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Congress Shuts $50,000 Social Security ‘Loophole’

Posted on October 28, 2015 by -

Under a section called “Closure of Unintended Loopholes,” the just-published Bipartisan Budget Act of 2015 has ended the so-called “file-and-suspend” Social Security claiming strategy that, perhaps more in theory than in practice, enabled some couples to receive up to $50,000 in extra benefits between ages 66 and 70.

No one knows how many people took advantage of the strategy. But the so-called loophole gave countless financial advisors an excuse to call older clients and prospects with the glad news of a potential windfall. “File and suspend” also catalyzed the publication of several popular books, notably “Get What’s Yours,” co-authored by Boston University economist Larry Kotlikoff.  

Here’s how file-and-suspend worked: The spouse with the higher expected benefit—typically the husband—filed for benefits at his full retirement age (66), then filed a notice to suspend those payments. The wife then filed for spousal benefits—half the husband’s benefit. 

That brought about $1,000 in found-money into the household per month. Four years later, when the husband reached age 70—the age at which benefits hit their high-water mark—the husband “unsuspended” and started receiving monthly checks. His wife could choose to go on receiving spousal benefits or (assuming she had reached age 66 before claiming the spousal benefit and had her own work record) switch to her own earned benefits, if higher.

Section 831 of the new budget nixes this switching strategy for couples turning age 62 after 2015 by saying:

“If an individual is eligible for a wife’s or husband’s insurance benefit in any month for which the individual is entitled to an old-age insurance benefit, such individual shall be deemed to have filed an application for wife’s or husband’s insurance benefits for such month.

“If an individual is eligible for an old-age insurance benefit in any month for which the individual is entitled to a wife’s or husband’s insurance benefit such individual shall be deemed to have filed an application for old-age insurance benefits.”

According to Steve Sass, a researcher at the Center for Retirement Research at Boston College, “The ‘deeming’ language means the beneficiary is given the higher of the two benefits and is not allowed to choose to collect one benefit (i.e., the spousal benefit) and allow the other (i.e., the worker benefit) to grow and be claimed later at a higher monthly rate. This rule had already applied in the period before people reached Full Retirement Age. This legislation will make it the rule after.”   

The problem with file-and-suspend was that it threatened to bleed billions of dollars from a system already suffering from financing issues. According to a 2009 research paper by the Center for Retirement Research, the “’Claim Now, Claim More Later’ strategy, [in which] a married individual claims a spousal benefit while delaying claiming his own retired worker benefit in order to build up delayed retirement credits… could potentially cost Social Security $10 billion a year.”

Eugene Steuerle, a former Social Security economist now at the Urban Institute, told RIJ that the new budget legislation still does not end Social Security’s long-standing preferential treatment of non-working wives, whose spousal benefits can be higher than the benefits paid to women who have worked their whole lives.  

© 2015 RIJ Publishing LLC. All rights reserved.

Principal Adds ‘In-Plan’ Deferred Income Annuity Option

Posted on October 23, 2015 by -

Principal Financial, the full-service provider of 35,000 mostly small to mid-sized defined contribution (DC) retirement plans, this week introduced a flexible-premium, unisex-priced deferred income annuity (DIA) as a stand-alone investment option for plan participants.

Called Pension Builder, the new institutional DIA is now being offered to plan sponsors for participant contributions next March, according to Principal. Contributions to the DIA purchase a set amount of guaranteed income for life, backed by Principal’s general fund. Contributions aren’t irrevocable; participants can transfer their contributions out of Principal Pension Builder and surrender the annuity, subject to certain restrictions and a potential surrender charge. 

“We see two purchasing scenarios,” said Jerry Patterson, senior vice president of retirement and investor services. “One scenario might involve a lump sum purchase of the DIA by, for instance, a 58-year-old who’s retiring in two years. The other scenario might involve someone aged 50 or even younger, who purchases a chunk of income with each contribution.”

As of June 30, 2015, Principal plans included some 4.2 million participants with more than $156 billion in assets. In the individual annuity market, Principal posted variable annuity sales of about $542 million (ranked #20) and fixed annuity sales of about $930 million (ranked #16) in the first half of 2015, according to the LIMRA Secure Retirement Institute.

For the past decade, large life insurers have tried in various ways to bring the essence of a defined benefit plan—guaranteed lifetime income—to DC plans. In 2004, MetLife introduced the Personal Pension Builder, which was similar to Principal Pension Builder. It was that marketed to participants in retirement plans administered by Bank of America/Merrill Lynch. 

A variety of income delivery structures have been developed and/or brought to market. Prudential, Empower, and John Hancock offer guaranteed lifetime withdrawal benefit wrappers around their proprietary target date funds. Participants in Vanguard-administered plans can easily roll 401(k) balances to an immediate or deferred income annuity at the Hueler “Income Solutions” web platform.

Alliance Bernstein and three insurers offer a DIA option as a sleeve inside a target date fund. Voya has a similar option in its plans. Last May, MetLife introduced Retirement Income Insurance, which allows participants in 10,000 MetLife plans to buy an institutionally priced MetLife QLAC (Qualified Longevity Annuity Contract) at the point of retirement but without a rollover. MassMutual has a program that allows participants to buy retirement income in $10 per month increments.

Patterson said that Principal decided to offer a stand-alone DIA because it was “simpler” than the VA/GLWB. “I’m very familiar with that benefit [the GLWB] in the advisor-driven world, and there’s a lot of complexity in those designs. When the DIA emerged, we saw that it’s easy for people to get their heads around. We sell the GLWB in the retail world, but we would have a hard time deploying it in the institutional world,” he told RIJ.  

“The next step after a stand-alone DIA,” Patterson told RIJ, “would be to integrate the DIA with a TDF offering. Principal is a large purveyor of TDFs, and we’re developing toward a TDF solution next year. Participants could be defaulted into that, and they could opt out if they want to.”

While many employers have shown an interest in in-plan deferred annuities, the market has been slow to develop. Certainly the financial crisis and low interest rates (which mean high prices for annuities) haven’t helped. But there’s also a regulatory hurdle. Employers are hesitant to maintain lifelong ties to former employees and they’re afraid that they might end up liable for annuity payments if the annuity issuer went broke. The Obama Administration has been an advocate of turning the DC into a true income vehicle. The Treasury Department last year announced that a qualified DIA called a QLAC could be offered as a default option when included in a TDF.

“Washington, plan sponsors, providers, and participants increasingly agree on the objective of greater retirement security and the role of DIAs as means of securing greater income,” said Mark Fortier, director and co-head of the DC business at NISA Investment Advisors. At Alliance Bernstein, he served as the architect for an in-plan annuity option in a TDF at United Technologies. “The strategic question is how to weave the DIA into the fabric of a DC participant’s lifecycle and reframe savings as an outcome—in the form of retirement income they can’t outlive.” 

In-plan deferred annuities could also help solve one of the key behavioral obstacles to buying annuities. “It’s much easier to move small amounts of money over time rather than lump sums all at once,” said Jody Strakosch, a Minneapolis-based retirement consultant, board member of the Defined Contribution Institutional Investment Association.

“You also need to display the amount of future income that has been purchased.” As for the lack of demand for annuities from plan participants, Strakosch said, “Participants don’t know to ask for something that’s not there yet. Was anyone demanding an iPhone before Steve Jobs invented it?” said Strakosch, a former MetLife executive who ran an innovative DIA program for 401(k) participants, now called LifePath Retirement Income, in concert with BlackRock (then BGI) prior to the financial crisis.

When DIAs are offered in retirement plans, they’re priced differently from retail DIAs. Institutional products are, in theory, cheaper than retail, because they don’t involve the cost of a selling agent. Annuities in ERISA plans must use gender-neutral (“unisex”) pricing, which makes them cheaper for women and more expensive for men than retail annuities, where the price accounts for the shorter average life expectancies of men. A big benefit of the flexible premium DIA is that plan participants could “dollar cost average” into their annuity, thus diversifying their interest rate risk–and letting them benefit if interest rates rise.

With Principal Pension Builder, participants can transfer up to 50% of their plan account balances (minus outstanding loans) and direct up to 50% of contributions to the DIA. The minimum contribution is $10 per transfer. The higher the prevailing interest rate and the younger the participant at the time of each contribution, the more future income each contribution will buy. Regarding portability, as long as at least $5,000 has been contributed to the DIA, employees who leave the plan “can retain their guaranteed income through a deferred annuity certificate,” a Principal spokesperson said. 

In calculating future income, Principal assumes that participants will elect a single life annuity with a 10-year period certain and will start income at age 65. In practice, however, participants have flexibility. They can choose from a variety of annuity forms, including life-only, joint and survivor, and cost-of-living-adjusted, for instance. Income must begin no earlier than age 59½ and no later than April 1 following the date the client reaches age 70½.

If the participant dies before the income date begins, the sum of the contributions to Principal Pension Builder minus any previous distributions or surrenders or applicable surrender charges is distributed to beneficiaries, like any other retirement account at death. A spousal beneficiary may instead elect to receive the guaranteed income payments as an annuity based on his or her own age.

“We’ve been getting lots of positive feedback from plan sponsors on it,” Patterson told RIJ. “But until the rubber actually meets the road, you never know.”

© 2015 RIJ Publishing LLC. All rights reserved.

DOL “delouses” socially responsible investments

Posted on October 23, 2015 by -

“Economically targeted investments” no longer “have cooties,” Secretary of Labor Thomas Perez announced during a press conference yesterday in an ornate inner chamber of the Alexander Hamilton U.S. Customs House in downtown Manhattan, a block from the bronze “Bowling Green bull” that stands for a booming stock market.

By that, the Secretary meant that the Department of Labor has reversed its position that for the last seven years has discouraged defined benefit plans from holding, and defined contribution plans from offering investments, “socially responsible” investments. The position was based on the idea that these investments too often sacrificed return for ethical purity.

But a new interpretive ruling from the DOL ruling removes “the cloud” over such investments, opening the way for retirement plans and their participants to invest in such securities as “green” bonds and mutual funds that includes stocks of companies engaged in socially beneficial activities, as long as those choices don’t violate the fiduciary obligation “not to accept lower expected returns or take on greater risks in order to secure collateral [non-financial] benefits.”

[At the press conference, Secretary Perez was asked to respond to public charges by Raymond James CEO Paul Reilly that the Department of Labor doesn’t understand the securities business, or how much damage the DOL’s still-pending “conflicts of interest” or “fiduciary” proposal, would harm the broker-dealer industry. Perez cited the long comment period on the proposal and the competence of his chief advisor on the industry, Judy Mares, as evidence that the DOL had done its homework. The rule, in its current form, could disrupt the current brokerage advisory model, where intermediaries freely mix objective investment advice with sales recommendations from which they profit.] 

Among the beneficiaries of the change on ETIs will be Morgan Stanley, a leading underwrite of green bonds. Last June 8, Morgan Stanley issued a $500 million green bond to raise funds “for the development of renewable energy and energy efficiency projects which are anticipated, once fully completed, to help avoid and reduce greenhouse gas emissions.”

Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing, and Lisa Woll, chairman of The Forum for Sustainable and Responsible Investing, of which Morgan Stanley is one of scores of member, were present at the press conference, as were Matthew Patsky of Trillium Asset Management, which specializes in socially responsible investing, and Bill Dempsey, CFO of the $2 billion Service Employees International Union.   

In the past, the DOL’s ambivalence toward ETIs arose in part from the fact that socially responsible mutual funds often passed up higher returns when they avoided “sin stocks” such as those issued by, for instance, highly profitable tobacco and alcohol companies.

But since 2008, when the DOL last ruled on the issue, there’s been an explosion in investments that seek high profits in the environmental and infrastructure fields that can be categorize as “economically targeted.” The 77 million-member Millennial generation has shown strong interest in such investments, and they are expected to drive demand for ETIs as they enter the workforce and being saving through ERISA plans. 

“The issue is return,” Secretary Perez said, adding that “If a socially responsible investment has a proven track record” there’s no reason for fiduciaries to be “gun shy” about including it in an ERISA plan. He said there’s been “an explosion of interest” in ETIs since 2008, especially among Millennials who are now coming of age.  

© 2015 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Cindy Hounsell

Posted on October 23, 2015 by -

What I do: I’m the president of WISER, the Women’s Institute for a Secure Retirement. We are a nonprofit organization that aims to improve opportunities for women to secure retirement income and to educate the public about the inequities that disadvantage women in retirement. Our programs are geared around educating women to take action. WISER was founded in 1996 through a grant from the Heinz Family Philanthropies to provide low and moderate-income women, ages 18 to 65, with basic financial information aimed at helping them take financial control over their lives. 

Why I do what I do: Most elderly women in America are living in poverty. When you look at why this happens, women were ill-informed and woefully unprepared for retirement. For these older women, there were no 401(k) plans, education was not widespread and retirement planning was not something that women were engaged in. Today, benefits are getting cut. It’s a scary world without a lot of safety nets. The financial well-being of many women is not improving. We are working to change that through education and policy efforts primarily for women under the age of 65. I started WISER to help people get information and take action. Remember, started this before the Internet. It was a different time and there weren’t a lot of places where women could get this information. Cindy Hounsell Copy Block

Where I came from: I was working for Pan American World Airways and they froze the retirement benefit. That’s when I became interested in retirement issues. I went to law school because I wanted to be an arbitrator. I sat on a board for the company and the union and the issues really were interesting. Georgetown Law Center awarded me a fellowship in Women’s Law and Public Policy to work on women’s issues in Washington D.C., and  I wound up working at the Pension Rights Center. I was really pulled into these issues and how they affect people’s lives. We won a number of exciting cases for older women. Before we started WISER, I came up with a checklist for the Department of Labor on retirement issues for women. Parade magazine wound up mentioning the checklist on why women should think about retirement income.

 On serving on the ERISA council: I was appointed in 2011 by Secretary of Labor Hilda Solis to the ERISA Advisory Council, and in 2008 by the Bush Administration to the Advisory Panel on Medicare Education representing the field of retirement and financial planning. It was a wonderful experience. Everyone brings their own wealth of knowledge. Mine was mainly about participants, but then I got to see the problems on the other side. I learned so much.

My claim to fame: In 2012, Money magazine named me one of its ‘Money Heroes.’ The feature celebrated 40 people who had made ‘extraordinary efforts’ to improve the financial well being of others.

On testifying before Congress: Making your point in front of a group of policymakers is important. A lot more people are aware of the issues and many policymakers know there are big retirement issues for women. But I don’t see a lot of change.   

What the retirement income business can do better: Educate! I think it’s really hard because of the new healthcare law. That’s where a lot of the information and action is concentrated at the moment. If anything, we hope employers get more involved in retirement income issues. People trust their plan sponsors.

On my writing: I have written several book chapters, columns, articles, op-eds, papers and booklets on women and retirement. Two booklets, ‘What Every Woman Needs to Know about Money and Retirement: A Simple Guide,’ and ‘What Everyone Needs to Know About Money and Retirement,’ appeared as inserts in Good Housekeeping magazine. They’re available on our website.

My retirement philosophy: After a lifetime of hard work, no one should have to sit at home biting their nails over severe money problems. We focus on women because of their longevity and because there are about six million more women than men at age 65. Think about the nightmare of the 96-year old woman getting thrown out of a nursing home because there’s no money left. We need to educate people in their communities, help them plan for retirement, and get ready for an aging world. 

© 2015 RIJ Publishing LLC. All rights reserved. 

As DOL ponders fiduciary proposal, retail channel assets grow

Posted on October 23, 2015 by -

Retail assets now account for nearly half of the assets in the asset management industry in the United States, according to the latest research from global analytics firm Cerulli Associates.

Much of the growth in retail assets has come through rollovers from 401(k) plans, and this is precisely the money targeted by the current Department of Labor proposal for reducing conflicted advice to IRA owners by requiring commissioned brokers to sign a pledge to act in their clients’ “best interest.”

“U.S. retail channels have exhibited strong growth in recent years, driven primarily by Baby Boomers transitioning assets out of traditional institutional channels, such as 401(k) plans, in preparation for retirement,” said Jennifer Muzerall, senior analyst at Cerulli, in a release.

“The narrowing gap between retail and institutional assets is the result of a myriad of factors,” Muzerall continues. “Since the financial crisis, retail investors typically have had more exposure to equities as compared to institutions, which has paid off given strong equity market returns over the past few years.

“Diminishing asset pools within certain institutional channels may also be reducing the gap. Fund managers’ focus on making historically institutional strategies (i.e., alternatives) available to retail investors through mutual funds and ETFs is also driving growth of retail assets.”

As of year-end 2014, the size of the U.S. professionally managed market reached $38.6 trillion, showing 6.5% growth year over year. Continued strength in U.S. financial markets has contributed to an increase in assets across all retail and institutional channels. If you include individual stocks and federal defined benefit plan assets, the total U.S. asset size is $50.5 trillion. The ten channels noted in the chart on today’s RIJ home page account for about $26.4 trillion of the total.

© 2015 RIJ Publishing LLC. All rights reserved.

U.S. ranked 15th in pension excellence: Mercer

Posted on October 23, 2015 by -

The Netherlands has leapfrogged Australia in the 2015 Melbourne Mercer Global Pensions Index, coming second only to Denmark in the global ranking of pension systems, IPE.com reported this week. The U.S. was ranked 15 out of 25 countries with a score of 56.3.

Both the Dutch and Danish systems were highlighted as “first class” in the seventh edition of the survey, while Sweden rose from sixth place to tie for fifth with Switzerland. Though Finland fell to sixth, it retained the highest overall sustainability ranking of 92.4 – an increase over the record 91.1 calculated in 2014.

The 25 countries’ scores were calculated by assessing a pension system’s adequacy, sustainability and integrity, with each of the three categories given a weighting of 40%, 35% and 25%.

The UK, which ended mandatory annuitization, narrowly retained its ninth-place ranking, nearly dropping out of the group of six countries deemed to have a sound system.

Unlike 2014, which saw Ireland and Germany tied for 12th place, Ireland pulled ahead to claim 11th, increasing its score by less than 1 point, while Germany’s score dropped 0.2 points to 62.

France came 13th, improving on its 2014 ranking, while Poland remained 15th. Austria, meanwhile, slipped one spot to 18th, ahead of Italy, the last-ranking European country at 20th. Italy saw its ranking decline by one, despite its score increasing to 50.9.

The report once again urged the country to increase participation in workplace plans and the level of contributions by participants.

Top-ranking Denmark was also presented with a number of reform suggestions, with the report proposing changes that would better protect accrued benefits in the event of fraud at a pension provider.

The report, which has added two countries to its index in recent years, is likely to resume the practice next year, author David Knox told IPE. Knox, a senior partner at Mercer in Australia, cited Spain as one of next year’s potential European entrants. He added that Latin American countries could join as well in the coming years.

For the first time, the report examined data gathered over the past seven years, investigating how the systems improved key areas, including time spent in retirement, since the first report was published in 2009.

“During this six-year period, five countries – namely Australia, Germany, Japan, Singapore and the UK – have increased their current pension age, which acted to offset the increase that would have otherwise occurred from increasing life expectancies,” the report said. 

“Despite these increases, life expectancy has increased at a faster rate, thereby lengthening the period of retirement.” The report also examined the level of government debt built up by all participating countries, noting that a number of countries had sought to cut expenditure.

“Such developments may improve the sustainability of the pension system,” the report said, “but, inevitably, some of these changes also affect the adequacy of the pension itself. This highlights the natural tension in all retirement income arrangements between adequacy and sustainability.”

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on October 23, 2015 by -

Voya renews its $500 ‘Born to Save’ campaign

For the second consecutive year, Voya Financial is offering a $500 mutual investment to every one of the approximately 10,000 babies born in the U.S. on the first working day of National Save for Retirement Week, the company announced this week. This year, the day is October 19.    

Last year, about 1,000 parents enrolled in the program and claimed the prize for their newborns. Those children, born October 20, 2014, will receive a $50 contribution to their Voya accounts.

A Voya press release said that most parents of newborns can afford to contribute $500 to a savings fund for their children, as evidenced by the amount of money they spend on things they and their children don’t need. According to a Voya survey in September of more than 1,000 new parents, about 40% spent at least $500 on baby-related items in the first year that they later determined were nonessential or they never used.

Almost 20% spent over $1,000 on items like clothing, toys, baby entertainment, strollers, baby carriers, and nursery furniture or décor.  http://voya.com/borntosave.  Parents and guardians of eligible babies must register for this offer at the Voya Financial website by December 18, 2015, Voya said. 

TIAA-CREF expands in Europe

TIAA-CREF is set to grow its European institutional presence following the launch of three new UCITS fund strategies.

Managed by Nuveen Investments, a subsidiary of the US financial services company, the funds will invest in bonds and global equity with an environmental, social and governance (ESG) focus, and give investors access to emerging market debt.

Amy Muska O’Brien, head of TIAA-CREF’s responsible investment team, said the ESG funds would focus on companies deemed “best in class” under its screening procedures.

Speaking about the ESG equity strategy, O’Brien said: “The strategy has been offered in the US for some time, and the same [portfolio management] team will be running the strategy as well.”

The ESG bond fund will focus on US holdings, aiming to achieve an exposure to holdings with a “measurable” social or environmental outcome, she added.

O’Brien said the ESG bond fund was likely to be of interest to those seeking exposure to impact investing.

Asked whether the new fund launches marked an attempt by TIAA-CREF to further establish itself in the European market, she noted that the company was already known to a number of large asset owners through its agricultural funds. 

She declined to state the company’s expectations for investments over the first year of each fund’s lifetime, saying only that “strong” demand was expected. 

Fouche´succeeds O’Donnell as chief of Prudential Annuities

Bob O’Donnell, currently head of Prudential Annuities, has been tapped to lead a new organization that will focus on innovation and development of new growth opportunities across all of Prudential’s U.S. business operations. The change will take effect December 7, according to a Prudential release.

Lori Fouché, currently head of Prudential’s Group Insurance operation, will succeed O’Donnell as president of Prudential Annuities. Andrew Sullivan, currently chief operations officer for Prudential Group Insurance, will succeed Fouché as that business unit’s president.

O’Donnell joined Prudential in 2003, following the company’s acquisition of American Skandia, where he had been a member of the Product Development Department since 1997. Prior to becoming president of Prudential Annuities in 2012, he was the operation’s vice president of product, investments, and marketing, and was responsible for its strategic development. He is also one of the founders of the Annuities Innovation Team.

Prior to joining American Skandia, O’Donnell was with Travelers Insurance Company and Mass Mutual in finance and asset management roles. He earned his bachelor’s degree in Economics from Fairfield University and an MBA in Finance from Rensselaer Polytechnic Institute.

Fouché joined Prudential as head of its Group Insurance operation in 2013. Previously, she served as president and CEO of Fireman’s Fund Insurance Company, and held several other senior leadership positions in its commercial and specialty insurance divisions. Fouché earned an MBA from Harvard Business School and a Bachelor of Arts degree in History from Princeton University, with a certificate in American Studies.

Sullivan joined Prudential in 2011 and has been responsible for the underwriting, claims and service organizations within the Group business. He earned an Executive MBA from the University of Delaware and a Bachelor of Science degree in mechanical engineering from the United States Naval Academy.

More large DB plan sponsors contemplate de-risking: MetLife

MetLife’s new 2015 Pension Risk Transfer Poll, released this week, found that nearly half of large plan sponsors (45%) have taken steps to prepare for an eventual pension risk transfer. Among those plan sponsors who are very or somewhat likely to engage in pension risk transfer, the percentage who have taken preparatory steps rises to 72%.

“Of those plan sponsors who have taken preparatory steps, approximately two-thirds have evaluated the financial impact of a pension risk transfer (65%); explored the pension risk transfer solutions available in the market place (62%); and/or, engaged in data review and cleanup (62%),” said Wayne Daniel, senior vice president and head of U.S. Pensions at MetLife.

According to the survey, plan sponsors identify key stakeholders as members of their company’s C-suite (including the CEO, CFO, etc.) (87%); plan actuaries (72%); attorneys/legal counsel (68%); ERISA/plan governance committee members (62%); and, outside consultants/advisors (45%). 

The top catalysts for a pension risk transfer to an insurance company are additional Pension Benefit Guaranty Corporation (PBGC) premium increases (51%), the impact of the new mortality tables issued by the Society of Actuaries in 2014 (45%) and the funded status of their plans reaching a predetermined level (34%).

© 2015 RIJ Publishing LLC. All rights reserved.

‘De-Risky’ Business

Posted on October 15, 2015 by -

Over the past few years, the sponsors of underfunded jumbo pensions have come to realize that interest rates won’t be rising very soon (or by very much). And any hope they may have had that rising rates would lift the funded ratios of their plans (now only about 80%) has pretty much vanished.

“A few years ago they were sure that rates were about to go up,” said Robert Pozen, the former Fidelity Investments president, during a retirement-focused conference sponsored by the Journal of Investment Management at MIT recently. “Now it’s a bit like Waiting for Godot.”

Many of those Fortune 500 sponsors have already closed their defined benefit plans to new hires, offered individual lump-sum buyouts, or increased their allocations to bonds. Now they’re taking the next step and doing deals that transfer at least part of their remaining DB obligations to life insurance companies through “pension buyouts.”

This fairly recent development has created opportunity for the handful of life insurers that are big enough to sell a multi-billion-dollar group annuity and that have the requisite amount of in-house actuarial and portfolio analysis expertise to price such a product. No life insurer has seized this opportunity as aggressively as Prudential, the second biggest life insurer in the U.S., after MetLife.

“We saw this wave coming,” said Peggy McDonald, a senior vice president at Prudential and member of its pension risk transfer team, who participated in the same panel discussion at the JOIM conference as Pozen. “The focus of thinking about defined benefit plans has shifted from the HR departments to the finance departments at large sponsors, and now it’s a legacy liability for them,” she added. “So they’re asking, ‘How can I move this off my balance sheet in a way that keeps the promises we made to the people who worked for us?’”

Prudential has been involved in about $40 billion worth of large deals—a majority of the total volume of mega-deals in recent years—with General Motors, Verizon, Motorola, Bristol-Myers Squibb and others. On October 9, only days before the JOIM meeting, Prudential had announced two separate multi-billion group annuity deals. JC Penney, the long-time clothier of middle-class American women, bought a group annuity that will move an estimated 25% to 35% of its $5 billion in pension assets and liabilities, covering some 43,000 workers, to Prudential. 

In the second deal, Prudential, in combination with Banner Life (a unit of Legal & General America) and American United Life (a unit of OneAmerica) relieved the North American subsidiary of Philips Electronics of about €1 billion in pension assets and liabilities affecting about 17,000 workers—reducing Philips U.S. pension liabilities to about €2.7 billion and global pension liabilities to about €8.5 billion. The deals are expected to close in December.

In this new jumbo pension buyout market, Prudential is the clear leader. “Prudential has been the winner of most if not all of the [jumbo pension risk transfer] business,” said Ari Jacobs, senior partner and Global Retirement Solutions leader for AonHewitt, which advises plan sponsors. “MassMutual and Voya are also in the business. Hundreds of pension buyout deals of less than $1 billion are closed each year, but only a handful of companies can work in the mega-market. Prudential has won most of the largest bids in that market.”

How Prudential does it

Watching the number of Prudential’s deals in this space, some observers have wondered how one company could safely take on so much apparent longevity risk and investment risk. To be sure, these deals are vetted by consultants to make sure the plan sponsors fulfill their ERISA fiduciary responsibilities and choose the “safest” available insurance partner. Still, a lot of risk seems to be accumulating in one place.

At the JOIM conference, and in a subsequent phone interview with RIJ, McDonald explained that Prudential and its plan sponsor clients bring these deals to fruition by taking great care in their selection of retirees to include in the group annuity, by closely analyzing the risks of those pools, and by carefully selecting the assets that will accompany those liabilities over to the insurer.   

In many cases, that means focusing on the oldest plan members, whose benefits are the least risky to transfer. “We addressed the cost issue by focusing on the retiree populations,” McDonald said at the conference. “About 50% of the pension obligation is obligations to retirees, those are the most efficient to transfer. Their average ages will be 70 or 72. It can be too expensive to do the buyout for non-retirees. There’s behavioral risk, interest rate risk, and longevity risk. With retirees, the duration of liabilities is relatively short. So there’s not as much longevity risk or investment risk as we would see with younger participants.”

It also involves a close analysis of the longevity risks of that group, and the variables that affect the longevity of sub-groups within it. “We have a longevity team that does a really deep dive and finely tunes our assumptions, based on certain variables. Geography, gender, current age and benefit size are the big ones,” McDonald told RIJ. “We know from Society of Actuaries tables, for instance, that people with bigger benefits have better longevity. As a company, we have mortality history in our very large block of annuity business going back to 1928. We rely on what we’ve learned from that book of business and tweak it for what we know about each specific group.”

In addition to identifying the liabilities carefully, Prudential and the jumbo plan sponsors had to identify the assets backing the liabilities with great care. Jumbo plan buy-outs require in-kind transfers of assets. In the run-up to the deal, the sponsor may have to change the plan’s asset mix to fit the insurer’s requirements. Those assets also need to remain equal to the liabilities during the period between the announcement of the transfer and the closing of the deal.

Cash not accepted

One big difference between the jumbo pension buyouts and those of under a billion dollars is that plan sponsors can’t pay for big group annuities with cash. It has to be done with assets, and those assets have to be tailored to the liabilities. Certain assets may even have to be purchased to fit the pricing of the deal.

“In a small plan buy-out, the insurer hands over the group annuity contract and the plan sponsor hands over cash,” McDonald said. “That wouldn’t have worked for the General Motors deal. If they gave us $25 billion in cash it would have taken us a long time to invest that.So we generally take high quality corporate bonds. It’s an in-kind exchange. We take some private equity. We give excruciating instructions on duration, sector, and quality of the bond. We say, here’s the perfect portfolio you can give us and here’s the price we can give.”

While the mega-buyouts create new business for Prudential, they are watched with some anxiety (and much chagrin) by advocates for DB participants. “We’re concerned about insurers taking on so many obligations,” said Nancy Hwa, a spokesperson for the Pension Rights Center. “It’s unlikely that a company like Prudential would go under, but we want to make sure they don’t mess up. These transfers are another opportunity for people to fall through the cracks. We’re also concerned about transfers of [personal] information. Generally, we don’t dislike these transfers as much as we disliked the [now restricted] lump-sum offers to retirees.”

If anything, the number of large pension buy-outs appears destined to grow. “When rates go up you’ll see tons more of these transactions,” McDonald said. “Plan sponsors won’t miss the boat a second time. The last time they were overfunded, they were too slow to act. There were plan sponsors looking to exit, but they weren’t ready. Now they’re better educated and they have a stronger desire to get the liabilities off their balance sheets. It’s not a matter of if, but when. Plan sponsors are coming to us. Their boards are asking them, ‘Why aren’t we doing this?’”

© 2015 RIJ Publishing LLC. All rights reserved.

The Link between Inequality and ‘Retirement Readiness’

Posted on October 15, 2015 by -

If you’ve ever wondered how the United States can have $24 trillion in total retirement savings and still suffer from a retirement “crisis,” you might want to take a look at the 2015 edition of the Global Wealth Databook, just published by the Research Institute at Credit Suisse.

The Credit Suisse report shows that those trillions are concentrated in only a handful of hands, and that while the middle class in the U.S.—those with between $50k and $500k—represents about 38% of the population it has only about 20% of the nation’s financial wealth. In a country with an egalitarian self-image, that’s surprising. Shocking, even.

“In North America – alone among regions – the population share of the middle class exceeds their share of wealth: in other words, the middle class as a group have less than average wealth. In fact the average wealth of middle class adults in North America is barely half the average for all adults,” the report says.

“In contrast, middle class wealth per adult in Europe is 130% of the regional average; the middle class in China are three times better off in wealth terms than the country as a whole; and the average wealth of the middle class in both India and Africa is ten times the level of those in the rest of the population.”

The middle class in the U.S., at 38% of the population, is also smaller than the middle class elsewhere, the report said. Proportionate to the total, the middle class is smallest in crowded, impoverished India (3% of the population) and largest in sparsely populated, resource-rich Australia (66%). In most high-income countries, the middle class includes 50% to 60% of the population.       

The shrinkage of our middle class is not entirely a bad thing, the authors of the report observe. Between 2000 and 2015, some middle class Americans evidently migrated to the uppermost 12% of the population, while others dropped into the 50% of the population with less than $50,000 in wealth. (The report didn’t examine age-specific wealth levels.) The wealth of our middle class is dwarfed by the wealth of our upper class.

In the U.S., the wealthiest 10% of families have 75% of the wealth, and the top one percent has 35% of the wealth. The top 25% have 90% of the wealth. In the U.K, by comparison, the top one percent of adults has 12.5% of the wealth and the top 10% has 44%.

What does this “inequality” in the U.S. have to do with the retirement crisis? That’s hard to say. Is the distribution of wealth a zero-sum game? Or is it a game where each family determines their own wealth or poverty, independent of the others? Or would the bottom 88% be poorer if not for the industry of the top 12%? Is there a cause-and-effect relationship between retirement readiness and the distribution of wealth, or just a correlation? Or a combination of the two.

When faced with difficult questions, I call on people who are better informed than I am. In this case, I reached out to Steven Sass of the Center for Retirement Research at Boston College, who wrote “The Promise of Private Pensions” (Harvard University Press, 1997). Sass, whose organization publishes a retirement readiness index, doesn’t think that retirement readiness is a finite resource.

“Rising ‘inequality’ per se, however, seems orthogonal to [i.e., statistically independent of] notions of a ‘retirement crisis,’” Sass told RIJ. “If fewer retirees were at risk of poverty or of being unable to sustain their pre-retirement standard of living (or some such measure), the ‘crisis’ would diminish even if the rich retirees got fabulously richer. I doubt that the rich got richer at the expense of the middle, unless one has a rather robust definition of ‘at the expense of.’”

The authors of the Credit Suisse report noted that a couple of their procedural decisions may have contributed to their small estimate of the small size of the U.S. middle class. First, young people with less than $50,000 in wealth were not included in the middle class, when their incomes may have justified inclusion. Second, state pensions (such as Social Security) weren’t counted as personal wealth; that would have pushed more people up into the middle class. On the other hand, the same rules were applied to all countries, and the U.S. middle class was at least relatively small.

Given those limitations, the study may not tell us a lot about the link between distribution and wealth and retirement readiness. The most worrisome part of the report may be the fact that about 50% of Americans have virtually no wealth. According to the Credit Suisse report, the wealthiest 12% of Americans have 79.1% of the country’s wealth, the 38% who belong to the middle class have 19.6%, and the indigent half of Americans owns only 1.3%. 

© 2015 RIJ Publishing LLC. All rights reserved.

Stock Market Volatility and Investors’ Trust

Posted on October 14, 2015 by -

Recently, volatility in the stock market has returned to levels last evident in September 2008 at the start of the past recession. Repeated market volatility produces more changes than simply in the amount of a household’s invested assets; it changes how investors think, feel, and behave about their investments.

The two most recent recessions (2000–01 and 2008–09) show clearly that even when the US stock markets recover, investors’ trust in financial institutions and professionals rarely returns to prerecession levels—investor mistrust simply increases with time.

Households mistrust discount brokerages the most. However, full-service brokerages and banks are not immune to an increasing lack of trust; financial-planning companies and mutual fund companies fare only marginally better. Brokerages and banks, in particular, focus on households with high investable assets. From the consumer point of view, this single focus (which does not consider the households’ total financial picture) engenders only greater mistrust. (Charts courtesy of The Macromonitor. Based on households with $100,000 or more in investable assets, adjusted for inflation.)

Macromonitor Chart

The prevailing view in the investment community has been that most investors will blindly follow their financial professional to another institution should their broker switch, should the institution fail to meet portfolio expectations, or should the institution participate in a bothersome scandal.

In fact, a growing number of investors do not share this view. Because of the industry’s focus on those with the most investable assets, many lower-net-worth investor households no longer have a personal relationship with a single financial professional or may not have a designated financial professional at all: They use call centers, online portals, and—most recently—robo-advisors. The result is that more households mistrust financial professionals than mistrust financial institutions. Financial planners are the exception because their recommendations and services build personal relationships with their customers through a review of—and suggestions for—the household’s complete financial needs.

Macromonitor Chart 2

Current market volatility reminds investors daily of the recent recessions. Consequently, investment firms—if they continue to behave as if nothing is different and do not alter their approach to investors to consider the complete needs of these desirable households—run the risk of further alienating their customers and losing their business forever.

© 2015 SRI. Reprinted by permission.

Longevity growth begins to slow: Society of Actuaries

Posted on October 14, 2015 by -

The Society of Actuaries this week released an updated mortality improvement scale for pensions that shows a trend toward “somewhat smaller improvement in longevity” than in the past. The new scale—MP-2015—includes just-released Social Security mortality data from 2010 and 2011.

Updating current defined benefit plans to the MP-2015 scale released today might reduce a plan’s liabilities by between zero and two percent, depending on each plan’s specific characteristics, SOA’s preliminary estimates suggest.

 “People are living longer, but longevity is increasing at a slower rate than previously available data indicated,” said Dale Hall, managing director of research at SOA. The new scale will allow pension actuaries to measure private retirement plan obligations more accurately, he added.

In October 2014, the Society released the RP-2014 base mortality tables and MP-2014 improvement scale, the first update to the SOA’s pension plan mortality tables in more than a decade.

At that time, the SOA indicated the mortality improvement scale (used to project mortality rates) would be updated more frequently as new longevity data became available.

“Every plan is different, and it is important that professionals working in this field perform their own calculations on the impact to their plan,” Hall said in a release. “It is up to plan sponsors, working with their plan actuaries, to determine whether to incorporate MP-2015 into their plan valuations.”

The updated mortality improvement scale was developed by the SOA’s Retirement Plans Experience Committee (RPEC). Click here for a full version of the Mortality Improvement Scale MP-2015 report.

 

Financial Engines offers call center support to rank-and-file participants

Posted on October 14, 2015 by -

In a sign of the ongoing convergence of web-mediated advice and human advice into a single hybrid form of investment guidance for middle-class investors, Financial Engines said it will open up its phones to any participant in any plan that offers its online service—not just to its managed account customers.

“Now, all 401(k) participants with direct access to Financial Engines can pick up the phone and talk with a Financial Engines advisor at no additional charge—whether they use the company’s investment advisory services or not,” said a Financial Engines release. Founded in 1996 by Nobel Prize winner Bill Sharpe and others, the Sunnyvale, CA-based fintech company was among the first of what would later be called robo-advisors. Its managed account service has helped it grow into the largest registered investment advisor (RIA) in the U.S.

Plan participants can use phone, webcam or “live chat” to discuss their finances with licensed Financial Engines counselors. They can get help with their retirement plan accounts, income planning and other financial topics. Advisors are non-commissioned and do not sell investment products.

Financial Engines’ advisors can talk with participants about assets in side and outside retirement accounts, savings rates and Social Security claiming strategies. They can also help participants with responding to market volatility, appropriate use of target date funds, budgeting, creating a rainy day fund and deciding between Roth vs. traditional IRA programs.

According to a new survey of over 1,000 401(k) participants by Financial Engines, employees want “a person in their corner.” The surveyshows that 54% of 401(k) investors not currently working with a financial advisor would like to work with one in the future.

  • 69% of participants said that it was “very important” that their financial advisor be legally required to act in their best interest, 18% said that it was “somewhat important.”
  • 76% of investors who use target date funds said that an advisor’s fiduciary status was very important, as did 73% of investors not currently working with an advisor but interested in doing so, 72% of those with assets between $100,000 and $500,000, and 70% of investors who already work with an advisor.

Commonly cited barriers to using an advisor included: affordability (46%), believing they didn’t have enough assets to get an advisor’s attention (36%) or uncertainty how an advisor could help them (26%). Twenty-three percent of investors said that they preferred a do-it-yourself approach to handling their investments.

While interest in online advisory services was strong (60%), interest in services that included access to financial advisors was even stronger (68%).

According to respondents, the top reasons people use financial advisors included the ability to avoid costly mistakes (44%), greater peace of mind or more confidence (28%) and the ability to further personalize financial plans and strategies (25%).

The financial topics of most interest to participants went beyond traditional retirement planning. According to the report, 401(k) participants are most interested in receiving help with:

  • Determining the appropriate savings rate  
  • Turning their savings into reliable retirement income
  • Evaluating their overall financial wellness
  • Assessing individual risk tolerance
  • Optimizing Social Security claiming strategies

© 2015 RIJ Publishing LLC. All rights reserved.

 

Bank annuity fee income dips 4.1% in first half of 2015

Posted on October 14, 2015 by -

Income earned from the sale of annuities at bank holding companies hit $1.74 billion, down 4.1% from the first-half record of $1.81 billion in 2014, according to the Michael White Bank Annuity Fee Income Report.

Second-quarter 2015 annuity commissions slipped to $898.9 million. It was down 2% from $916.8 million earned in second quarter 2014, but up 7.0% from $840.1 million in first quarter 2015 and the third-highest quarterly mark on record.

Wells Fargo & Company (CA), Morgan Stanley (NY), and Raymond James Financial, Inc. (FL) led all bank holding companies in annuity commission income in first half 2015. Among BHCs with assets between $1 billion and $10 billion, leaders included Santander Bancorp (PR), Wesbanco, Inc. (WV), and National Penn Bancshares, Inc. (PA).

The report is based on data from all 6,656 commercial banks, savings banks and savings associations (thrifts), and 648 large top-tier bank and savings and loan holding companies (collectively, BHCs) with over $1 billion in consolidated assets operating on June 30, 2015. Several BHCs that are historically and traditionally insurance companies have been excluded from the report.

Michael White Oct 2015 Bank Annuity Sales

Of the 648 BHCs, 305 or 47.1% participated in annuity sales activities during first half 2015. Their $1.74 billion in annuity commissions and fees constituted 18.7% of their total mutual fund and annuity income of $11.24 billion and 36.0% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $4.83 billion. Of the 6,348 banks, 861 or 13.6% participated in first-half annuity sales activities. Those participating banks earned $389 million in annuity commissions or 28.6% of the banking industry’s total annuity fee income; their annuity income production was down 10.7% from $435.4 million in first half 2014.

“Of 305 large top-tier BHCs reporting annuity fee income in first half 2015, 189 or 62.0% are on track to earn at least $250,000 this year. Of those 189, 63 BHCs or 33.3% achieved double-digit growth in annuity fee income for the quarter,” said Michael White, president of Michael White Associates (MWA), in a release.

“That’s more than a halving from first half 2014, when 127 institutions or 58.3% of 218 BHCs on track to earn at least $250,000 in annuity fee income achieved double-digit growth. However, the number and percentage of BHCs with double-digit growth is more typical in past years. The best news is the strength of annuity revenue in second quarter 2015, which is one of the best quarters in history and up 7.0% from first quarter.”

Two-thirds (67.7%) of BHCs with over $10 billion in assets earned first-half annuity commissions of $1.66 billion, constituting 95.2% of total annuity commissions reported by BHCs. This revenue represented a decrease of 2.0% from $1.69 billion in annuity fee income in first half 2014.

Within this asset class of largest BHCs in the first half, annuity commissions made up 27.7% of their total mutual fund and annuity income of $9.10 billion and 38.0% of their total insurance sales volume of $4.36 billion.

Annuity fee income at BHCs with assets between $1 billion and $10 billion fell 28.9%, from $108.3 million in first half 2014 to $77.0 million in first half 2015 and accounting for 19.1% of their total insurance sales income of $403.1 million.

The smallest community banks, those with assets less than $1 billion, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were Sturgis Bank & Trust Company (MI), The Oneida Savings Bank (NY), and FNB Bank, N.A. (PA). These banks with less than $1 billion in assets generated $33.89 million in annuity commissions in first half 2015, down 4.9% from $35.63 million in first half 2014.

Only 10.3% of banks this size engaged in annuity sales activities, which was the lowest participation rate among all asset classes. Among these proxy banks, annuity commissions constituted the smallest proportion (19.0%) of total insurance sales volume of $178.7 million.

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 6.2% in first half 2015. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 15.4% of noninterest income.

© 2015 RIJ Publishing LLC. All rights reserved.

RIIA’s RMA designation goes online

Posted on October 14, 2015 by -

The Retirement Income Industry Association (RIIA) and Salem State University near Boston are launching a new online course for financial advisors who want to pursue RIIA’s Retirement Management Analyst (RMA) designation.    

The new program combines classroom-based teaching with web-based “distance learning.” The first nine-week program runs from October 26 through December 18.  The program will incorporate live and recorded expert presentations, discussion groups and interactive engagement around the RMA curriculum and case studies. Michael Lonier, RMA, CEO of Lonier Financial Advisor LLC, is the principal instructor.

The course is designed for financial advisors with at least three years’ experience who want to master RIIA’s retirement planning advisory process and “View Across the Silos” approach to serving clients. 

The course covers the RMA’s methods for:

  • Implementing a four-part planning framework that starts with a Client Diagnostic Kit that generates Retirement Allocations that are built using the RMA Toolbox within the RMA Practice Management context.
  • Comprehensive retirement planning based on the household balance sheet.
  • Using the client’s cash flow and balance sheet to determine the appropriate application of investment-based planning, goals-based planning, and product-based planning.
  • Generating secure retirement income allocations protected by four broad risk-management techniques to build Upside, Floor, Longevity, and Reserves.
  • Focusing on goals and successful outcomes, in addition to investment returns and performance.
  • A cross-silo approach that embraces products across the investment, banking and insurance spectrum.

The completion of this and other programs will prepare advisors to take the RMA exams for the two RMA designation levels.  For more information and to apply click here. 

© 2015 RIJ Publishing LLC. All rights reserved. 

The Bucket

Posted on October 14, 2015 by -

Life settlements industry still not fully recovered: Conning

The life settlements market continues to draw investor interest, but is challenged by the shifting demand for smaller face amounts, according to a new study by Conning.

“We have seen continued investor interest in life settlements as they seek above average returns in this low interest rate environment,” said Scott Hawkins, vice president, Insurance Research at Conning, Inc.

“Investors purchased $1.7 billion worth of U.S. life insurance face value in 2014, bringing our estimate of the total face value of life settlements at year end to just over $32 billion. We project continued steady growth in the amount of face value available for life settlements, but the industry has a long way to go to re-attract capital to pre-2009 levels to meet that supply.”

The new study, “Life Settlements and Secondary Market Annuities: Opportunities and Challenges,” provides Conning’s annual Life Settlements Market Review and Forecast, along with market guidance. Beyond life settlements, the study covers secondary annuities, structured settlements markets and non-U.S. secondary markets for insurance. It is Conning’s twelfth such report on the market.

“One challenge in attracting higher capital is the availability of other alternative investments,” said Steve Webersen, head of Insurance Research at Conning, Inc. “To attract capital to the traditional life settlement market, providers will need to restructure their operations to more effectively address small-face business and more closely align their compensation models with investor interests.”

Conning is a investment management company for the global insurance industry. It manages $92 billion in assets as of June 30, 2015, through Conning, Inc., Conning Asset Management Ltd, Cathay Conning Asset Management Ltd, Goodwin Capital Advisers, Inc., and Conning Investment Products, Inc. All are subsidiaries of Conning Holdings Ltd, a unit of Cathay Life Insurance Co., Ltd., a Taiwanese company.  

Pension funded status falls to 81.7% on weak equity returns: Milliman 

The funded status of the 100 largest U.S. corporate pension plans declined $28 billion in September, according to the latest edition of the Pension Funding Index, a service of Millman Inc. Asset values declined $19 billion and pension liabilities rose $9 billion. The funded status fell to 81.7% from 83.3%.

“It will take a massive rally in the fourth quarter for these 100 pensions to sniff their annual expected return of 7.3%,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index.

Milliman actuaries have established optimistic and pessimistic forecasts for the year ahead. Under the optimistic forecast, rising interest rates (reaching 4.34% by the end of 2015 and 4.94% by the end of 2016) and asset gains (11.3% annual returns) would boost the funded ratio to 85% by the end of 2015 and 97% by the end of 2016. 

Under the pessimistic forecast (4.04% discount rate at the end of 2015 and 3.44% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 80% by the end of 2015 and 73% by the end of 2016. 

Pan-European pension product proposed

A Europe-wide, standardized “third-pillar” personal pension product (PPP) run by private providers has been proposed by the European Insurance and Occupational Pensions Authority (EIOPA), but Dutch and German pension officials don’t think it’s such a good idea.

The third-pillar product—in other words, a personal savings vehicle outside of government and employer-based retirement savings plans—would require “default products to guarantee contributions” or “need to be based around a lifecycle fund,” according to proposals by the European Insurance and Occupational Pensions Authority (EIOPA).

“The goal of a Pan-European Personal Pension (PEPP) system would be to deliver value for money for consumers through economies of scale as providers operated across national borders,” said the EIOPA, according to an IPE.com news report.

The Dutch Pensions Federation has criticized the proposal, however, arguing that demand for such plans would come only from the “happy few”, and fail to encourage workers to save more for pensions.

It said the European Commission should focus instead on second-pillar pensions, which encourage “solidarity, risk-sharing and the participation of all participants in governance.” This, it said, has “clear advantages” over purely commercial products, which “place risk and the drive for accrual with the consumer”. 

Representatives of Germany’s pension funds association (aba) agreed, arguing that “we need more funded pensions in Europe but with the focus on occupational pensions”, as this pillar offered “good value for money.” It said existing systems should be “further developed and enhanced” before new systems were set up. Aba described the PPP as “unconvincing” and arguing that many questions “remained unanswered.”

The Dutch Pensions Federation also expressed concerns that cross-border product providers would be unable to offer sufficient service locally. “It would be difficult for a Danish provider of a PEPP to advise a participant in Italy correctly about how to deal with his pension rights during a divorce, unless the provider has a local subsidiary,” it said.

Morningstar acquires “tax-efficient rebalancing” technology

Morningstar, Inc., has agreed to buy Total Rebalance Expert (tRx), an “automated, tax-efficient investment portfolio rebalancing platform” for financial advisors, from FNA, LLC for an undisclosed um. Morningstar expects to complete the transaction net month.

More than 500 financial advisors from 175 firms currently rely on tRx to rebalance more than $20 billion in client assets, a Morningstar release said. Advisors can use the software to minimize taxes, harvest losses, and rebalance at the account or household level. The tool can show clients exactly how much they saved them in taxes.

Sheryl Rowling, CEO of FNA and principal of independent advisory firm Rowling & Associates, created tRx in 2008 when she couldn’t find an affordable, tax-efficient, easy-to-use rebalancing system for her own practice.

According to Tricia Rothschild, head of global advisor solutions for Morningstar, the Chicago-based fund information firm will integrate tRx with its ByAllAccounts aggregation service, which advisors use for client acquisition and profiling, building and analyzing portfolios across all of their clients’ assets, and communicating performance.  

In June 2015, Morningstar announced it was integrating the tRx rebalancing capabilities into Morningstar Office, the company’s practice and portfolio management system, which more than 4,000 independent financial advisors use.

“Morningstar plans to add other important metrics, such as its investment valuation, risk factors, and real-time pricing, to the rebalancing capability,” Rowling said in a release.

Rowling will continue to run her advisor practice and work for Morningstar on a part-time basis. Morningstar plans to incorporate the tRx capability into its advisor offerings and will also continue to offer it as a standalone platform.

More than half of U.S. financial advisors and the 25 largest U.S. broker-dealers have access to Morningstar’s software, data, and research. The company has three primary research and practice management platforms for advisors: Morningstar Advisor Workstation, Morningstar Office, and Morningstar Direct. In 2014, Morningstar acquired ByAllAccounts, an account aggregation provider that helps advisors deliver more complete advice to their clients. Morningstar also offers outsourced investment management services through Morningstar Investment Services, Inc.

Longevity growth begins to slow: Society of Actuaries

The Society of Actuaries this week released an updated mortality improvement scale for pensions that shows a trend toward “somewhat smaller improvement in longevity” than in the past. The new scale—MP-2015—includes just-released Social Security mortality data from 2010 and 2011.

Updating current defined benefit plans to the MP-2015 scale released today might reduce a plan’s liabilities by between zero and two percent, depending on each plan’s specific characteristics, SOA’s preliminary estimates suggest.

“People are living longer, but longevity is increasing at a slower rate than previously available data indicated,” said Dale Hall, managing director of research at SOA. The new scale will allow pension actuaries to measure private retirement plan obligations more accurately, he said.

In October 2014, the Society released the RP-2014 base mortality tables and MP-2014 improvement scale, the first update to the SOA’s pension plan mortality tables in more than a decade.

At that time, the SOA indicated the mortality improvement scale (used to project mortality rates) would be updated more frequently as new longevity data became available.

“Every plan is different, and it is important that professionals working in this field perform their own calculations on the impact to their plan,” Hall said in a release. “It is up to plan sponsors, working with their plan actuaries, to determine whether to incorporate MP-2015 into their plan valuations.”

The updated mortality improvement scale was developed by the SOA’s Retirement Plans Experience Committee (RPEC). A full version of the Mortality Improvement Scale MP-2015 report is available here.

Slower growth of withholdings indicates slowing economy: TrimTabs

TrimTabs Investment Research reports that the U.S. economy is slowing, based on declining growth in the withheld income and employment taxes that flow daily into the U.S. Treasury. Year-over-year real growth in income tax withholdings dropped to 4.0% in September from 5.5% in August.

“September’s growth rate was the lowest all year, and it suggests the U.S. economy is cooling off,” said David Santschi, chief executive officer at TrimTabs. “We believe turmoil in financial markets and emerging economies is having a negative impact on the U.S. economy.”

TrimTabs added that growth in withholdings has continued to decelerate into early October. Year-over-year real growth slipped to 3.9% in the four weeks ended Friday, October 9.  TrimTabs’ analysis is based on daily income tax deposits to the U.S. Treasury from the paychecks of the 143 million U.S. workers subject to withholding.

“We’ve been writing for some time that the Fed will act later rather than sooner,” noted Santschi. “The Fed has demonstrated repeatedly that its foremost objective is to support asset prices, and recent market volatility and looming fiscal debates in Congress are likely to keep it on hold for the rest of this year.”

TrimTabs said another sign the economy is slowing is that the TrimTabs Macroeconomic Index fell to a three-month low last week and is down 0.7% this year after rising 4.5% last year.  The index is a correlation weighted composite index of leading macroeconomic variables.

Eisenbach to run retirement marketing at Voya

Karen Eisenbach, the former executive director of Retirement Marketing at J.P. Morgan Asset Management, has joined Voya Financial Inc. as chief marketing officer for its Retirement business. Eisenbach will be based in Voya’s Windsor office and report to CEO of Retirement Charles P. Nelson.

Eisenbach will oversee the marketing strategy for Voya’s institutional and retail retirement segments while partnering with Corporate Marketing to drive engagement with distribution partners, plan sponsors and retirement plan participants, a Voya release said. 

At J.P. Morgan Asset Management, Eisenbach helped develop and launch a retirement offering for small- and mid-sized plan sponsors. She has also managed her own consulting business and held prior leadership positions with Nationwide Financial and National City Bank.

Eisenbach received her undergraduate degree in finance from The Ohio State University.  She also served as a past board member of the Bexley Education Foundation.

Aging workforce means higher benefit costs: LIMRA 

Even as waves of Millennials enter the workforce, millions of Boomers are still working. As a result, 73% of employers have planned for their benefit costs to go up as a consequence of having those older workers in their companies, according to a survey by the LIMRA Secure Retirement Institute.

Half of employers surveyed have said they will absorb the higher benefit costs while 41% will pass the costs on to employees. About a third of employers said they might reduce in benefits, salary growth and employer contributions to retirement plans to manage benefit costs. 

Despite higher benefits costs, 9 in 10 employers told LIMRA that keeping older workers on the job is good for business. Eighty percent of employers said that older workers offer experience, leadership and institutional knowledge.

Many older employees prefer to keep working, often because they want to increase their retirement savings. Only 5% of workers in the study said they feel “extremely well prepared” for retirement, according to a previous LIMRA survey.  Among pre-retirees (workers within 10 years of retirement), 30% say they intend to work until age 66, while one in five expects to retire at age 70 or older. 

At the same time, 60% of employers worry that delayed retirements will slow the careers paths of younger workers. Nearly half said they “struggle to address the different retirement planning needs for workers of various ages.”

Seven in ten employers said they would like guidance from their plan provider on how to transition older workers into retirement.  Half said they would use an advisor or consultant for this guidance. 

UBS to pay $19.5 million for misleading U.S. investors

UBS AG has agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to its own foreign exchange trading strategy, the Securities and Exchange Commission announced this week.

Structured notes typically consist of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices. The return depends on the performance of the derivative over the life of the note.

UBS agreed to cease any similar future violations, to pay disgorgement and prejudgment interest of $11.5 million, to distribute $5.5 million of those funds to V10 investors to cover their losses, and to pay a civil penalty of $8 million.  

Between $40 billion to $50 billion of structure notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors, the SEC said in a release. UBS is one of the largest issuers of structured notes in the world.

UBS agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap. According to the charges, UBS falsely stated that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the financial instruments underlying the index, when in fact undisclosed hedging trades by UBS reduced the index price by about 5%.

According to the SEC’s order instituting a settled administrative proceeding:

• UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products so long as the underlying trading strategy was transparent. In registered offerings of the notes in the U.S., UBS depicted the V10 Currency Index as “transparent” and “systematic.”

• Between December 2009 and November 2010 approximately 1,900 U.S. investors bought approximately $190 million of structured notes linked to the V10 index.

• UBS lacked an effective policy, procedure, or process to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the U.S. aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index.

• UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions.  

• The unjustified markups on hedging trades resulted in market prices not being used consistently to calculate the V10 index.  In addition, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion.    

• As a result of the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by approximately five percent, causing investor losses of approximately $5.5 million.   

© 2015 RIJ Publishing LLC. All rights reserved.

 

 

Go Ahead, Buy the Harley

Posted on October 8, 2015 by -

As an advisor, how do you react to a new retiree’s natural desire to splurge? What if he or she yens for a granite-countered kitchen? Or a Harley-Davidson Sportster? Or a three-week spree in France? Well, according to new research, you don’t necessarily have to play the spoiler.

Writing in the latest issue of the Journal of Personal Finance, James Welch Jr., a computer programmer at Dynaxys, shows that when you look at the way retirees actually spend their money, as opposed to focusing on portfolio survival over a 30-year retirement, retirees can justify spending about 20% more in early retirement than William Bengen’s classic 4% rule would allow.

Welch postulates a 65-year-old who started saving at age 30 and now has a $1 million portfolio ($400,000 in an IRA, $350,000 in a Roth IRA, and $250,000 in taxable accounts). The paper assumes a 27-year planning horizon, a 2.5% inflation rate, 5% annual returns, and zero assets at death. It combines that with the retirement spending patterns described in four different analyses (listed below) to arrive at a new (but still sustainable) estimated rate of early spending. For instance:

Reality Retirement Planning (29.4% more). This model, based on what actual spending by Americans at different ages (according to the Department of Labor’s Consumer Expenditure Survey) suggests that, starting at age 55, spending typically drops by about 15% every five years (2.86% to 4.44% per year) before leveling out at age 75. Average expenditure from ages 55 to 59 is about $45,000. At ages 70 to 74, it’s only $27,517. Under this scenario, our hypothetical retiree could spend 29.3% more in early retirement than orthodoxy prescribes.

The Lifecycle of Spending (24.6% more).  This model, based on the spending patterns of 1.5 million retired customers of Chase Bank, asserts that people spend an average of 0.545% less each year in retirement (assuming 2.5% inflation). In this model, clients can spend about 5% of their assets in the first year of retirement (24.6% more than the 4% rule would allow).  

Age Banding Model (18.6% more). This spend-down model tries to improve on Bengen by assigning different inflation rates to different categories of retirement spending (basic living; leisure; health care) and weighting them accordingly. By distributing the weights differently at age 65, 75 and 85, the method raises first-year spending by 18.6%.

Changing Consumption Model (10.2% more). Attributed to David Blanchett of Morningstar, this model reflects the fact (based on the Health and Retirement Study of older Americans) that consumption by retirees tends to be nominally flat year-to-year in mid-retirement before rising again (because of medical expenses) in real terms at the end. This method, which Welch describes as the one “closest to reality”) implies 10.2% more income in the initial year.

There’s always a catch, of course. In this case, higher spending early inevitably reduces the base on which the rest of the portfolio compounds. The longer the person lives, the bigger the potential loss of growth. But the loss isn’t prohibitive, and many people might agree that spending money while you can enjoy it is preferable to saving for a distant expense that may never materialize. This study buttresses that philosophy with math.    

Investment mistakes: Who made them in 2008?

In the Global Financial Crisis, the investors who were most likely to pull out of the market were either averse to losing money or were over-confident, concluded West Texas A&M University professor Shan Lei and University of Missouri professor Rui Yao, also writing in the current issue of the Journal of Personal Finance.

You might be surprised by the types of people who made that timing mistake: They tended to be men, Asians, and business owners. The likelihood of making mistakes increased with investable wealth. Those with $25,000 to $99,000 were twice as likely to err and those with over $1 million 2.4 times as likely to err as those with less than $25,000.

The study analyzed survey data for nearly 2,800 investors from the 2008 Value of Financial Planning Research Study by the FPA and Ameriprise Financial. They controlled for education, income and other factors that influence investment behavior. 

How to raise savings by 12%

“Present bias” (difficulty in planning ahead) and “exponential growth bias (an inability to understand compounding) are detrimental to retirement saving behavior, a new study led by Gopi Shah Goda of Stanford University’s Institute for Economic Policy Research found. If these biases were eliminated, the study showed, retirement savings would increase an estimated 12%.

The findings were based on surveys where subjects were asked to choose between having $100 now or more later, to compound the value of different assets, and to answer questions that gauged their confidence in their compounding estimates. More than 90% of those surveyed displayed one or both biases. People who are unaware of these biases were even less likely to save. The results persisted even when controlling for financial literacy, intelligence, and several demographic characteristics.

Low lifespan expectations and early Social Security claiming

Americans who claim Social Security before age 65 have an 80% higher self-assessed probability of dying before age 71 than those who wait until after they turn 65, according to a recent NBER working paper by Gopi Shah Goda and John Shoven of Stanford and Sita Nataraj Slavov of George Mason University. 

The need for income, the researchers found, is not necessarily why so many people claim early. At least one-fourth of the sample population had enough IRA assets to provide them with sufficient income to fund a two- to four-year delay in claiming Social Security benefits.   

A search for the fountain of age

Although people born in the late 1800s had much lower average life expectancies than people born today, some of them lived a very long time. A new study in the North American Actuarial Journal identifies the characteristics of people born at that time who lived to be 100 years old.

Those born into households in the western United States lived longer, possibly due to their distance from cities with high rates of infectious disease. Living on a family farm also contributed to longevity. In the northeast, men who grew up in larger households tended to live longer. Oddly enough, so did women who grew up in homes with radios. Siblings of centenarians also lived longer than average; researchers attributed that to environmental rather than genetic similarities.

© 2015 RIJ Publishing LLC. All rights reserved.

 

The Bezzle Years

Posted on October 8, 2015 by -

More than a half-century ago, John Kenneth Galbraith presented a definitive depiction of the Wall Street Crash of 1929 in a slim, elegantly written volume. Embezzlement, Galbraith observed, has the property that “weeks, months, or years elapse between the commission of the crime and its discovery. This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled feels no loss. There is a net increase in psychic wealth.” Galbraith described that increase in wealth as “the bezzle.”

In a delightful essay, Warren Buffett’s business partner, Charlie Munger, pointed out that the concept can be extended much more widely. This psychic wealth can be created without illegality: mistake or self-delusion is enough. Munger coined the term “febezzle,” or “functionally equivalent bezzle,” to describe the wealth that exists in the interval between the creation and the destruction of the illusion.

From this perspective, the critic who exposes a fake Rembrandt does the world no favor: The owner of the picture suffers a loss, as perhaps do potential viewers, and the owners of genuine Rembrandts gain little. The finance sector did not look kindly on those who pointed out that the New Economy bubble of the late 1990s, or the credit expansion that preceded the 2008 global financial crisis, had created a large febezzle.

It is easier for both regulators and market participants to follow the crowd. Only a brave person would stand in the way of those expecting to become rich by trading Internet stocks with one another, or would deny people the opportunity to own their own homes because they could not afford them.

The joy of the bezzle is that two people – each ignorant of the other’s existence and role – can enjoy the same wealth. The champagne that Enron’s Jeff Skilling drank when the US Securities and Exchange Commission allowed him to mark long-term energy contracts to market was paid for by the company’s shareholders and creditors, but they would not know that until ten years later. Households in US cities received mortgages in 2006 that they could never hope to repay, while taxpayers never dreamed that they would be called on to bail out the lenders. Shareholders in banks could not have understood that the dividends they received before 2007 were actually money that they had borrowed from themselves.

Investors congratulated themselves on the profits they had earned from their vertiginously priced Internet stocks. They did not realize that the money they had made would melt away like snow in a warm spring. The stores of transitory wealth that were created seemed real enough to everyone at the time – real enough to spend, and real enough to hurt those who were obliged to pay them back.

Fair value accounting has multiplied opportunities for imaginary earnings, such as Skilling’s profits on gas trading. If you measure profit by marking to market, then profit is what the market thinks it will be. The information contained in the accounts of the business – the information that should shape the market’s views – is to be derived from the market itself.

And the market is prone to temporary fits of shared enthusiasm – for emerging-market debt, for Internet stocks, for residential mortgage-backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize. IBGYBG, they say – I’ll be gone, you’ll be gone.

There are numerous routes to bezzle and febezzle. In a Ponzi scheme, early investors are handsomely rewarded at the expense of latecomers until the supply of participants is exhausted. Such practices, illegal as practiced by Bernard Madoff, are functionally equivalent to what happens during an asset-price bubble.

Tailgating, or picking up dimes in front of a steamroller, is another source of febezzle. Investors search for regular small gains punctuated by occasional large losses, an approach exemplified by the carry trade by which investors borrowed euros in Germany and France to lend in Greece and Portugal.

The “martingale” doubles up on losing bets until the trader wins – or the money runs out. The “rogue traders” escorted from their desks by security guards are typically unsuccessful exponents of the martingale. And the opportunity to switch between the trading book and the banking book creates ready opportunities for financial institutions to realize gains and park losses.

The essential story of the period from 2003 through 2007 is that banks announced large profits and paid a substantial share of them to their traders and senior employees. Then they discovered that it had all been a mistake, more or less wiped out their shareholders, and used taxpayer money to trade their way through to new levels of reported profit.

The essential story of the eurozone crisis is that banks in France and Germany reported profits on money they had lent to southern Europe and passed the bad loans to the European Central Bank. In both narratives, traders borrowed money from the future. And then the future came, as it always does, turning the bezzle into a bummer.

© 2015 Project Syndicate.

 

RetirePreneur: Paul Feldman

Posted on October 8, 2015 by -

What I do: I am the president and publisher of InsuranceNewsNet.com and InsuranceNewsNet Magazine, two news media companies for the insurance industry. We provide news for annuity, life, health and the property/casualty industries, as well as financial services. Our business model is based on advertising and subscriptions. Some recent stories we ran were ‘Why Single-Payer Health Coverage May Be the Nation’s Future,’ and ‘Three Ways to Nurture a Relationship with Your Clients’ Children.’

Where I came from: I am a third-generation insurance agent. I tagged along with my father on client visits. Soon after I started college, I was impatient to get going in what I knew would be my career. So I left Monmouth College at 19 years old and started selling insurance for my dad’s marketing organization. Paul Feldman copy block

My career switch: I was an early-adopter online. I loved the speed and reach that the Internet provided. In 1999, there wasn’t much online about insurance. With the industry knowledge I had, I thought I could do better than what was there. I’ve also always been fascinated by the media. It’s funny; I was young and naïve at the time. I had no skills, no degrees and no experience with journalism. I didn’t know anything about graphic design, programming, publishing or what it took to run a magazine. All I had was pig-headed determination and a willingness to learn.

Why we publish both print and online editions: People consume and prefer their information in different ways. I started InsuranceNewsNet as an online publication and then went to print, so I think I have a unique perspective. Companies have been shuttering print publications and focusing solely on digital. But print continues to be a strong part of our business and our brand, because people have a closer relationship with a printed magazine. They read and keep print magazines and newsletters for years. More than one reader has told us that ours is the only magazine they take with them on trips. Our average reader spends almost an hour with each issue, while online readers are there for minutes at a time. I’m a big digital reader, but I enjoy reading a magazine when I don’t want to be distracted by email, ads or even screens. When you look deeper at digital media and online content, you see that many readers will print good articles to either read, keep, comment on or share with colleagues. I think that people still like to have things in print.

Why print still makes sense: As far as an advertising effectiveness, we have advertisers that have generated twice as many leads in a year from our magazine than they did online. When done right with measurement tools, advertisers are seeing that print can sometimes deliver a better cost-per-lead and cost-per-action result than digital. We have also heard from numerous clients that the quality of leads from print far outweighs that of a typical online lead. I think print is seeing a resurgence in relevance and effectiveness for advertisers. In an over-communicated world it’s becoming more difficult and more expensive to make an impact if you are only in the digital world.

On advertising: We deal mostly direct with advertisers, but work with many ad agencies. Advertisers include Pacific Life Insurance, Prudential, Protective Life Insurance Company, Legal & General America, American Bankers Insurance Association, and John Hancock, among others.

On serving the Wild West of the insurance business: There are certainly a few rogues out there. But you find them in the fee-based world, where there are far more consumer complaints filed annually. The securities industry provides little, if any, legal recourse for consumer losses, but insurance has a well-regulated backstop to protect consumers from fraud and misrepresentation. I also don’t see a stark difference between commissions and fees, with the exception that fees are charged to the consumer’s assets under management and split with the rep every year and commissions are typically paid by an insurance company.

On insurance-related legislation: I am worried about the new DOL fiduciary rule. The underlying assumption is that sales with any indirect compensation leads to conflicted advice. The suitability standard already requires agents and advisors to do right by the client. Plenty of advisors have felt the wrath of state insurance and finance departments when they didn’t. If the federal government makes it difficult to earn a living with indirect compensation, more clients will have to pay fees out of the few dollars they already have.

© 2015 RIJ Publishing LLC. All rights reserved.

Prudential buys a chunk of JCPenney pension

Posted on October 8, 2015 by -

In another big pension buyout deal, Prudential Insurance has sold a group annuity to JCPenney that will settle 25 to 35% of the big retailer’s $5 billion U.S. retiree pension benefit obligation. Prudential, which dominates the U.S. pension buyout market, has done similar deals with Verizon, Motorola, General Motors and Bristol-Myers Squibb, worth some $40 billion.

A portion of plan assets and liabilities of some 43,000 retirees and beneficiaries will move to Prudential without a cash contribution from JCPenney, according to a release. The deal is expected to be completed by December 2015.

After the expected closing of these transactions in December, the rest of the pension plan is expected to remain over-funded on accounting as well as ERISA bases, and JCPenney said it doesn’t foresee needing to add more cash to the plan. 

Up until September 18, 2015, JCPenney offered lump sums to retirees to settle its obligations to them. About 12,000 retirees and surviving beneficiaries took the voluntary buy-outs. Another 1,900 former employees of JCPenney who have deferred vested benefits took lump sums. Payments will be made in November.

Under JCPenney’s group annuity contract, Prudential will pay and administer future benefit payments to select retirees. The agreement provides for the Plan to transfer a portion of its obligations and assets to Prudential, and the transfer would leave the remaining Plan over-funded on both accounting and ERISA bases. 

The transaction’s final size is subject to the condition that the Plan remains overfunded at closing.  If market conditions warrant, closing may be extended to 2016. After closing, Prudential will assume financial responsibility for making the annuity payments as provided in the group annuity contract. 

Retirees and beneficiaries whose benefit obligations are transferred to Prudential will receive individualized information packages with further details and answers to frequently asked questions.

Fiduciary Counselors Inc., represented the JCPenney pension plan and its participants and beneficiaries in the negotiation with Prudential. The group annuity contract segregates plan assets in a separate account dedicated to the payment of benefits to the JCPenney retirees and their beneficiaries.

“The actions announced today should reduce the pension obligation by 25-35% and the number of participants in the Plan by 25-35%. Although the Plan has been fully funded since 2009, owing to successful execution of the Company’s asset de-risking strategy, market conditions were favorable to reduce the obligation now,” a JCPenney release said. 

“These transactions may result in a non-cash pension settlement charge with the impact to be determined at the closing of the transaction. This charge will be excluded from the Company’s 2015 adjusted results.

“These actions continue a series of steps taken to reduce pension volatility and further de-risk the pension while maintaining a competitive benefit for associates.  Previous steps include changes to Plan design, past contributions to maintain a well-funded pension Plan status, matching the Plan’s asset allocation to the pension’s liability profile, and offering participants who separate from the Company the option of a lump-sum settlement payment,” the release said.

© 2015 RIJ Publishing LLC. All rights reserved.