was driven by demand, stabilizing inflation also stabilized growth – there was no trade-off.

Central banks should live with supply-driven inflation, rather than destroy demand and economic activity – provided inflation expectations remain anchored. When inflation is the result of sectoral reallocation, accommodating it yields better outcomes, as recent research (Guerrieri et al, 2021) shows. Insisting on stabilizing inflation would lead to an over-tightening of monetary policy, more demand destroyed and a slowing down of the needed sectoral reallocation. Given the persistence of supply constraints over many years, delivering the best outcome might require further adjustments to central banks’ inflation-targeting frameworks.

We expect the sum total of rate hikes in this cycle to be low. Central banks will take their foot off the gas to remove stimulus – but they shouldn’t go further to fight inflation, in our view. Yet we expect negative bond returns as, faced with inflation volatility in this environment, investors question – as they have in recent weeks – the perceived safety of holding longer-term government bonds at historically low yield levels.

The primary risk we see is that central banks hit the brakes by raising rates to restrictive levels. As in recent weeks, we can expect markets to price some of this at points, as they adapt to the new macro landscape. But if central banks do go ahead and hit the brakes, they will likely learn that the damage to growth to get inflation down is too great and will be forced to reverse course – flattening or even inverting yield curves.

How Wealthy Investors Allocate Among Asset Classes

Posted on January 27, 2022 by No Author -

Target Practice: AIG and Milliman’s New Annuity

Posted on January 27, 2022 by Editorial Staff -

“Structured” annuities and exchange traded funds (ETFs) have proliferated in recent years as a kind of Goldilocks investment for people who want exposure to stocks and are willing to give up some of their potential reward for partial protection against risk of loss.

Now AIG, the giant annuity manufacturer, and Milliman Financial Risk Management, have taken elements of structured Registered Index-Linked Annuities (RILAs) and of Defined Outcome ETFs (a series issued by Innovator Capital Management and subadvised by Milliman) into “Advanced Outcomes Annuities,” a suite of variable annuities issued by American General Life, an AIG company.

Like RILAs, these funds use pairs of put and call options to capture part of the performance of an equity index. The indexes in these funds are the price-only versions (no dividend yield) of the large-cap S&P 500, the tech-heavy NASDAQ-100, the Russell 2000 small-cap index and the global MSCI EAFE.

Along with downside protection, an investor in these funds enjoys the tax-deferral of an annuity and the liquidity of an ETF. While the funds have specific start dates and term lengths (six months, one year or six years), their prices change daily and investors can enter or leave when they want or need to.

Like B-share variable annuities, the Advanced Outcomes Annuities are sold through broker-dealers by commission. Their fees resemble the fees of B-share products. They have surrender fees (7% in year one), annual contract fees (1.25%) and fund fees (0.99%). They also have an optional guarantee against long-term loss.

Prospective investors in these funds should be aware that AIG signaled in October 2020 that it plans to divest or spin off its life and retirement businesses, including annuities. MetLife made a similar move in 2016 when it created Brighthouse Financial. AIG declined to comment on what that might mean for contract holders.

The latest funds

The most recent flight of Advanced Outcomes Annuity offerings include five one-year funds, two six-month funds, and two six-year funds. During each term, the funds are priced daily. Investors can jump into and out of the funds to create their own durations, but their performance will vary depending on the fund’s prices when bought and sold.

“Each fund has its own target payout profile, each has its own upside target and downside protection target. These are managed like registered index-linked or structured annuities. But our product is not a RILA, it’s a variable annuity,” Adam Schenck, managing director, Head of Fund Services at Milliman FRM, said in an interview.

The amount of the investor’s money that is used to buy options on one of the indexes depends in part on the performance of the “collateral fund” into which most of the money is invested. Most of the collateral fund is invested directly or indirectly in fixed income investments.

One year crediting term funds:

Milliman Buffered S&P 500 with Spread Outcome Fund (buffer against first 10% of index losses; upside performance in excess of an initial “spread” is uncapped)
Milliman Floored S&P 500 with Par Up Outcome Fund (possible loss capped at -10%)
Milliman Buffered S&P 500 and NASDAQ-100 with Stacker Outcome Fund (buffer against first 10% of index losses)
Milliman Buffered S&P 500 and Russell 2000 with Stacker Outcome Fund (buffer against first 10% of S&P 500 losses)
Milliman Buffered S&P 500 and MSCI EAFE with Stacker Outcome Fund (buffer against first 10% of S&P 500 losses)

Six-month crediting term:

Milliman Buffered S&P 500 with Par Up Outcome Fund (loss limited to first 10% of index loss)
Milliman Parred Down S&P 500 with Par Up Outcome Fund (loss limited to 50% of S&P 500 Index loss)

Six-year crediting term

Milliman Buffered S&P 500 with Par Up Outcome Fund. Over six years, losses are limited to 50% of S&P 500 price index losses; gains are provided by a participation rate.
Milliman Parred Down S&P 500 with Par Up Outcome Fund (loss limited to 50% of index loss)

Bryan Pinsky, president, Individual Retirement, AIG Life & Retirement, said these products were designed in part on the basis of feedback from financial advisers. That feedback led to the “Capture-Reset-Reinvest” feature for liquidity. It also led to three crediting methods:

Participation rates that offer fixed percentages of the index gain or loss during the investment term
Spreads (uncapped participation in all index gains in excess of an initial expense or “spread”)
Stacker cap (the market gains of an index such as NASDAQ-100 added to the S&P 500, each up to a pre-defined level)

“As we talked to advisers, we heard loud and clear their desire for flexibility. Because of the nature of the funds, the duration can be whatever they want it to be. The six-month strategy lets them capture gains and reset more frequently,” Pinsky told RIJ. “It brings Milliman’s expertise from the Innovator Defined Outcome ETFs into AIG’s tax-deferred wrapper.”

AIG also adds optional guarantees that stop the total possible loss over six years at either -10% or -20%.

A New Film, ‘The Baby Boomer Dilemma,’ Praises Annuities

Posted on January 27, 2022 by Kerry Pechter -

A fictional Florida couple’s agony throbs at the heart of “The Baby Boomer Dilemma: An Expose of America’s Retirement Experiment,” a new film about America’s retirement financing woes. The movie ends with the wife weeping tears of regret and recrimination because her husband failed to opt for a pension or buy an annuity.

Yes, an annuity. In Doug Orchard’s Ken Burns-ish documentary, an A-list of US retirement experts take turns telling the back-story of retirement financing in the US since World War II before finally converging on a fairly strong endorsement of income annuities.

By the end of this 85-minute cautionary tale, some viewers might want to run out and, like Tom Hegna, buy a dozen annuities. It’s no wonder that financial advisers are renting this film and showing it to groups of middle-aged prospects. (The film can be downloaded for $29.99.)

A roster of experts

Orchard visited the subject of retirement in an 2018 film on the national debt (“The Power of Zero”). Here he taps into a network of professors, annuity industry people, former regulators and others who understand (and in some cases helped create) the products and the policies that have shaped retirement financing in the US.

Readers of RIJ over the past decade may recognize some of the commenters. Respected academics Moshe Milevsky, Olivia Mitchell, Brigitte Madrian appear here, along with the late David Babbel of Wharton. Two Nobel economist/entrepreneurs, Robert Merton and William Sharpe, offer their views.

Former officials, whistleblowers and authors also adorn the cast. There’s a former Comptroller General of the US, an attorney who blew the whistle on bankers who fleeced a pension plan, a former president of the National Association of Insurance Commissioners, and congressman Michael Gallagher (R-WI).

Tex Benna

We even meet Tex Benna, the reputed “father of the 401(k).” Ambling about his grassy horse farm near Philadelphia, Benna explains his discovery of a subsection of the Internal Revenue Code–(401(k)–that would permit the tax-deferred, private-sector defined contribution savings plans that tens of millions of American workers participate in today.

As the movie warms towards annuities, people who frankly love annuities take center stage. We meet celebrity retirement speaker and author Tom Hegna on an Arizona golf course (and in his kitchen with his spouse, Laura). In a office in Des Moines, amid foot-high stacks of reports-to-be-read and items-to-be-filed, we find Sheryl Moore, founder of annuity consulting firm Wink, Inc., whose life goal is to “rebrand annuities” in a positive way. I know several of these experts; I could tell that the filmmaker knows how to draw people out.

How we got here

Alternately back and forth between interviews with these well-known retirement mavens, Orchard tries to simplify and condense the tumultuous history of defined benefit pensions, 401(k)s, and Social Security. People with no prior knowledge of this history—the prequel to our world today—may strain to catch some of the references.

We hear about the rise and fall of corporate pensions. Olivia Mitchell covers the history of the modern private pension from the wage controls of World War II to the failure of Studebaker’s plan in 1963, to the passage of the Employee Retirement Income Security Act of 1974, to the underfunded public pensions of today.

Moshe Milevskly

The 401(k) defined contribution plan has of course succeeded the pension as the primary employer-sponsored tax-favored retirement savings vehicle. These plans have helped Americans save trillions of dollars for retirement, Benna tells us, but at the cost of exposing innocents to the risks of the stock market. If there’s a heavy in this film, it’s the 401(k).

The film doesn’t dispel a viewer’s doubts about the state of Social Security. We learn about the program’s financing crisis in 1980s, George W. Bush’s push in the early 2000s to partially “privatize” the program, and the shortfall in funding that it might face in 2034. (Critics harp on the idea that Social Security’s future liabilities are “unfunded.” But our government has “print on demand” money. It doesn’t need to pre-fund future expenses, nor should it.)

The film also makes passing references to esoteric phenomena like “sequence-of-returns risk” and “mortality credits.” Each of these hard-to-unpack topics might sustain its own movie, and maybe its own six-part Ken Burns epic. Orchard keeps up a swift pace—maybe too swift for the average viewer.

Annuities get star treatment

In the final section of the film, the conversation shifts subtly from big picture public policy matters to individual annuities. “Annuities” are positioned as a solution to the dilemma posed by the disappearance of defined benefit plans and the lack of provisions in most 401(k) plans for converting savings to retirement income.

Here you will meet people who rave about annuities. Hegna, pausing between putts, explains that he owns 11 different annuities. Babbel says that he owns 14 annuities, half of them still growing tax-deferred and half of them switched on and delivering monthly income. We learn that Moore wants her tombstone to reflect her lifelong quest to redeem the reputation of annuities and save America’s elderly from poverty.

Sheryl Moore

Economists, Milevsky tells us, tend to disagree on every possible matter except one. They all believe that annuities are a good idea for retirees. He urges 65-year-olds to put 20% to 60% of their savings into a lifetime income annuity. Mitchell suggests carving out 10% of 401(k) the savings at retirement to buy an annuity that starts paying out at age 80.

We don’t learn too many details about annuities as specific financial products. Orchard’s film doesn’t name the many kinds of annuities, or describe their different purposes. It doesn’t distinguish between the types of advisers and agents who sell them or between the types of life insurers that issue them. That’s a wise choice of the filmmaker, because the details are devilish—and eye-glazing.

Save this marriage

“The Baby Boomer Dilemma” collapses some 75 years of retirement policy history into less than an hour and a half of cinema. And it all collapses on the head of one unfortunate 62-year-old driver’s exam official in Florida, who appears to have lost half his family’s savings in a stock market crash.

The movie’s finale reminded me of the ending of the Pulitzer Prize-winning 1949 drama, The Death of a Salesman. Willy Loman, only 63, has just killed himself. His widow, Linda, sobs: “I made the last payment on the house today. Today, dear. And there’ll be nobody home. We’re free and clear. We’re free. We’re free.”

The Lomans lost hope prematurely, and I wanted to reassure the desperate housewife of this film: “It’s not so bad. Your husband can work five more years and get a bigger Social Security benefit. Your stocks will bounce back by then. Roll with it.” As the film’s title points out, Baby Boomers don’t face a retirement tragedy. They just face a dilemma.

Private assets may be coming to Britain’s DC plans (at a price)

Posted on January 20, 2022 by Editorial Staff -

To become eligible to market their products to retirement savers in the UK—who have some half a trillion pounds ($680 billion) in their “pension pots”—private equity (PE) fund managers are considering lowering their annual expense ratios, Bloomberg reported.

But the PE firms may want bigger performance bonuses in return.

As the UK government pushes for more retirement savings to be invested into alternative assets—infrastructure, affordable housing, technology firms, illiquid products—both the government and the private equity firms have reasons to compromise.

Buyout firms say they might reduce their usual 2% management fees if they can keep their performance-related payouts, which are contingent on meeting return targets, according to the Department for Work & Pensions, the UK’s equivalent of our Labor Department.

Fees on target date funds, into which retirement savers can be defaulted (in both the US and UK) are currently capped at 0.75%. The government is asking for public comment on whether a performance fee could exceed that cap. One model being considered would see the buyout firms get 30% of any profits, instead of the usual 20%.

If they reduce their expense ratio, private equity firms could get more access to the UK’s pool of defined contribution retirement savings. That pool, the savings of millions of workers, grew 45% to 471 billion pounds between 2015 and 2020, according to the Pensions Policy Institute. Such accounts, equivalent to 401(k)s, represent the savings of millions of workers.

Resolving the level of fees “is one of the last major operational or structural issues for DC investment into private markets,” said James Monk, head of Defined Contribution Investment at pension consultants Aon Plc.

Private equity supporters say their products would help investors diversify their portfolios while investing more in the “real economy.” But pension fund trustees wonder if a performance fee can be fairly calculated for investors.

“Members will come in, go out, have different asset values, different contribution structures,” said Stephen Budge, partner at pension advisers Lane Clark & Peacock. “How do you make sure members are fairly charged for the performance they have received?”

Abrdn Plc (formerly Standard Life Aberdeen Plc), Legal & General Group Plc and Phoenix Group Holdings Plc are expected to roll out private market products should the rules be relaxed, Bloomberg reported.

Some DC pension plans already include private market strategies as investment alternatives. NEST, the public-option defined contribution plan, appointed BNP Paribas SA to run a private credit portfolio in 2019.

Last summer, NEST began seeking private equity partners to help the firm invest 1.5 billion pounds in private assets by 2024. Partners Group Holdings AG’s Generations Fund has around $1 billion in DC assets invested in private assets.

TIAA Expands into 401(k) Plan Market

Posted on January 20, 2022 by Editorial Staff -

For the first time in its 100-year history, TIAA is offering its guaranteed lifetime income solutions to the corporate 401(k) retirement plan market through the “TIAA Secure Income Account.” Until now, TIAA has offered those services mainly through 403(b) plans at non-profits and academia.

“Now, private-sector companies can provide employees with TIAA’s unique, pension-like guaranteed income for life as part of their retirement plan,” according to a release from TIAA president and CEO Thasunda Brown Duckett.

TIAA was founded as a teacher’s retirement fund in 1918, it was funded largely with grants from Pittsburgh steel magnate, financier, and philanthropist Andrew Carnegie.

The TIAA Secure Income Account is a deferred fixed annuity that offers a predictable, steady stream of guaranteed income for life in retirement. Plan participants’ contributions are guaranteed to grow over time and are protected from losing value no matter what the market does. The account is fully cashable during employees’ working years and fully portable to another 401(k) plan or rollover RIA,

Employees can choose—but are not required—to turn some or all of their savings into monthly income paychecks for life when they stop working. They also have the opportunity for more growth and higher amounts of income the earlier and longer they contribute because of the unique way TIAA shares profits with its individual clients.

Lifetime income payments may also increase once people are in retirement, which can help offset the effects of inflation. In 2022, for example, many currently receiving income from TIAA fixed annuities are enjoying a 5% increase in their lifetime income payments—the largest bump in 40 years.

TIAA’s 2021 Lifetime Income Survey found that more than 70% of workers say they would choose to work for, or stay with, a company that offers access to guaranteed lifetime income in retirement compared to one that doesn’t.

The TIAA Secure Income Account is specifically designed to be a Qualified Default Investment Alternative, which means the account can serve as an allocation in a managed account or target-date fund and that participants can be defaulted into it when they enroll in a plan.

Plan sponsors can automatically direct plan participants to a product with principal protection, guaranteed growth, low volatility and lifetime income with potentially increasing payments. Employees who choose to annuitize will not pay any expenses or commissions.

Lifetime income solutions turn simple savings accumulation vehicles into true retirement investing and payout plans,” said Colbert Narcisse, TIAA’s Chief Product and Business Development Officer, in the release.

The TIAA Secure Income Account is available through the defined-contribution investment-only distribution channel overseen by Nuveen, TIAA’s asset manager. It is the first in a series of innovative lifetime income solutions TIAA plans for a variety of retirement savings vehicles, including employer-sponsored and individual IRAs.

Nuveen, TIAA’s asset manager and a provider of “outcome-focused investment solutions,” will provide investment management expertise. For more information, please visit www.tiaa.org/secure-income

American Life & Security FIA adds ‘macro regime’ index

Posted on January 20, 2022 by Editorial Staff -

American Life & Security, a Nebraska-based, B++ rated fixed indexed annuity (FIA) issuer that got new life in 2018 after asset manager Vespoint LLC bought control of its owner, Midwest Holding, will offer the Goldman Sachs Xenith Index to owners of its FIA contracts, according to a release.

Vespoint aims to capitalize on the “convergence” of the insurance and asset management businesses, according to a November 2021 investor presentation. “The insurance industry is archaic; Midwest is here to help,” their website said.

Midwest Holding describes itself as a technology-enabled, services-oriented annuity platform. Midwest designs and develops in-demand life and annuity products that are distributed through independent distribution channels, to a large and growing demographic of US retirees. Midwest Holding went public on NASDAQ in December 2020 and has a market capitalization of about $78 million.

Midwest “originates, manages and transfers these annuities through reinsurance arrangements to asset managers and other third-party investors. Midwest also provides the operational and regulatory infrastructure and expertise to enable asset managers and third-party investors to form, capitalize and manage their own reinsurance capital vehicles,” the Midwest website says.

“We are a unique cross-disciplinary team of insurance, technology and investment professionals building innovative businesses at the intersection of insurance and technology,” according to a release.

Midwest Holding has assembled the machinery to execute that strategy: a fixed annuity issuer, a reinsurer in a regulatory haven (Seneca Re in Vermont), 1505 Capital, a registered investment advisor, and a cloud-based policy administration system, m.pas, according to its website.

The group’s latest announcement involves its licensing agreement with Goldman Sachs for the Xenith index, which uses macro-regime asset allocation. According to Goldman Sachs’ paper on the index:

The Goldman Sachs Xenith Index is designed to provide exposure to a diversified portfolio that adjusts its exposure between five underlying assets… depending on whether a monthly Growth Signal is signaling a rising economic growth or a decreasing economic growth environment. In a rising growth environment, higher exposure will be allocated to equities and copper than in a decreasing growth environment and, in a decreasing growth environment, higher exposure will be allocated to fixed income and gold than in a rising growth environment.

Regardless of the growth regime, the basket will always provide a constant exposure to the Commodity Curve Component… the Index is also subject to a volatility control mechanism that adjusts the exposure of the Index to the Underlying Assets in order to achieve a predefined volatility target of 5%, subject to a leverage cap of 125%.

“Instead of relying purely on the S&P 500 Index for exposure to US equities, the index employs an intraday overlay that can reduce equity exposure based on intra-day trading ‘signals.’ As a result, the strategy incorporates real-time market movements, in addition to other factors, in its rules-based methodology,” a Midwest Holding release said.

Depending on the prevailing market regime, the Goldman Sachs Xenith Index also provides commodity exposure by switching between copper and gold based on anticipated economic growth.

Midwest Holding recently announced the closing of a majority ownership sale of a consolidated reinsurance facility to a subsidiary of ORIX Corporation USA (ORIX USA). Under the terms of the agreement, a subsidiary of ORIX USA purchased approximately 70% of Seneca Incorporated Cell, LLC 2020-01 (SRC1), a Midwest consolidated reinsurance cell.

Midwest established SRC1 in early 2020 as the first reinsurance cell of Seneca Re, a Vermont domiciled captive reinsurance company. SRC1 has reinsured premium from its sister insurance company and Midwest subsidiary, American Life & Security Corp. ORIX Advisers, LLC, another subsidiary of ORIX USA, will be the manager of the assets underlying SRC1’s reinsurance obligations going forward, replacing Midwest’s asset management arm, 1505 Capital LLC.

The coming wealth transfer: $84.4 trillion

Posted on January 20, 2022 by Editorial Staff -

Multigenerational wealth transfer is one of the most significant factors affecting the high-net-worth (HNW) and ultra-high-net-worth (UHNW) segment—its impact in the coming decades is set to increase substantially.

Shifting wealth into next-gen’s hands will reward firms that are able to sustainably establish advisory relationships with younger clients in the years to come, according to Cerulli’s latest report, “U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021: Evolving Wealth Demographics.”

Cerulli projects that wealth transferred through 2045 will total $84.4 trillion—$72.6 trillion in assets will be transferred to heirs, while $11.9 trillion will be donated to charities. Greater than $53 trillion will be transferred from households in the Baby Boomer generation, representing 63% of all transfers.

Silent Generation households and older stand to transfer $15.8 trillion, which will primarily take place over the next decade. $35.8 trillion (42%) of the overall total volume of transfers is expected to come from high-net-worth and ultra-high-net-worth households, which together only make up 1.5% of all households.

As a result, firms that can remain on the cutting edge of complex planning and wealth structuring tactics will be invaluable to clients as taxation becomes a more pressing worry. According to the research, grantor trusts (77%) are far and away the most common way to increase the tax-efficiency of wealth transfer events among HNW practices, followed by spousal lifetime access trusts (54%) and strategic gifting (46%).

“As taxes become an increasingly pressing regulatory issue among legislators, wealth managers will need to keep a pulse on the latest developments at the state and federal levels,” said Chayce Horton, an analyst at Cerulli.

As transfers lead to changes in family dynamics as well as engagement preferences, financial services providers across the wealth spectrum must adapt their business models. “Winners of walletshare will need to be prepared for changes to their business model and to evolve with the needs of a younger demographic,” said Horton. According to the research, family meetings and regular communication (81%) is considered the most-effective wealth transfer planning strategy by HNW practices, followed by educational support (59%), and organized succession planning (31%).

To improve relationships across generations, Cerulli recommends making family events a regular part of the advisory process. “Extending interfamily relationships to involve the entire range of stakeholders rather than just the current controllers of that wealth will create a greater sense of responsibility and inclusion among heirs that will help in the likely case that more complex discussions about management of the family’s wealth occur in the future,” said Horton.

Asset Class Returns, 2021

Posted on January 20, 2022 by No Author -

A 5-Year Cushion against Market Risk

Posted on January 20, 2022 by Kerry Pechter -

Louis S. Harvey, the founder of Dalbar, a kind of J.D. Power for the financial services industry, analyzed stock market history and found that since 1940 US equities have always recovered, even in real terms, within five years of any crash.

He uses that finding—which might surprise a few people—as the basis for a portfolio asset allocation strategy that he’s now sharing with the world.

In a recent white paper, Harvey asks, Is an “Arbitrary Asset Allocation” more efficient than a “Prudent Asset Allocation.” By “arbitrary,’ he means setting a ratio of stocks and bonds according to an investor’s current risk tolerance and then rebalancing the portfolio back to the same ratio if the winds of volatility drive it off course.

By “Prudent Asset Allocation” Harvey means something different. His prudent approach involves two buckets. The first bucket should contain enough safe (“preservative” or “protection”) assets to cover cash needs (in excess of expected income) for the next five years.

The second bucket, including the rest of the client’s investable money, goes into growth assets. Once a year, the preservative bucket gets replenished with gains, if needed, from the growth bucket. The rolling five-year buffer, like the shadow of an eclipse crossing the landscape, moves one year forward.

“We said, let’s examine every possible combination in history to find the maximum recovery period for stocks—the longest it ever took for equities to recover their pre-crash value—and it came out to about 4.9 years,” Harvey told RIJ recently. “In the worst case scenario, if you have a diversified portfolio, you are more than likely to recover your losses in five years or less.”

The five-year buffer

Born in Puerto Barrios, Guatemala in 1942, Harvey emigrated to the US with a degree in physics from the University of the West Indies. He started Marlborough, MA-based Dalbar in 1976. Dalbar surveys financial services providers, establishes benchmarks for quality, publishes syndicated research and gives out awards. Harvey based the “Prudent Asset Allocation” technique on his own experience as an investor.

Here’s how it works:

Set up a bucket of safe assets equal to the difference between expected income (salary, Social Security, pension benefits, systematic withdrawals from a 401(k) plan) and spending needs over the next five years.
Safe assets include principal-guaranteed products, guaranteed income investments, FDIC-covered savings, US Treasuries, money market mutual funds, other cash equivalent securities.
When market conditions are favorable (anytime but right after a decline, before a full recovery), growth assets (individual securities, are sold to replenish the protection bucket.
If there is a buildup of Preservative assets from rising income or windfalls (or appreciation of the Preservative assets net of spending), the excess goes into the Growth class.
The process is applied during an annual reevaluation. The procedure is intended to continuously deplete the Preservative assets at a rate that is slower than the growth of the Growth class.
Revisit the strategy when there’s a major change in circumstance, such as an inheritance, retirement, job change, birth or divorce.

“The procedure is intended to continuously deplete the Preservative assets at a rate that is slower than the growth of the growth class,” Harvey writes. “When market conditions are favorable, Growth assets are used to replenish the Preservative class,” the white paper said. “Favorable conditions are considered to be any time except immediately following a decline, before a full recovery is achieved.”

Stocks have always rebounded

Louis S. Harvey

The Prudent method is grounded in Harvey’s finding that stocks have crashed less often and their prices have bounced back faster than a lot of loss-leery investors tend to assume or imagine. According to his back-testing exercises, the S&P 500 Index fell 10% or more in only eight calendar years since 1940 (see chart below) and took no more than five years to recover the loss.

Ipso facto, an investor should be able to maximize returns and keep anxiety far away—a sustainable armistice between greed and fear—by hoarding enough cash to avoid a forced sale of depressed assets for up to five years and stretching for growth with the rest.

Before you run to your spreadsheets to prove that this two-bucket approach is an illusion (because a balanced fund performs the same as two one-asset funds), or purely behavioral (i.e., prevents panic-selling) or impossible to prove (because no two plans will ever perform identically), or rife with market-timing issues, remember that Harvey isn’t claiming that the Prudent method optimizes a portfolio. He’s saying that it outperforms the popular Arbitrary method and relieves stress.

Back-testing the Prudent allocation method vs the Arbitrary allocation method over the score of years from 2001 to 2020, Harvey found that his strategy beat an arbitrary portfolio of 60% stocks (S&P 500 Index) and 40% bonds (10-Year Treasuries) and found:

In 13 (65%) of the 20 years, total return for a one-year time horizon was superior for the Prudent Asset Allocation
In 12 (60%) of the 20 years, total return for a ten-year time horizon was superior for PAA
For the years 2010 to 2020, PAA outperformed AAA in one-year returns (23.78% to 15.58%)
For the years PAA outperformed AAA in ten year returns (98.62% to 60.94%)
Where the Arbitrary method outperformed, the Prudent method allowed the investor to wait (up to five years) for a market recovery instead of selling in a down market

“The arbitrary method is not focused on what’s changing in the market place, or in the investor’s personal circumstances,” Harvey said. Instead, “We suggest that you have an annual schedule unless there’s an extraordinary event—such as the market going berserk. If it’s significant, go back and revisit your asset allocation.”

Good for decumulation or accumulation

Harvey’s approach is intended to work for people of all ages, in either the “accumulation stage” before retirement or the decumulation stage” after retirement. “People at older ages, who no longer have an earned income, can substitute their Social Security income for earned income and perform exactly the same calculation. It is most applicable in the decumulation stage, but also in the appreciation stage,” he said.

“When you look at society, you can see that so many people are in both stages. You can’t reasonably draw a line between the two. So many people are working and receiving retirement income at the same time. The same principle applies, regardless of how old you are, even if the numbers change.” [I assume that Harvey would recommend dealing separately with tax-favored accounts and not incorporating them into the Prudent method until after retirement.]
“If you have millions of dollars, you might need to hold only two or three percent of your net worth to cover the next five years. The method is also totally fluid; it’s just a function of your net cash needs,” he added. In other words, the more total savings you have, relative to your need for excess cash each year, the easier it is to run this strategy, and vice-versa.

The Prudent method accommodates almost any selection of growth assets. “It doesn’t have to be stocks,” Harvey said. “If you feel comfortable with alternative assets or options, go ahead and use them. You can make that determination yourself. The amount of risk you take will depend on your personal preference or gut and skill. Using risk ‘appetite’ to determine asset allocation, without segmentation, without consideration of income needs, is a cruel waste.”

Harvey acknowledges, without apology to the bucketing-skeptics, that the Prudent method is a kind of bucketing or time-segmentation. “It’s 100% supportive of time segmentation. One of our goals was to make it real simple. Using expressions like ‘bucketing’ or ‘time-segmentation’ can make it sound complicated. But any advisor and many individuals can implement it without rocket science.”

In calling for a rolling five-year window of safety, however, the Prudent method differs from retirement bucketing strategies that consist of, for example, four five-year buckets from age 65 to 85. In that strategy, each bucket’s assets grow for five, 10, or 15 years before they’re sold and the proceeds swept into the active spending bucket. The Prudent strategy calls for a rolling five-year buffer of safe assets.

“The bottom line of Prudent asset allocation is to have the confidence of knowing that over the next five years, you don’t have to worry about market conditions,” Harvey told RIJ. “It changes the character of your approach to risk, and it generally means that you can put more money into growth assets.”

LGIM America launches ‘Retirement Income Fund’ and four other funds for DC plans

Posted on January 14, 2022 by Editorial Staff -

LGIM America (Legal & General Investment Management America), a registered investment adviser (RIA) specializing in designing and managing investment solutions across active fixed income, index, multi-asset and liability driven investment in the US market, today announced the launch of five new mutual funds.

The funds are designed for distribution through the defined contribution plan market in the US. LGIM America’s flagship fund, Legal & General Retirement Income 2040 Fund, focuses on “retirement income and investment solutions that help retirees make the right spending decisions throughout their retirement journey,” the company said in a release today.

Details of the five funds, which are offered only to institutional investors, include:

The Legal & General Retirement Income 2040 Fund is composed of the four funds listed below. Its goal is to provide current income during the early and middle-years of retirement while ensuring capital is not exhausted prior to the fund’s terminal date.

The Legal & General Global Developed Equity Index Fund seeks to provide investment results that, before fees and expenses, track the performance of the MSCI World Index.

The Legal & General Cash Flow Matched Bond Fund seeks current income through the management of investment grade credit with a final maturity between zero and five years. The Fund does not have a specific target for its average duration. The Fund’s portfolio is laddered by investing in fixed income securities with different final maturities so that some securities age out of the zero- to five-year maturity range during each year.

The Legal & General Long Duration US Credit Fund aims to maximize total return through capital appreciation and current income. It primarily invests in investment-grade fixed income securities with an average portfolio duration that is within 10% of the Fund’s benchmark, the Bloomberg Long Duration US Credit Index.

The Legal & General US Credit Fund looks to maximize total return through capital appreciation and current income. It primarily invests in investment-grade fixed income securities with an average portfolio duration that is within 10% of the Fund’s benchmark, the Bloomberg Capital US Credit Index.

“These Funds are part of a larger retirement income solution initiative and complete our retirement income strategy, which is designed to bring investors through the early- to middle-years of retirement. Within the first several months of 2022, we anticipate completing a long-life strategy, which is the longevity piece of our solution and designed to support individuals into their later years of retirement,” the release said.

Voya to keep records for new pooled employer plan (PEP)

MetLife announces ‘significant’ pension risk transfer deal in UK

SEC bolsters oversight of private funds

Public pensions are 85.5% funded: Milliman

A roster of experts

How we got here

Annuities get star treatment

Save this marriage

The five-year buffer

Data Connection

Lists*