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Conning appraises the invasion of the life insurance company snatchers

Posted on June 20, 2014 by -

Conning Research has published a new research paper on the private equity and investment management firms that have recently entered the annuity market by purchasing life insurance companies that were divested in the wake of the 2008-2009 financial crisis.

The proprietary study, “The Retirement Market Attracts New Entrants: Alternative Capital Moves In,” “recaps and analyzes the market moves of the key alternative market players and their performance to date, and explores some possible strategies that may be driving this change. Further, the study provides profiles of the alternative capital players and their development to date,” a Conning release said.

In an interview with RIJ this week, Conning annuity specialist Scott Hawkins said:

“We tried to understand why these investment firms are in this space and what their entrances mean for established insurers.

“We looked at Athene, Harbinger, Guggenheim, and Global Atlantic. Global Atlantic we saw as moving to create a broad insurance platform and even expanding into life insurance. That’s a bit different from Harbinger, which has traditionally targeted distressed companies and then looked to sell them.

“And that’s different from Apollo and Guggenheim. They are investment companies, and owning an annuity business gives them access to a whole new pool of assets and a new type of client—the retail annuity client. That also enables them to manufacture GICs [guaranteed investment contracts] and stable value funds. It also gives them access to inexpensive capital to fund other investment products that they might want to create.”

Shorter bond maturities

Conning also looked into the business and investment strategies of those companies. “We found that they are offering higher credit ratings to rebuild sales,” Hawkins continued. “We did a study comparing their investments and returns with the investments and returns of similar insurance companies—net investment income over assets, and total returns including unrealized gains and losses—and there was not a lot of difference.

“In terms of investment strategies, however, there was some difference in asset allocation. The new entrants are shorter in their bond maturities. We took a look at the potential effects of rising interest rates and found that, all else being equal, the new entrants would capture more of the benefit of that because they have a shorter investment horizon on their existing investments.

“They also tended to invest more in ‘Schedule AB’ or alternative assets. Of course, the higher capital charges on those assets will serve as a natural limit on the allocations.”

Conning believes that the recent acquisitions are good for the retirement industry as a whole. “We’ve talked and written about the need for more capital in the life insurance industry so that the insurers have the capacity to capture more business in the retirement space,” Hawkins said.

“We’re just at the start of the process, but if the new entrants are successful they could attract more capital into the insurance marketplace. And if new capital does come in and pursues similar strategies, that could raise the value of the established players.”

© 2014 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Mathew Greenwald

Posted on June 20, 2014 by -

What I do: We specialize in market research for financial service companies, with a focus on retirement. We also conduct research on life insurance, employee benefits, health insurance and long-term care. What we do is to try to help companies make better decisions to serve consumers.

Where I came from: I received a Ph.D in sociology from Rutgers University and taught sociology for a few years. Through a series of coincidences, I began working for the American Council of Life Insurers and stayed there for 12 years. I eventually became their senior research person on staff and realized that I had to either give up on opportunities for promotion or be promoted out of research. I thought there was something very special about creating a company and continuing to do research and serve clients. In 1985, Mathew Greenwald & Associates was born.

Who my clients are: We conduct surveys and focus groups for many financial services companies, including Prudential, John Hancock, Pacific Life, Lincoln Financial, Morgan Stanley, the American Council of Life Insurers, and AARP, among others.

What has been one of our most interesting research projects: We’re working a project right now in which we are gathering insights on retiree preferences for managing their assets. It’s called Retiree Insights, and it will be out soon. Behavioral finance professionals have found that people don’t always decide in their own best interest. Many companies make plans and assumptions based on an overly rational model of people that does not often exist. These types of plans often do not resonate with retirees, and they don’t really address their emotional needs.

For example, some models define success for retirees as having assets above zero before death. But most people have a strong need for a financial cushion. They don’t want to be 90 years old and have $5,000 in the bank. A Monte Carlo analysis that states success is anything above zero will not be reassuring.  Retiree Insights aims to really understand the preferences of pre-retirees and retirees so companies will develop products and services that will be most effective. We have 19 companies participating, and it’s been a great project for us.

Why people hire me: We combine subject-matter expertise with research expertise and the ability to interpret and communicate research findings. I think our strong subject-matter expertise really sets us apart.

Why I testified in Congress: It was fun. I was a Congress-appointed delegate to the 1998 and 2002 National Summits on Retirement Savings and was also asked to testify before the U.S. Senate Committee on Aging and the Securities Exchange Commission on retirement and retirement-oriented products. Charles Grassley of Iowa was the head of the Committee on Aging at the time. They give you five minutes for an opening statement and there are three lights (green, orange and red) to keep your time in check. I testified about long-term care and the need to encourage people to use long-term care insurance.

Where I get my entrepreneurial spirit from: It started in the Bronx, where I’m from. In some ways, the interest in retirement started with my father. He never made a lot of money and he did not enjoy his job as a poultry salesman. He wanted to be able to retire at 65, and talked about it a lot and about his strategies for accumulating enough money to retire. I think he wanted to own his own business, but never got a chance to do that. I think I absorbed his interest in retirement and, in a way through starting my business, accomplished something he didn’t have a chance to do.

My retirement philosophy: I have spent a lot of thinking about how I want to live my life in retirement. I have a detailed budget ranging from household expenses to travel and have done the calculations of how much I need to fund the lifestyle I want. I’m now 67 years old and I really enjoy working. I’m not that eager to retire. I plan on working to beyond age 70. I think a lot of people think about age and retirement improperly. It’s about life expectancy. I would like to retire with about eight years of remaining life expectancy. My father had a 27-year retirement since he lived to 92. I’m aiming for less time in retirement. The decision to retire is about how much time you are likely to have left and how you want to spend that time.

© 2014 RIJ Publishing LLC. All rights reserved.

Merrill Lynch overcharged 41,000 small business retirement plans: FINRA

Posted on June 20, 2014 by -

The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts.

FINRA also ordered Merrill Lynch to pay $24.4 million in restitution to affected customers, in addition to $64.8 million the firm has already repaid to harmed investors.

Mutual funds offer several classes of shares, each with different sales charges and fees. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges for retirement accounts and some waive these charges for charities.

Most of the mutual funds available on Merrill Lynch’s retail platform offered such waivers to retirement plan accounts and disclosed those waivers in their prospectuses. However, at various times since at least January 2006, Merrill Lynch did not waive the sales charges for affected customers when it offered Class A shares.

As a result, approximately 41,000 small business retirement plans, and approximately 6,800 charities and 403(b) retirement plan accounts available to ministers and employees of public schools, either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses.

Merrill Lynch learned in 2006 that its small business retirement plan customers were overpaying, but continued to sell them more costly shares and failed to report the issue to FINRA for more than five years.

Merrill Lynch’s written supervisory procedures provided little information or guidance on mutual fund sales charge waivers. Even after the firm learned that it was not providing sales charge waivers to eligible accounts, Merrill Lynch relied on its financial advisors to waive the charges, but failed to adequately supervise the sale of these products or properly train or notify its financial advisors about lower-cost alternatives.

In concluding this settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

© 2014 RIJ Publishing LLC. All rights reserved.

Social Security a “screamingly good” deal: Financial Engines

Posted on June 20, 2014 by -

Surveys show that millions of Americans have given up hope that Social Security will “be there” for them. Meanwhile, lots of people in the financial advice industry are celebrating the bounty of the allegedly near-bankrupt program, and rushing to remind their clients that big benefits lie in store for those who claim later.      

Yet, ironically, there’s little evidence that a majority in Congress would be amenable to the higher payroll taxes that will probably be needed to make those generous, inflation-indexed Social Security checks a reality.

The latest advisory firm to find hidden virtue in Social Security is Financial Engines. The provider of financial advice and managed accounts to millions of participants at large defined contribution plans announced this week that it will educate large numbers of plan participants on the benefits of delaying Social Security benefits, and how they might live on their qualified savings during the interim.   

The new integrated offering is available online and through Financial Engines’ advisor representatives to participants at Akzo Nobel, HD Supply, Motorola Solutions, Sargent & Lundy, Teradyne, UL and other firms, the company said in a release. Financial Engines will also make a free interactive Social Security planner available to the public at www.financialengines.com.

Financial Engines is making the services available to employers offering Income+, its program for helping 401(k) participants take systematic withdrawals from their plan accounts after they retire. Record keepers currently or committed to supporting Income+ with Social Security and income planning services include Aon Hewitt, Mercer and Xerox. The cost of Income+ is included in what employees pay in managed account fees.   

Over the past three months in limited release, the services have identified more than $500 million in additional Social Security benefits available for near-retirees2. The median amount of additional benefits found for a typical married couple is well over $100,000.

It’s becoming more widely recognized that by claiming at age 70, the higher-earning and shorter-lived spouse—most often the husband—can significantly augment his widow’s income, thanks to the 100% spousal benefit that Social Security provides.

Users can consider different strategies and receive a clear, personalized retirement income plan based on Financial Engines’ patented Income+ methodology. The comprehensive plan includes multiple income sources, including part-time work and pensions, and shows how retirement savings in a 401(k) or IRA can be converted into income to help defer Social Security.

“Delaying Social Security is a screamingly good deal, especially in today’s low interest rate environment,” said the Financial Engines’ release. 

Participants with access to the new services through their employers can talk with a Financial Engines advisor certified by the National Social Security Advisor program at no additional cost. The advisors can create Social Security and income plans, answer questions and even share their screens so individuals can see the plans take shape in real time.

(c) 2014 RIJ Publishing LLC. All rights reserved.

Limit participants to three loans: TIAA-CREF

Posted on June 20, 2014 by -

Nearly one-third (29%) of Americans who participate in a retirement plan say they have taken out a loan from the savings in their plan. Of those, 43% have taken out two or more loans and 44% of borrowers regret the decision, according to a new study by TIAA-CREF of 1,000 randomly chosen plan participants.   

Paying off debt was cited as the top reason for borrowing from retirement plan savings (46%), yet only 26% of respondents said that paying off debt justified a loan.

Emergency expenditures was the next largest reason for borrowing, cited by 35%. Women were more likely than men (52% vs. 41%) to borrow to pay off debt. Men were more likely (40% vs. 29%) to borrow to cover emergency expenditure.

Nearly half (47%) of those who have borrowed from their retirement plan savings borrowed more than 20% of their savings, with 9% of respondents borrowing more than 50%.

In addition to borrowing funds from retirement savings plans, many Americans are also contributing less to their plans while they pay back the loan. More than half of respondents (57%) who took out loans decreased their contribution rate during the payback period.

Those ages 18-34 were the most likely to decrease their contribution amount (81%). Forty-eight percent of women kept the same contribution rate while paying back the loan, compared to only 39% of men.

Plan sponsors should consider limiting participants to three loans each from their retirement savings, TIAA-CREF said. These loans should come from participant contributions rather than employer contributions. Fewer loans can mean lower plan expenses and have a positive impact on plan fees.

© 2014 RIJ Publishing LLC. All rights reserved.

Connecticut funds the creation of a public IRA by 2016

Posted on June 20, 2014 by -

Legislation to spend $400,000 to develop a public IRA plan for all of Connecticut’s 740,000 private sector workers who lack retirement plan coverage was signed into law this week by Governor Dannel Malloy. The Democratic-controlled legislature approved the expenditure as part of the FY 2014-2015 budget last May 3.

State budget implementer H.B. 5597 establishes the Connecticut Retirement Security Board within the State Comptroller’s office. The Board, chaired by the State Treasurer and State Comptroller, will be charged with assessing the feasibility and development of a state-administered Public Retirement Plan.

The Plan is mandated to:

  • Provide a guaranteed rate of return
  • Offer universal access and portability
  • Have low-administrative costs
  • Be administered transparently   

The Board will be expected to report their findings and a plan for implementation to the General Assembly by April 1, 2016.  Other Board members will include the Secretary of the Office of Policy and Management, the Commissioner of the Department of Labor, employees, employers, and investment experts. 

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on June 20, 2014 by -

Michael McLaughlin joins NFP Advisor Services

Michael McLaughlin has joined NFP Advisor Services as the managing director of Fusion Advisor Network and senior vice president of Business Consulting. He will support and develop business consulting functions for Fusion Advisor Network and Advisor Services. McLaughlin joins NFP after earlier stints at Gerstein Fisher, SEI and Lord Abbett. He holds Series 7, 24, 63, 65 license and earned a B.A. from Bucknell University.

Behavioral finance drives Prudential’s new website tools

Prudential Retirement, a unit of Prudential Financial, Inc, has introduced several technology tools designed to help participants, plan sponsors and intermediaries take more positive steps toward improving retirement savings, according to a press release this week.

The new tools, which leverage behavioral research, include an update to Prudential Retirement’s Retirement Income Calculator (RIC) and the introduction of the “Day One Achievement Meter,” “Quick Join” and “Plan Health.”

Both Prudential Investments and Prudential Retirement also launched “Experience Day One,” an interactive web site designed to educate participants about the effects of life events or milestones on retirement savings goals.

Retirement Income Calculator (RIC)

The new RIC offers a personalized report and action plan for participants, with specific savings recommendations and a “Do It” button, making it easy to implement those recommendations. The images portrayed throughout the experience help participants visualize their life in retirement based on the pleasurable activities they imagine themselves enjoying.   

Day One Achievement Meter

Using the techniques of “gamification,” this tool encourages users are encouraged to take positive actions such as repaying loans or increasing contributions.   

Quick Join

Quick Join is a mobile-ready web site that allows users to join their employer’s defined contribution retirement plan within minutes. The web site eliminates the need to register and offers participants the chance to enroll with one click, allowing them to join with pre-selected options from their employer or choose their contribution percentage and investment style on their own, based on their risk tolerance

Plan Health

Plan Health is a web tool that gives plan sponsors and advisors quick access to information that can diagnose the health of their retirement plan, such as cash-flow details and how long a participant has been enrolled in the plan. It also includes industry benchmarks for key metrics such as participation rate and average account balance, and allows plan sponsors and intermediaries to gauge the effectiveness of a plan and make appropriate changes to better prepare participants for retirement.

Experience Day One Funds

Experience Day One Funds is an interactive web site designed to help people visualize their life in retirement. Animations featuring two fictitious characters show their different paths to retirement beginning during the year they enrolled in the Day One Funds. The animations illustrate such life events as repaying college loans, marriage, starting a family, buying a home, becoming a caregiver for a parent, starting a business, and receiving an inheritance. Experience Day One Funds is a joint effort of Prudential Retirement and Prudential Investments.

Retirement… It beats working: Northwestern Mutual

The retirement attitudes and expectations of Americans who are still working versus those already retired differ significantly, according to Northwestern Mutual’s 2014 Planning and Progress Study.

The research suggests that many people will work longer by choice rather than necessity.  Others – and there are plenty of them – aren’t as fortunate and don’t feel they’ll have the luxury of choice.

Among retirees:

  • The average age they retired was 59
  • 72% say they are completely retired from working  

Among those still working:

  • The average age they expect to retire is 68 (nearly a decade longer than the retirees in the study)
  • 45% say they will continue to work in retirement because they want to
  • 21% are not sure how many years he or she will spend in retirement
  • 13% think they’ll never be able to retire
  • 38% aged 60 and over estimate that they will have to work until age 75 or older

Working adults are pessimistic; retirees happy

Working adults describe their own future retirement as “bad/poor,” “bleak/dismal” and “nonexistent.” Retired Americans describe their retired life as “fun/cheerful” and “good/pleasant.”  

  • 37% of working adults expect they to be happier in retirement than today
  • 84% of current retirees say they are happy in retirement
  • 60% say they’re happier now than when they were working
  • 70% of retirees describe life as ‘fulfilling’ 

Half of retirees saw health care costs increase significantly in retirement, and among them 45% didn’t anticipate these expenses.

Retirees who call themselves as “highly disciplined” planners are much likelier than non-planners to say that they are “happy in retirement” (91% vs. 63%). The study found that 42% of adults have never had a conversation with anyone about retirement. 
The 2014 Planning and Progress Study was conducted by Harris Poll on behalf of Northwestern Mutual and included 2,092 American adults aged 18 or older who participated in an online survey between January 21, 2014 and February 5, 2014. 

‘Esoteric ABS’ specialist joins Guggenheim Securities

Guggenheim Securities, the investment banking and capital markets division of Guggenheim Partners, has hired Matt Bissonette as a managing director in the fixed income division, effective in August, the firm announced this week. He will work on structured products transactions with a focus on Esoteric Asset-Backed Securities (ABS).

Bissonette had been co-head of the Special Situations sector within Structured Credit at Deutsche Bank, where he focused on Esoteric ABS and related financing products. He has structured and led securitizations for wireless cell towers, ground leases, rooftop leases, broadcast towers, distributed antenna systems (DAS) and non-US assets.

He holds a B.S. in economics from the Wharton School of the University of Pennsylvania.

Allianz Life sees “2020” in alliance with Barclays

Allianz Life’s exclusive agreement with Barclays on the use of Barclays US Dynamic Balanced Index, which began in 2013, will extend through 2020, the Minneapolis-based Insurer announced this week.

This agreement includes the index on Allianz Life Fixed Index Annuity (FIA) and Fixed Index Universal Life (FIUL) products. Depending on realized market volatility, the Barclays US Dynamic Balance Index provides shifts weight daily between the S&P 500 Index and the Barclays U.S. Aggregate Bond Index.

Since late 2013, the Barclays US Dynamic Balance Index has been added to several index allocation options available on Allianz Life FIA and FIUL products including:

  • Allianz 222 Annuity
  • Allianz 360 Annuity
  • Allianz 365i Annuity
  • Core Income 7Annuity
  • Signature 7 Annuity
  • Allianz Life Pro+ Fixed Index Universal Life Insurance Policy

The Barclays US Dynamic Balance Index shifts weight toward the S&P 500 Index when volatility is low and towards the Barclays bond index when volatility is high, reducing the issuer’s risk exposure. and allowing it to increase the potential crediting rate. the client more upside potential. Currently, FIA index allocations using the Barclays US Dynamic Balance Index apply a spread, and Life Pro+ index allocations apply a participation rate, the company said. 

Retirement income “barometer” is rising: MetLife 

“Keep it simple and avoid over-complication” when designing retirement plans.

That’s what executives at almost 90% of companies that offer defined benefit and defined contribution plans and 77% of DC-only plan sponsors say, according to the 2014 MetLife Qualified Retirement Plan Barometer (QRPB).

The Barometer was created by MetLife to assess the prevalence of a “new culture” among plans sponsors at FORTUNE 1000 companies that emphasizes on retirement savings and retirement income equally. As it was in 2011, the highest score this year was 89. But the lowest score in 2014 was 30, up from 19 in 2011.     

Most companies that only offer a DC plan are talking to all or most of their participants about retirement income, such as the effects of longevity (56%), the importance of establishing target retirement income levels in relation to current pay (56%). DC-only plan sponsors are also “exploring” guaranteed lifetime income options, the release said.

According to the QRPB, Over half (57%) of DC-only plan sponsors who do not include an income annuity have discussed this option with their record keeper, according to the study. Over a third (34%) have reviewed lifetime income solutions available in the marketplace and 11% have conducted due diligence about the providers of income solutions.

The Barometer score across all plan types was 58 out of a possible 100. Companies that offer broad access to DB and DC plans outpace their peers with a Barometer score of 71, indicating a much stronger retirement income culture. DC-only plan sponsors were more than twice as likely (58% to 28%) to believe that their workers will reach retirement age with inadequate retirement savings.    

Matthew Greenwald & Associates and Asset International, Inc., publisher of PLANSPONSOR and PLANADVISER magazines, conducted the online survey of Fortune 1000companies for MetLife.   

Seniors will spend $4.7 trillion: Zillner

Stocks, bonds and REIT shares aren’t the only things that older folks will be buying in the years ahead.

Spending in the age 50+ consumer market, which includes about 104 million current retirees and Boomers of diverse races, religions and lifestylce, is estimated at $3.1 trillion across all industries, except health care, which is estimated at an additional $1.6 trillion, according to Zillner, an agency providing research, strategic and marketing services focused on Senior consumers.
The 50+ group includes people in second careers, traditional retirees, parents of children and teens, divorcees, widows and widowers, grandparents, empty nesters and caregivers. “Two consumers of the same age may be experiencing very different lifestages, creating complexity in effectively reaching and communicating,” the release said. Adults often become more individuated and “comfortable in their own skin” as they age, so marketers must make messages targeted and personalized.

By 2025 the population will be: 20.5% Hispanic; 5.8% Asian; 12.6% Black; and 57.6% White.  Boomers will be America’s most culturally and racially diverse older generation. They include the first generation of fully acculturated Asian and Hispanic matures, raised by foreign-born parents.

To help marketers, Zillner has produced All the Wiser-Senior Consumer Insights and Outlook is a four-part research and insight series focusing on senior:

  • Buying power and marketing
  • Technology
  • Lifestyle — Mind, Body and Spirit
  • Influence

Part one of All the Wiser – Senior Consumer Insights and Outlook, is available now at zillner.com/wiser. 

 

(c) 2014 RIJ Publishing LLC. All rights reserved.

With ‘Daily+4,’ Forethought VA gets creative

Posted on June 12, 2014 by -

A new addition to the ForeRetirement variable annuity suite from Forethought Life Insurance Company, a subsidiary of Global Atlantic Financial Group Ltd, offers an income benefit with two roll-up options and three death benefit options.

The “Daily 6” income option, which Forethought launched under the name Daily Lock on its first ForeRetirement VA contract in early 2013, features a 6% annual deferral bonus to the benefit base or, if larger, the highest daily step-up in the value of the benefit base, in each of the first 10 contract years (or until the first withdrawal, if earlier).

The “Daily +4” income option, which is new, features a 4% simple annual deferral bonus to the benefit base and a daily market-driven step-up, if the growth of the account value generates one. The step-up is dollar-for-dollar and gains are credited even if the account value high doesn’t exceed the benefit base.

For example, if the purchase premium was $100,000 and the account value hits a high water market of $105,000 in the first year, the new benefit base would be $109,000 ($100,000 plus $5,000 plus a $4,000 deferral bonus). In year two, if the account value hits a new daily high of $107,000, the benefit base at the end of the year would be $115,000 ($109,000 plus $2,000–the change from $105,000 to $107,000–plus a $4,000 deferral bonus).

“That’s unique, and it’s been incredibly well-received,” said Robert Arena, president of Forethought’s annuity business, in an interview yesterday. [Two years ago, the income rider of a Security Benefit fixed index annuity used a “stacking” strategy that provided a 4% annual roll-up plus whatever the contract earned from fixed income investments or options on an equity index.]    

With the Daily 6 option, every day that the contract value exceeds the current benefit base, the benefit base locks in to the new high. If the markets drive the benefit base up by more than 6%, the benefit base will lock in the higher amount. But the benefit base goes up by at least 6% per year for the first 10 years, barring withdrawals.

With the Daily +4 option, each day that the contract value reaches a new high, the withdrawal base steps up to capture the new value. At the end of the year, a 4% bonus is added to the current withdrawal base on top of the growth achieved by the daily step-ups.

“Instead of applying either a fixed deferral credit or performance-based increases, Daily +4 credits both,” the company said in a release. “A 4% annual deferral credit applies on top of daily, performance-driven growth potential, or step-ups, for income purposes.”

“Daily 6 offers more downside protection with a higher deferral credit while the additive nature of Daily +4 provides greater growth potential when performance is strong,” said Paula Nelson, president of Forethought Distributors, LLC, the underwriting broker/dealer, in the release.

Contract owners who elect either income rider must invest in the available managed-volatility investment options, said Arena. There are nine managed-risk funds, eight offered through Forethought Variable Insurance Trusts and one from American Funds. All volatility overlays are provided by Milliman. The contract offers more than 50 investment choices in all. Fund expense ratios range from 0.58% to 2.84% per year, according to the prospectus. There’s currently an additional five to 15 basis point charge for investments in certain investment options.  

ForeRetirement variable annuities are offered in B shares (seven-year surrender period with 8.5% charge in first year), C shares (no surrender charges) and L shares (four-year surrender period with 8% charge in first year). They’re sold through over 100 national and regional financial institutions, including wirehouses, banks and independent broker-dealers. ForeRetirement variable annuities are available in all states except New York.

The combined mortality and expense risk and administrative fee is 0.65% for the B share, 1.65% for the C share and 1.10% for the L share contract. On the B and L shares, there’s a 0.50% annual fee for premium invested in options other than the fixed account. The minimum initial premiums are $5,000 for qualified contracts and $10,000 for non-qualified. There’s a $50 per year maintenance fee for contracts valued at $50,000 or less on a contract anniversary.

The annual expense ratio for either income rider is 1.25%. The annual percentage payout rates of the benefit base for the income riders (single life) are 4% from age 59½ to age 64, 5% from 65 to 84 and 6% from 85 onward. The rates for joint life contracts are a half-percent lower for each age bracket. 

There are three death benefit options: Legacy Lock II (85 basis points with the income rider, 115 basis points without 125, 61-65), Return of Premium (15 basis points) and Maximum Daily Value (45 basis points). All-in annual costs for the B share, including insurance and investment fees, including an income rider and return-of-premium death benefit, would be about 3%. 

© 2014 RIJ Publishing LLC. All rights reserved.

VAs’ negative cash flow exceeds $1 billion in 1Q2014

Posted on June 12, 2014 by -

New sales of variable annuities dropped 6.4% in the first quarter of 2014, to $33.0 billion vs. $35.3 billion in the last quarter of 2013, according to Morningstar’s quarterly Variable Annuity Sales and Asset Survey.

Sales were also down 3.7% from the first quarter of 2013 level of $34.3 billion. Assets rose to $1.88 trillion from $1.87 trillion at the end of last year. Net cash flow was again negative for the quarter, estimated at $(1.1) billion.

VA sales were affected by “poor market performance and increased volatility” during the quarter. Both factors may have helped lift the sales of “VA substitutes” like fixed index annuities with guaranteed lifetime withdrawal benefits (GLWBs).

Jackson National’s industry-leading market share reached 19.3% at March 31, 2014, up from 15.5% on December 31, 2013. With sales of $6.4 billion, up from $5.5 billion in 4Q2013, the unit of Britain’s Prudential plc was the only major VA issuer whose sales grew in the first quarter.

Jackson’s sales growth was more concentrated in its Perspective product line, which saw a 20.2% sales increase, than in its newer EliteAccess line of accumulation-driven VAs, which grew 4%. The other top-25 companies showing growth were Fidelity, Thrivent Financial, and New York Life. Their sales were up 10.5%, 5.5%, and 4.9% in 1Q2014, respectively.

Morningstar noted that its “net flow survey is discontinued beginning this year; the calculated estimates are derived from all reported assets in VA products, vs. the survey process which did not have the industry’s full participation.” Net flows continue to be hurt by “drawdowns of large blocks of aged 403(b) business and the exodus of assets from contracts issued by companies that have exited the industry,” Morningstar said.

© 2014 RIJ Publishing LLC. All rights reserved.

Total U.S. Annuity Sales Up 13% YOY: IRI

Posted on June 12, 2014 by -

The Insured Retirement Institute (IRI) today announced final first-quarter 2014 sales results for the U.S. annuity industry, based on data reported by Beacon Research and Morningstar, Inc. Industry-wide annuity sales during the first quarter reached $56.1 billion, up 13.1 percent compared with the first quarter of 2013 when sales totaled $49.6 billion.

The year-over-year sales growth was supported by continued high levels of fixed annuity sales, which totaled $22.6 billion during the first quarter, according to Beacon Research. This was a 50.7 percent increase from nearly $15 billion in first-quarter 2013 and down just 4.1 percent from $23.5 billion in the previous quarter. Meanwhile, according to Morningstar, variable annuity total sales came in at $33.5 billion in the first quarter, down 3.2 percent compared with first-quarter 2013 total sales of $34.6 billion and down 6.4 percent from $35.8 billion during the fourth quarter of 2013.

“Combined annuity sales across the marketplace are well above the pace set in 2013,” said Cathy Weatherford, IRI President and CEO. “This surge was supported by continued strong sales of fixed annuity products. Sales of all types of fixed annuities soared well above first-quarter 2013 levels, achieving year-over year sales growth ranging, depending on the product, from 38 percent to nearly 155 percent.”

According to Beacon Research, strong fixed annuity sales during the first quarter were sustained by the second highest quarterly sales of indexed annuities on record. Indexed annuity sales reached $11.2 billion during the quarter, a 44.3 percent increase from nearly $7.8 billion during first-quarter 2013 but a 4.4 percent decline from the record high of nearly $11.8 billion set during fourth-quarter 2013. Market value adjusted (MVA) annuity sales continued to grow, reaching $2.48 billion in the first quarter. This was a 26 percent increase compared to sales of $1.96 billion during the previous quarter and a 154.6 percent increase from MVA annuity sales of $972 million during first-quarter 2013. For the fixed annuity market, there were approximately $11.1 billion in qualified sales and $11.5 billion in non-qualified sales during first-quarter 2014.

Of Ponies, Manure Piles, and Annuities

Posted on June 11, 2014 by -

In the New York Times article on deferred income annuities last Saturday, the writer seemed to focus on whether DIAs are a “wise buy.” Like most articles on annuities in mass media, this one presented annuities in what’s known as the “investment frame.”

Here we go again.  

Viewed through the investment lens (“as through a glass eye, darkly,” to borrow Mark Twain’s assessment of James Fenimore Cooper’s dim literary vision), life-contingent annuities tend to look dumb. 

When using the investment frame—i.e., when comparing annuities with investments like no-load mutual funds—annuity expenses seem ridiculously high. The costs of income annuities, though hidden in the payout rate, run (according to a recent presentation by Wade Pfau of The American College) as high as 15% of premium for distribution, administration and (largest of all) adverse selection. And that doesn’t count the potential 3.5% state tax.     

It gets worse before it gets better. When a writer frames annuities as investments, the value of the so-called survivorship credit or mortality credit tends to be discounted. (Or, if mentioned at all, it becomes a sad reminder, as behavioral economist Meir Statman once said, that annuities “smell of death.”) To banish the odor, many people elect a cash refund option. But that just adds another cost, and another reason not to buy the product. Opting for the cash refund or a period certain (although not a terrible idea) is like buying insurance for your insurance.     

Using the investment lens to evaluate a DIA is like looking at a burning match through a welding mask. The flame won’t be very bright. For DIAs or SPIAs (single-premium immediate annuities) to make sense, you have to view them through what Jeff Brown of the University of Illinois and others have called the “insurance frame.”

In a nod to the insurance frame, the Times reporter conceded that “you might view the purchase [of a DIA] as an insurance policy.” But that understatement only added to the confusion. An annuity is an insurance policy. And insurance policies cost more than investments because you’re paying insurers to relieve you of a chunk of your market risk and longevity risk. When you buy stocks or bonds, you retain the risk.   

The cost of annuities is akin to the pile of manure in the barnyard parable that Ronald Reagan made famous. According to The Gipper’s brand of cowboy optimism, a manure pile meant that a pony must be nearby. If we admit that annuity costs are like manure—a necessary evil, if you will—then you have to ask, where’s the pony?     

For a retiree, the pony is: more spending power, relative to a 3.5% systematic withdrawal plan from a mutual fund portfolio; the extra risk you can take with your other money; the cash you don’t have to hoard against the risk of living to 95; the assurance that if the stock market blows up, your retirement won’t; the freedom to ignore CNBC and sleep heartburn-free. These ponies, invisible to anyone wearing investment glasses, are reasons to tolerate the manure pile. You buy insurance so you can do fun stuff that you wouldn’t otherwise be able to do, because of the risks.

When you’ve spent all your life thinking with your investment side of your brain, it’s tough to switch to the insurance side. But it would be refreshing to see a Times article on DIAs that quoted, for example, Curtis Cloke, the Iowa adviser who uses period certain DIAs to give ultra-HNW clients free rein with the rest of their wealth. Or Faisal Habib at Cannex, whose PrARI modeling tool shows how to squeeze more income with less risk from the same-size nest egg by blending mutual funds and income annuities. 

Or the Times might have called David Laibson, the Harvard behavioral economist who has become interested in retirement and annuities. Last February, in a keynote at the Morningstar institutional investor conference, Laibson described good bets and bad bets. The strategy of buying a life-contingent income annuity with a fraction of your savings is a good bet for retirees, he said.

If you live a long time, he reasoned, the annuity’s survivorship credits will pay off. And if you die early, so what? Your heirs won’t be cheated because you won’t have had the time or the need to spend the bulk of your savings. The annuity asset may vanish (or shrink), but so will the liability. That’s using the insurance frame.

We’re not here to exalt annuities. If you (or your clients or customers) can afford to retain market risk and longevity risk in retirement, so much the better. It would be nice, however, if mainstream journalists would look at income annuities with fresh eyes and see them through insurance lenses.

© 2014 RIJ Publishing LLC. All rights reserved.

The Interest Rate Enigma

Posted on June 11, 2014 by -

Today, the United States government can borrow for ten years at a fixed rate of around 2.5%. Adjusted for expected inflation, this translates into a real borrowing cost of under 0.5%. A year ago, real rates were actually negative. And, with low interest rates dominating the developed world, many worry that an era of secular stagnation has begun.

How problematic low real rates are depends on the reason for their decline. The prevailing view is that the downward trend largely reflects a fall in equilibrium or “natural” interest rates, driven by changes in saving and investment fundamentals. In other words, a higher propensity to save in emerging economies, together with investors’ growing preference for safe assets, has increased the supply of saving worldwide, even as weak growth prospects and heightened uncertainty in advanced economies have depressed investment demand.

This perceived decline in “natural” interest rates is viewed as a key obstacle to economic recovery, because it impedes monetary policy’s capacity to provide sufficient stimulus by pushing real rates below the equilibrium level, owing to the zero lower bound on nominal rates. How to stem the decline in equilibrium rates has thus become the subject of lively debate.

Conspicuously absent from the debate, however, is the role of financial factors in explaining the trend decline in real rates. After all, interest rates are not determined by some invisible natural force; they are set by people. Central banks pin down the short end of the yield curve, while financial-market participants price longer-dated yields based on how they expect monetary policy to respond to future inflation and growth, taking into account associated risks. Observed real interest rates are measured by deducting expected inflation from these nominal rates.

Thus, at any given point in time, interest rates reflect the interplay between the central bank’s reaction function and private-sector beliefs. By identifying the evolution of real interest rates with saving and investment fundamentals, the implicit assumption is that the central bank and financial markets can roughly track the evolution of the equilibrium real rate over time.

But this is by no means straightforward. For central banks, measuring the equilibrium interest rate – an abstract concept that cannot be observed – is a formidable challenge. To steer rates in the right direction, central banks typically rely on estimates of unobserved variables, including the equilibrium real rate itself, potential output, and trend unemployment. These estimates are highly uncertain, strongly model-dependent, and subject to large revisions. 

Moreover, central banks’ policy frameworks may be incomplete. By focusing largely on short-term inflation and output stabilization, monetary policy may not pay sufficient attention to financial developments. Given that the financial cycle is much more drawn out than the business cycle, typical policy horizons may not allow the authorities to account adequately for the impact of their decisions on future economic outcomes. The fact that financial booms and busts can occur amid relatively stable inflation does not help.

With financial-market participants as much in the dark as central banks, things can go badly wrong. And so they have. Over the last three decades, several credit-induced boom-bust episodes have caused major, sustained damage to the global economy. It is difficult to square this reality with the view that interest rates, which set the price of leverage, have been on an equilibrium path all along.

The focus on fundamental saving and investment determinants of interest rates is entirely logical from the perspective of mainstream macroeconomic models, which assume that money and finance are irrelevant (“neutral”) for the output path in the long run. But successive crises have shown that finance can have long-lasting effects. Financial factors, especially leverage, not only can amplify cyclical fluctuations; they can also propel the economy away from a sustainable growth path. Indeed, a growing body of evidence shows that output is permanently lower in the wake of a financial crisis.

All of this suggests that the trend decline in real interest rates does not just passively mirror changes in underlying macroeconomic fundamentals. On the contrary, it also helps drive them. Low interest rates can sow the seeds of financial booms and busts.

Policies that do not lean against the booms but ease aggressively and persistently during busts induce a downward bias in interest rates over time, and an upward bias in debt levels. This creates something akin to a debt trap, in which it is difficult to raise rates without damaging the economy. The accumulation of debt and the distortions in production and investment patterns induced by persistently low interest rates hinder the return of those rates to more normal levels. Low rates thus become self-reinforcing.

This alternative perspective highlights the trade-off inherent in ultra-accommodative monetary policy. Monetary policy cannot overcome structural impediments to growth. But the actions that central banks take today can affect real macroeconomic developments in the long term, primarily through their impact on the financial cycle. These medium- to long-term side effects need to be weighed carefully against the benefits of short-term stimulus. While low interest rates may be a natural response to perceptions of a chronic demand shortfall, such perceptions are not always correct – and can be very costly over time.

Laying the foundations of a sustained recovery requires measures to strengthen public- and private-sector balance sheets, together with structural reforms aimed at raising productivity and improving growth potential. More stimulus may boost output in the short run, but it can also exacerbate the problem, thus compelling even larger dosages over time. An unhealthy dependence on painkillers can be avoided, but only if we recognize the risk in time.

© 2014 Project Syndicate.

Vanguard issues “How America Saves 2014”

Posted on June 11, 2014 by -

Vanguard, the full-service provider of defined contribution plan services to more than 3.5 million participants with over $600 billion in assets at some 3,000 companies, has published “How America Saves 2014,” the 13th edition of its annual report on participant behavior and experience.   

A copy of the 99-page report can be downloaded here.

Among other findings, the report documented the rise in the use of employer-provided investment solutions by participants. “In 2013, 40% of all Vanguard participants had their entire account balance invested in either a single target-date fund, a single target-risk or traditional balanced fund, or a managed account advisory service,” the report’s introduction said. This trends signals “a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.”

The report pointed to another emerging plan design strategy called “reenrollment,” in which plan sponsors address portfolio construction issues by moving participants into investments such as target-date funds, balanced funds and managed accounts. How America Saves also includes supplemental reports on participant patterns in the DC retirement plans of 12 industries.

The report showed that, although higher participation rates are correlated with auto-enrollment, so are lower deferral rates.

“Plan design, specifically the predominant use of a 3% default deferral rate, means participants in plans with automatic enrollment are saving less,” the report said. “Participants joining a plan under an automatic enrollment feature have an average deferral rate of 4.9%, compared with 7.5% for participants under plans with voluntary enrollment.”

This occurred even though “participants earning less than $30,000 save about 75% more on average under voluntary enrollment designs,” the report added. “This suggests that higher default deferral rates would be amenable to plan participants in automatic enrollment designs. Our research on automatic enrollment indicates that “quit rates” do not deteriorate when higher default percentages are used to enroll employees.”

Other “How America Saves 2014” findings included:

  • In 2013, the median participant account balance was $31,396 and the average was $101,650. Vanguard participants’ median and average account balances rose by 13% and 18%, respectively, during 2013. During the five-year 2008–2013 period, both median and average balances rose by about 80%.
  • Reflecting strong stock market performance in 2013, the median one-year participant total return was 21.9%. Five-year participant total returns averaged 12.7% per year.
  • At year-end 2013, the Roth feature was adopted by 52% of Vanguard plans and 13% of participants within these plans had elected the option.
  • 34% of Vanguard plans had adopted automatic enrollment (AE) as of year-end 2013, up from 24% five years earlier. More than half of all contributing participants in 2013 were in plans with AE and 62% of employees participating for the first time in 2013 were in plans with AE.
  • While initially applied only to new hires in many plans, AE is increasingly used for eligible nonparticipants in half of those plans.
  • AE substantially increases plan participation among low-income workers, young workers, and minorities.
  • Employees who joined their plan through AE had an overall participation rate of 82%, compared with a participation rate of 65% for employees who joined through voluntary enrollment.
  • Of AE plans, 69% automatically increase their participants’ contribution rate annually. Another 29% do not. Separately, 65% of AE plans automatically increase participants’ contribution rate but default them at an initial 3% or less. Vanguard recommends that a typical participant target a total contribution rate of 12% to 15%, including both employee and employer contributions.
  • 98% of AE plans use a target-date fund (TDF), other type of balanced fund, or managed account as the default investment. Nine in 10 choose a target-date fund.
  • In 2013, 40% of participants were solely invested in an automatic investment program, compared with 22% at the end of 2008. Of those, 31% were invested in a single TDF, another 6% held a balanced fund, and 3% used a managed account program.   
  • With the growing use of  target-date funds, Vanguard anticipates that 58% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed option by 2018.
  • The average participant account balance was $101,650 in 2013. Among continuous participants—those with a balance between both year-end 2008 and 2013—the median account balance rose by 182%, reflecting both the effect of ongoing contributions and market returns during this period.  
  • Low-cost index, or passive, funds are becoming prevalent. In 2013, nearly half of Vanguard plans offered an “index core,” or set of index options spanning the global capital markets. Large plans have adopted this approach more quickly, and about 60% of all Vanguard participants are offered an index core.
  • Factoring in indexed target-date funds with their equity and fixed income mix, 84% of participants hold equity index investments.

© 2014 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on June 11, 2014 by -

Prudential board authorizes another $1 billion in share repurchases

The board of directors of Prudential Financial, Inc., has authorized the repurchase of up to $1 billion of its outstanding common stock between July 1, 2014 and June 30, 2015, the Newark, NJ-based company said in a release this week.

Between June 2013 and March 31, 2014, the company repurchased approximately $750 million of its Common Stock.

“Management will determine the timing and amount of any share repurchases under the share repurchase authorizations based on market conditions and other considerations. The repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions, and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended,” the release said.

MetLife to buy back $1 billion of its common stock

MetLife, Inc. announced that it will resume share repurchases and intends to repurchase up to $1 billion in MetLife, Inc. common stock. The company will utilize existing authorizations from the board of directors to repurchase MetLife, Inc. common stock. The last time MetLife repurchased shares was 2008.

Commenting on the announcement, Chairman, President and Chief Executive Officer Steven A. Kandarian said:  “Our philosophy is that excess capital belongs to our shareholders. The challenge is to strike the right balance between adherence to our philosophy and recognition that MetLife’s required capital levels remain unknown if we are designated a non-bank systemically important financial institution, or SIFI, under the Dodd-Frank Act.

“We anticipated that the non-bank SIFI capital rules would be known by now, but recent statements by the Federal Reserve suggest that we may not see draft rules until 2015. Meanwhile, our capital continues to grow, and later this year we will raise $1 billion as the last tranche of equity units issued to fund the Alico purchase converts to common shares.”

AIG names Peter Hancock as next CEO

The board of directors of American International Group, Inc., has named Peter D. Hancock to succeed Robert H. Benmosche as AIG’s  president and Chief Executive Officer and join AIG’s board, effective September 1, according to a release by AIG this week.

Mr. Hancock will also join AIG’s Board of Directors, effective September 1. He and will succeed Robert H. Benmosche, who currently is AIG President and Chief Executive Officer.

Hancock, 55, currently serves as executive vice president, AIG, and CEO of AIG Property Casualty. He joined AIG in 2010 and was named CEO of AIG Property Casualty in March 2011, when the division was reorganized into two major global groups: Commercial and Consumer. He had previously served as Executive Vice President, Finance, Risk, and Investments, AIG.

Before coming to AIG, Hancock was vice chairman, responsible for Key National Banking, at KeyCorp. Earlier, he spent 20 years at J.P. Morgan, where he established the Global Derivatives Group, ran the Global Fixed Income business and Global Credit portfolio, and served as the firm’s chief financial officer and chief risk officer. He also co-founded and served as president of Integrated Finance Limited, an advisory firm specializing in strategic risk management, asset management, and innovative pension solutions. 

Mr. Hancock was raised in Hong Kong and later attended Oxford University, where he earned his Bachelor of Arts degree in politics, philosophy, and economics.

Plumvo, a “social finance” site, is launched by Peridrome

Plumvo, a new website designed to “help people build and maintain financial plans, allows users to build comprehensive plans for retirement, college funding and other goals and to link the goals to specific pools of assets,” has been launched by Peridrome Corp., the company said this week. A free preview version of Plumvo was also released.

In a release, Plumvo co-founder Gib Veconi said the tool was designed to “accommodate the various and personal ways people think about their goals and money instead of expecting individuals to fit their lives into narrowly-focused forms and spreadsheets.” “People do not experience retirement the same way and they do not save and invest the same way,” he said. “Everyone has a different set of plans and expenses. Plumvo allows each member to develop a personalized plan, unlike any other, that reflects their unique situation.”

Peridrome (the names means “a genus of moths”) is a marketing service for wealth managers, and Plumvo is apparently aimed at advisers as well as individuals. According to the Plumvo website:

“In the future, Plumvo will also become a great new place for financial professionals to reach new clients who are already actively engaged in financial planning. Once a member has organized her finances and identified her goals, she is  in a better position to make decisions informed by professional advice. Both advisor and client benefit from a deeper relationship, built on a shared understanding of the client’s current situation and goals. Plumvo will also keep you up to date on changes in your clients’ plans and provide opportunities to introduce products and services on a timely basis.”

Securian president will also serve as CEO

Securian Financial Group announced that president Christopher M. Hilger will also serve as chief executive officer, effective January 1, 2015. Chairman and CEO Robert L. Senkler, 61, who will retire from active management after serving as CEO for 20 years, will remain as chairman of the board of directors.

Hilger, 49, will be the 13th CEO in Securian’s 134-year history. He was appointed president in 2012.

A 27-year veteran of the insurance industry, Hilger also serves as CEO of Allied Solutions LLC, a Securian subsidiary headquartered in Indianapolis, IN that distributes insurance products and services to financial institutions. He joined Securian’s management team in 2004 when the company purchased Allied Solutions and was subsequently named senior vice president of Securian’s Financial Institution Group. In 2010, he was promoted to executive vice president with the added accountability for the company’s group insurance business. In 2012, he was appointed president with responsibility for all of Securian’s businesses.

Hilger holds a bachelor’s degree from Indiana University. Senkler, a 40-year veteran of the company, has served as chief executive officer since July 1994. Under his direction, the insurance protection the company provides grew at a compound annual rate of 12% to more than $1 trillion and assets under management quadrupled. The company expanded its St. Paul, MN headquarters to over one million square feet of office space, and its national workforce grew to more than 3,700.

© 2014 RIJ Publishing LLC. All rights reserved.

Club Vita: Where Levity Meets Longevity Risk

Posted on June 10, 2014 by -

Club Vita’s London headquarters are housed in a gleaming, glass-walled 13-story building, designed in 2003 by architects Foster and Partners. From a window in the reception room, visitors can glimpse a handsome tree and a section of an ancient wall that the Romans built sometime around 200 A.D.

The juxtaposition of ancient and modern appropriately represents a firm that pioneers longevity research. Launched in 2008, as a sister company to actuarial consultancy Hyman Robertson, Club Vita delivers longevity analysis and prediction to pension plans of over 200 clients from a cross section of industries: banks, insurance companies, technology, basic materials, industrials, consumer goods and services, utilities and local government. That roster includes major UK firms like Aviva, BP, Diageo, Johnson Matthey and the Daily Mail.

Club Vita works like a real club, with member firms paying subscriptions to receive top-notch statistics gleaned from their deep collective pool of data.  The aim is to provide sharper insights into the life expectancy of every participant in a given plan, and thus improve on ad-hoc adjustments to standard mortality tables. The company’s own 20 employees, including actuaries, statisticians and infrastructure specialists, have developed the largest data base of its kind in the UK, to help firms manage the danger of unexpectedly long-lived participants.

A green solution

“It’s a particularly nasty risk in our business,” explains Steven Baxter, one of the firm’s longevity experts. He and I sit in a conference room, facing the Museum of London, which is devoted to the capital city’s history since prehistoric eras.  It’s another reminder of how time marches on. “Longevity risk is creeping and insidious,” he continues, noting the imaginative theme on the firm’s website at www.clubvita.co.uk. Graphics there depict avocado-shaped cartoon figures in avocado green hazmat suits, engaged in waste disposal activities. 

The point is that dangerous longevity risk requires expert handling, with millions of pounds in UK pension plans at stake. So why did Club Vita decide to go with such whimsical illustrations for marketing their ultra-serious, even somber, service? “We wanted to make life a bit more fun,” is the simple answer.  Even the name—vita means life—expresses a positive goal. “At one point, we actually considered buying some of those green suits and modeling them!” Baxter smiles.

In order to sidestep those unpleasant longevity surprises, plans need a thorough understanding of their membership dynamics, as well as ongoing trends and projections. Club Vita, which looks across workers in diverse industries, is positioned to drill down and calibrate for a granular mortality experience. Its statistical sample pool comprises about 2 million retirees from member firms who are receiving pensions, along with another 4 million pre-retirees. “We focus most on the retired cohort,” says Baxter, “since the probability would be low that a 30-year-old would die soon.”

In its detailed level of analysis, the group takes into account a host of factors.  It measures affluence, considering both pay at and during retirement; geo-demographics, refined down to local postal codes as precise as 12 to 20 houses; age and gender; occupation and health. As another unique element in Club Vita’s manipulation of data, Baxter adds, “we can also use marketing information around consumer habits, like supermarket loyalty rewards.” That sophisticated analysis helps to establish individuals’ characteristics for comparing tiny clusters in the postal code map. 

Club Vita meanwhile prides itself on accessing the most current data, as subscribers update their memberships annually. That timeliness is key to compiling accurate insights. Other statistical record keepers, particularly the Office for National Statistics (ONS) model, estimates for the live UK population based on extrapolations from a 10-year census, which risks error around under-reporting and migration. For example, one important development has been improvement patterns in longevity between socio-economic groups, based on lifestyle adjustments. “We both see that gap narrowing, and our results are consistent with ONS, but we see insights sooner,” Baxter explains.

£1.2 trillion in DB liabilities

Exact prediction counts in the tug-of-war between exposure to costly shortfalls and tying up unnecessary funds for reserves in defined benefit plans.  (The defined contribution market is a different game, where participants shoulder their own longevity risk, by individually assuming that burden upon retirement.) Club Vita primarily serves the shrinking but still substantial DB universe, which now represents eight percent of UK pensions. According to the Purple Book, published annually by the Pension Protection Fund and Pensions Regulator, DB liabilities in January 2014 stood at £1.2 trillion. 

The trouble is that UK plans are not fully funded, and not every company can afford the cash to transfer the shortfall risk, nor are all equipped to buy insurance. That whopping sum of DB obligations in the UK swamps the capacity of the insurance industry to absorb that longevity risk.

Here is where Club Vita plays its role. It helps level the playing field and keeps the longevity insurance players honest. Those counterparties have enjoyed a long history of writing insurance and managing risk. In such a highly competitive sellers’ market, and commanding a wealth of information about key factors, they are advantageously placed to name their own prices.  Compounding their advantage, insurers can balance out some of their life insurance costs against annuities, if account holders live longer.

Before Club Vita came on the scene, the pension industry had little or few comparable data pools to work from, but the club has shifted the asymmetry, so that pension plans can finally assess whether they are indeed paying a fair price. “In the past,” says Baxter, “they relied on guesswork or a leap of faith. But now we provide the science.”

Specific conditions, causing companies pain in funding DB plans from their own pockets, began to transpire in the UK in the late 1990s. Similar storm clouds are now gathering in the US, according to Baxter.  First, a change in accounting practices in the UK, with increased marking-to-market, have made corporate balance sheets more sensitive to interest rate levels. That means payments tied to the end of a contract have become more valuable, and hence a material issue.  These adjustments have resulted in the recognition of the critical importance of understanding longevity patterns, as a way to avoid surprises and gain better insights.

That mission is the driving rationale behind Club Vita’s unique offering. As its clever artwork illustrates, little avocado figures scuttle to monitor and shore up toxic, elusive substances, dispatching them into risk reduction units to contain the challenge. Where knowledge is power, Club Vita provides advance preparedness.

© 2014 RIJ Publishing LLC. All rights reserved.

An Algorithm That Loves Annuities

Posted on June 5, 2014 by -

Decumulationistas, to coin a term, tend to believe that a lot of Americans could probably spend more money with less risk during retirement if they allocated their savings to a blend of annuity and investment products rather than to investments or annuities alone.

Such a product allocation, the theory goes, pays off in at least three ways. It uses mortality risk pooling to boost income; it reduces the need to hoard against uncertain future expenses, and it lets people gamble a little with their liquid investments without losing sleep.   

But how do you optimize such a strategy? And how can you do it in an intellectually rigorous way that:

  • Incorporates the major knowns (income needs, existing resources, legacy desires)
  • Adjusts for the major variables (product fees and features; broker-dealer suitability restrictions) and
  • Doesn’t fudge the major uncertainties (market risk, sequence risk and longevity risk) by assuming average values

In 2008, Moshe Milevsky’s QWeMA Group in Toronto tackled this multidimensional problem. Using partial differential equations, they developed a calculator to generate custom allocations within a portfolio with three types of products: mutual funds, variable annuities with lifetime income riders, and fixed income annuities.

The calculator’s acronym is PrARI, or Product Allocation for Retirement Income. This past spring, Cannex, the Toronto-based financial product data distributor, acquired QWeMA and PrARI. According to Faisal Habib (below right), the president of QWeMA at Cannex, the deal is a win-win for the two firms. The PrARI tool will add a service element to Cannex data products, and the Cannex distribution network will introduce PrARI to a wide audience of broker-dealers. 

Faisal Habib

Insurance company broker-dealers are the most logical audience. Manulife and John Hancock (Manulife’s U.S. unit) were early adopters of PrARI. Then Pacific Life licensed the tool. More recently, Principal Financial has rolled it out. (Those firms could not be reached for comment before deadline.) So far, about 5,000 advisers have access to PrARI, Habib told RIJ, and use it as a sales, education or planning tool.  

Triple threat

PrARI creates portfolios of mutual funds, VA with income riders, and income annuities for a specific reason. Those three product classes address, respectively, three of the biggest financial risks that retirees face: dilution of spending power by inflation, pressure to liquidate depressed assets (“sequence” risk), and the risk that they’ll outlive their savings (longevity risk).

“Each product gives you a certain hedge for a certain cost,” Habib told RIJ recently. “PrARI gives you a cost-benefit analysis. We can say to the client: this particular combination works in your best interest.” Those three products are for everyone, he adds. They’re mainly for retirees who can’t get enough income simply by withdrawing about four percent of their savings each year.   

To find a blend of those products that meets a retiree’s financial needs and desires with the best chance of success, PrARI needs several inputs. These include the client’s personal and financial information (e.g., age, assets, income needs, sources of guaranteed income); product information from the Cannex annuity database (now supplemented with VA data through a partnership with Beacon Research); and the broker-dealer’s suitability parameters, whatever they might be.

To calculate the probable success of a given product allocation in producing the income a client needs, PrARI feeds all of this information into the algorithm that Moshe Milevsky’s Qwema Group, a private consulting firm, created about six years ago. This algorithm is unusual: It estimates probabilities of success by using “numerical analysis” instead of the more popular Monte Carlo simulations.

In the world where most retirement calculators use the Monte Carlo approach, that’s significant. To get an accurate probability assessment from a Monte Carlo simulation, you have to run millions of projections. That requires too much expensive computer power and time—too much for an everyday adviser-client desktop calculator like PrARI. Numerical analysis offers a short cut. Based on a few carefully chosen samples, it quickly and cheaply interpolates a result that’s still accurate enough for planning purposes.

Numerical analysis

Here’s a crude analogy: A journalist on deadline might confirm a disputed event or fact by calling three knowledgeable people. If all three agree on the facts, the reporter proceeds with the story. The accuracy of that technique, and of numerical analysis, depends on the skill with which the samples are chosen. A Monte Carlo approach might, by contrast, involve asking hundreds of randomly chosen people a single question. 

Habib provided RIJ with screenshots of the inputs and outputs of a highly simplified sample PrARI calculation. The hypothetical involved a newly retired 66-year-old single New Yorker with $1 million in savings, with 60% in stocks and 40% in bonds.

The client expected $18,000 from his inflation-adjusted Social Security but wanted a total retirement income of $55,000, increased by 3% per year for inflation. He wanted a 90% chance of maintaining his desired income for life. He had no legacy desire.

PrARI illustration

PrARI offered a side-by-side comparison between a classic systematic withdrawal from mutual funds and a customized blend of funds and annuities. Both projections called for maximizing income over legacy value. The SWiP program entailed an annual inflation-adjusted drawdown starting at $37,000 from the $1 million (in a 60% equity/40% bond portfolio) to supplement the $18,000 in annual Social Security benefits. This strategy yielded a success probability of 88%, with an expected legacy value of $376,000.  

According to PrARI, the blended solution was better. It generated an income of $71,500 from three sources: Social Security, a $300,000 SPIA (with 10 years certain) paying $23,500 a year for life, and a $600,000 VA/GLWB (50/50 equity/bond allocation) paying $30,000 for life. The plan left $100,000 in cash. The estimated legacy was $340,000 and the probability of meeting the original $55,000 annual income requirement for life (what Qwema calls the RSQ or Retirement Sustainability Quotient) was 100%.   

A credible basis for sales 

In the world of financial product distribution, at least in channels where the culture, the incentives, and the licensing aren’t biased against insurance products, a calculator like PrARI has obvious potential to help financial advisers sell more guaranteed income products.  

“For an insurance agent who has never sold mutual funds, or for a registered rep who has only used systematic withdrawal and never an annuity, this tool helps them in suggesting and justifying alternative solutions,” said Habib. “It’s a value-add for them.”

Each distributor that uses PrARI “white labels” it and puts its own product options and suitability guidelines into the system. Cannex, as a purveyor of data on products from hundreds of insurance companies, tends to remain product-agnostic.

“We didn’t want to be seen as partial to one set of products or another. We had a unique proposition in product allocation. We never wanted Qwema to be seen as the development arm of any particular company,” Habib told RIJ.

PrARI does, however, exclude certain products when their terms aren’t attractive. “The tool is client-focused. If the fees are too high, or if the withdrawal rates or crediting rates are too low, then you’ll see the allocations move out of them,” he said.

In some cases, PrARI produces no recommendations at all. As retirement advisers know, clients don’t always have enough savings to spend as much as they’d like during retirement and still avoid ending up without enough money to live on. 

“The algorithm won’t magically bring them an adequate income. Advisers say, ‘If I put all my client’s information in, why don’t we get a solution? Why doesn’t my client get more income?’ We tell them, ‘We can’t go against the market. If you don’t have enough you don’t have enough,’” Habib said.

“The question then comes up, ‘What can I go back to my client with?’ We tell them: Ask the client to save more, delay retirement, or consume less. The adviser says, ‘You are making my life difficult.’ But there’s a no other way to do it. We can put in all the complex math and the theory of actuarial science, but sometimes it won’t give you an answer.”

© 2014 RIJ Publishing LLC. All rights reserved.

British pension industry wary of “collective” DC

Posted on June 5, 2014 by -

The British pension industry offered a mixed response this week to the UK government’s announced intention to create new legislation that will allow the establishment of collective—i.e., centrally managed—defined contribution (CDC) retirement plans similar to Denmark’s. 

The UK government’s commitment to CDC was made in the Queen’s Speech, a statement by the head of state describing Parliament’s initiatives in its next session, which begins in the autumn, according to IPE.com.

UK pension law does not currently allow DC/DB hybrids in which plan sponsors and participants share the investment risk. There’s no provision for anything but pure DC, where participants bear the risk for outcomes, and pure DB, where plan sponsors bear the risk.    

The new legislation is slated for 2016. That’s when the country launches its new basic “first pillar” old age insurance program. That’s also when workers will no longer be able to substitute participation in an employer-sponsored plan for contributions to the government-sponsored supplemental DC plan, a practice known as “contracting out.”

Many existing DB plans are expected to close when contracting-out ends. When that happens, the government would prefer to see employers adopt CDC plans (also called “Defined Ambition” plans) than to see U.S.-style DC plans become the norm in the UK.

While some sections of the UK industry welcomed CDC, others said plan sponsors aren’t enthusiastic about it, it’s not consistent with the recent abolishment of requirements for annuitization of tax-favored savings, and the timing is bad.

The National Association of Pension Funds (NAPF), for instance, had previously asked the government to slow down its reforms of the DC market, as the industry absorbs other changes, including auto-enrollment and a cap on fees by 2015.

Others said that CDC plans might have difficulty achieving the scale required for success. Duncan Buchanan, president-elect of the Society of Pension Consultants (SPC), said, “It is unlikely employers will feel pressure from employees to establish or contribute to new-style ‘risk-sharing’ schemes. CDC requires critical mass to make risk sharing fair. Without large numbers of members, these collective schemes might not be able to get off the ground.”

Alex Waite, of LCP, a pension consulting firm, said, “This type of pension scheme has some attractions. However, pooling risks between members generates winners and losers, and it is likely that anyone that loses out materially will call foul. Against this background, it is unlikely employers will rush to set up CDC schemes.”

Lee Hollingworth, head of DC at consultancy Hymans Robertson, said CDC would have distinct winners and losers. “Potential losers include younger savers and the less well-off,” he said. “The muted reaction of employers is based in part on the Netherlands’ experience. There, employers have found themselves paying in extra money rather than face the industrial relations impact of benefits being reduced.”

Not everyone is so skeptical. Danny Wilding, partner at consultancy Barnett Waddingham, said that while CDC might not be right for all employers, it would be a welcome new option. “CDC has the potential to offer more generous and stable pension returns to scheme members and act as a viable alternative to both DC and DB schemes,” he said.

© 2014 RIJ Publishing LLC. All rights reserved.

Voya hires Milliman to hedge its closed VA block

Posted on June 5, 2014 by -

Voya Financial, Inc. (formerly ING U.S.) has agreed to outsource the actuarial valuation, modeling and hedging functions for its Closed Block Variable Annuity (CBVA) segment to Milliman, the companies said in a release this week.

Milliman will calculate the financial reporting and risk metrics, and the analytics used to determine hedge positions. Voya will oversee and manage the CBVA segment and retain full accountability for assumptions and methodologies, as well as the setting of hedge objectives and execution of hedge positions, according to the companies.

In the release, Michael Smith, chief executive officer, Insurance Solutions and manager of Voya Financial’s CBVA segment, said:

“Following our move to cease offering variable annuities with guarantee features in 2010, and having also completed significant work to ensure the CBVA segment is appropriately managed to protect regulatory and rating agency capital, we are now taking an appropriate next step by outsourcing certain functions for this run-off block. Our agreement with Milliman allows us to create a more streamlined framework for the CBVA segment and achieve a more variable cost structure for this run-off block.”

Voya Financial, which has had a long-term relationship with Milliman, will complete parallel financial closing actions with Milliman prior to final implementation. The transition is expected to be completed in 2015. At the end of 2013, ING Group had about $71 billion in VA assets, according to Morningstar. But that amount is said to have shrunk considerably since then.

In 2010, Voya Financial stopped actively writing new retail variable annuity products with substantial guarantee features and separated its CBVA segment from its Ongoing Businesses. This run-off segment is classified as a closed block and is managed separately from Voya Financial’s Ongoing Businesses – Retirement Solutions, Investment Management and Insurance Solutions.

Milliman manages about $100 billion in closed variable annuity business for about 15 life insurance companies, according to Deep Patel, a Milliman principal who is involved in the project.

Once a block is in run-off, it gradually shrinks to nothing. Its guarantees are still sensitive to interest rate risk and equity market risk and have to be hedged, however. But companies typically want to focus their IT budget and best IT personnel on new and growing parts of their businesses. So it makes sense for them to outsource the maintenance of a shrinking business.

For Milliman, on the other hand, hedging is a core business. “This is our bread and butter,” Patel said. He added that hedging a closed block of VA guarantees isn’t much different from hedging new business. Both require a lot of computing power, hard-to-find financial engineers and costly redundancies. “We have double everything. For our internet connection, we’ll have AT&T and Verizon.”

VA hedging has also evolved in a way that makes it more appropriate for outsourcing, he said. “The way that companies see VA hedging has changed a little over the years. They used to see hedging as a strategic tool and a competitive advantage. But now it’s seen as an ongoing operation or service. When something is strategic, you tend to keep it in house. When it’s just operational, you might not.”

© 2014 RIJ Publishing LLC. All rights reserved.

Morningstar buys HelloWallet, bolsters participant advice business

Posted on June 5, 2014 by -

Morningstar, Inc. has agreed to buy HelloWallet Holdings, Inc., the five-year-old, 50-employee provider of online financial advice to retirement plans and their participants, for $52.5 million. Morningstar had a $15.3 million minority stake in HelloWallet and will pay the balance of $39.0 million shortly, the Chicago-based financial services company said in a May 29 release.    

HelloWallet allows retirement plan participants to create dashboards on their computers or smartphones where they can monitor all of their financial information—retirement accounts, checking accounts, credit card accounts, health care savings accounts, etc.—in one place. Then it provides tools for creating budgets, investing for retirement or achieving specific financial goals. Members give HelloWallet read-only access to their accounts.

HelloWallet was founded in 2009 by Matt Fellowes, a 39-year-old consumer finance expert with a Ph.D. in political science from the University of North Carolina. He will remain a leader of the company. Over the past five years, the SaaS (“Software as a Service”) startup has established a number of clients among retirement plan sponsors, including Marsh and McLennan, United Technologies and Salesforce.com.

Their participants can use the HelloWallet software to manage their personal finances; HelloWallet claims to help companies prevent 401(k) leakage, drive higher participation in health savings accounts and flexible spending accounts, and reduce taxes.
Even before the acquisition, Morningstar was the largest provider of managed retirement accounts in terms of participants served, with almost one million individuals enrolled.

Behavioral economics plays a big role in HelloWallet’s software design. It “combines behavioral economics and the psychology of decision-making with sophisticated technology to provide personalized, unbiased financial guidance to more than 1 million U.S. workers and their families through their employer benefit plans,” the release said.  

“Holistic advice is becoming a ‘must have’ capability, as employers increasingly look for integrated solutions across their retirement and healthcare programs. Today’s routine financial choices are directly linked to tomorrow’s long-term retirement, health, and savings decisions,” Fellowes, founder and CEO of HelloWallet, said in the release.

According to the release:

“Through HelloWallet’s website and mobile applications, employees input their goals and priorities and add their financial information, including income, bank accounts, credit cards, retirement plans, insurance, and investments. HelloWallet creates budgets and analyzes trends in financial behavior to recommend how members can prioritize financial decisions, identify ways to stretch their paychecks, and make the most of their benefits, such as 401(k) plans, health savings accounts, flexible spending accounts, and insurance. “HelloWallet also automatically alerts members when they need to make changes.

“The majority of participants who use HelloWallet make quantifiable changes in how much they save, use available benefits, and pay off debt. During the last 12 months, the median HelloWallet member increased savings deferrals by 38%. HelloWallet has also found that its members pay off debt two times faster after receiving the company’s proprietary, personalized financial guidance.”

© 2014 RIJ Publishing LLC. All rights reserved.

Hungry for rollover data? This pricey report might help

Posted on June 5, 2014 by -

A new proprietary report from Cerulli Associates may interest anyone who’s trying to follow-the-retirement-money and capture more Boomer assets as they leak from the buttoned-down world of 401(k) plans to the relative flexibility and freedom of the rollover IRA universe.

The 129-page report is called, “Evolution of the Retirement Investor 2013,” and is priced at $13,000, according to a Cerulli release.

The report contains data on 401(k) participant behavior and attitudes, the size of the IRA market, flows into rollover IRAs, and perceptions of financial services products, among other metrics. 

Qualitative information is based on executive interviews, a focus group composed of retirement plan “communication experts,” and a proprietary survey of more than 1,000 retirement plan participants, Cerulli said.

Companies named in the report include Charles Schwab, Fidelity, MassMutual, MetLife, MFS, Precision Information, Putnam, TD Ameritrade and Vanguard.

Cerulli has distributed a few sample pages of the report, including two charts. One of the charts shows that “personal budget” and “company match” are the two biggest determinants of an individual’s contribution to an employer-sponsored retirement plan.

Plan sponsors may be interested to know that Cerulli found “personal budget” to be more important to participants ages 50 to 59 than to participants in any other age group. “Company match” was more important to participants ages 30 and under than to participants in any other age group.

Another chart showed that savings shortfalls and personal debt were the reasons most often cited by plan participants ages 55 and older for delaying retirement. Cerulli noted that Boomers are likely to move gradually into retirement, rather than follow the traditional pattern of ending their careers with a small office party and the proverbial gold watch.

“Retirement is a significant lifestyle change and it may take many individuals extra time to come to a decision, especially if a spouse is still working. This further demonstrates that retirement is not necessarily the logical, planned decision that the industry often conveys in many of its messages,” an excerpt from the report said.

The gradual or erratic nature of the Boomers’ retirement process, and the rarity of formal planning, suggests that advisers and product manufacturers might find fewer markers or milestones—age, employment status, asset level, location of retirement accounts—that can help them identify the most likely prospects at any given time.

Boomers will evidently present a moving target.

© 2014 RIJ Publishing LLC. All rights reserved.