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Posted on October 21, 2021 by -

Investcorp hires ‘insurance solutions’ expert away from Blackstone

Investcorp, a global provider and manager of alternative investment products, has launched the Investcorp Insurance Solutions platform, the firm’s newly formed business that will provide investment management services to meet the investment needs of insurers.

Investcorp has hired Todd Fonner as Chief Investment Officer, who has over 28 years of experience in the insurance and asset management industries, having held a variety of roles across functions including investments, treasury, enterprise risk, underwriting and strategy.

Most recently, he served as Senior Managing Director, CIO North America, Blackstone Insurance Solutions until 2020. There, he contributed significantly to the build out and enhancement of the Blackstone Insurance Solutions platform formed in late 2017. He also has held CIO, Treasurer and Chief Risk Officer roles at RenaissanceRe  Holdings, where he spent nearly 15 years of his career. 

Investcorp is a global investment manager, specializing in alternative investments across private equity, real estate, credit, absolute return strategies, GP stakes and infrastructure. Since our inception in 1982, we have focused on generating attractive returns for our clients while creating long-term value in our investee companies and for our shareholders as a prudent and responsible investor.

Investcorp has today presence in 12 countries across the US, Europe, GCC and Asia, including India, China and Singapore. As of June 30, 2021, Investcorp Group had US $37.6 billion in total AUM, including assets managed by third party managers, and employed approximately 430 people from 45 nationalities globally across its offices.

US ranked 19th among world’s retirement systems

Iceland’s retirement income system has been named the world’s best in its debut in the 13th annual Mercer CFA Institute Global Pension Index (MCGPI). The Netherlands and Denmark have taken second and third places respectively in the rankings, after a decade of competing for the top spot.

The study also reveals that there is much that pension systems can do to reduce the gender pension gap—an issue inherent in every system.

The US index value increased from 60.3 in 2020 to 61.4 in 2021, primarily due to an increase in individual’s net replacement rates, higher household savings, and an increase in the value of the assets held in private pension arrangements.

While COVID-19-related legislation passed by Congress provided some relief to individuals and employers in 2020 and 2021, the resulting increases in government debt and retirement asset leakage caused by providing individuals access to funds before retirement were negative side effects.

These results, coupled with the projected depletion of social security by 2034, will have a significant impact on the ability for the US pension system to adequately provide for its retirees in the future.

The MCGPI is a comprehensive study of global pension systems, accounting for two-thirds (65%) of the world’s population. It benchmarks retirement income systems around the world highlighting some shortcomings in each system and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits. The top three systems, all receiving an A-grade, were sustainable and well-governed systems, providing strong benefits to individuals.

Gender differences in pension outcomes

Women are still facing retirement with substantially less saved in their pensions than men and the MCGPI’s analysis highlighted that there was no single cause of the gender pension gap worldwide, despite all regions having significant differences in the level of retirement income across genders.

Pay equity is a major contributing factor to the gender pension gap. Women also tend to have less time in the workforce compared to men, largely due to family leave policies, or lack thereof, and greater expectation for women to manage caregiving and family commitments, which ultimately means less time for accumulation of savings for retirement.

As a result, they tend to become self-employed or hold more part-time positions, which aren’t always eligible for retirement program participation, or leave the workforce all together. Women also have longer life expectancies and are more likely to experience poverty in their old age than men; therefore requiring more capital to get them through their retirement years.

Pacific Life VAs to include Invesco ‘Defined Outcome’ funds

Pacific Life has launched the Invesco V.I. Defined Outcome Funds, available with certain Pacific Life variable annuities. These funds are designed to give investors the benefits of a registered index-linked annuity (RILA) but with more flexibility, control, and transparency.

The Invesco V.I. Defined Outcome Funds offer growth potential linked to a market index, up to a cap, and downside protection through a buffer that protects against the first 10% of loss over a one-year outcome period. These features are available to clients without the need for an optional benefit for an additional cost.

By offering the funds through a variable annuity, clients can combine this strategy with other investment options to create a custom portfolio. Clients can also move in and out of the Invesco V.I. Defined Outcome Funds.

A tool on the Invesco website allows financial professionals and their clients the ability to view the cap, buffer, and time remaining in the outcome period for each fund.

“We’ve seen industry growth in RILAs, low-cost mutual funds, and outcome-focused exchange-traded funds (ETFs),” said Kevin Kennedy, senior vice president of sales and chief marketing officer for Pacific Life’s Retirement Solutions Division. “By placing these Invesco funds inside our variable annuities, we are one of the first to give investors an additional vehicle to get the growth and protection they need without sacrificing flexibility.”

Fund  and ETF flows abate in September: Morningstar

Long-term mutual funds and exchange-traded ETFs had $58 billion of inflows in September, their lowest intake since October 2020 when they gathered $15 billion, according to the latest monthly fund and ETFs flow report from Morningstar, Inc.

Consistent with the broader shift in favor of index-tracking US equity strategies, passive US equity funds had $12.5 billion of inflows in September, while active funds had outflows of $20.0 billion. US equity funds’ overall $7.4 billion outflow was the most among U.S. category groups.

International-equity funds had inflows of $9.8 billion, compared to the category group’s average monthly intake of $24 billion over the first eight months of 2021.

Funds with sustainability mandates incorporated into their prospectuses, as measured by Morningstar, had inflows of $3.8 billion in September. Sustainable US equity funds gathered $1.6 billion, bringing their year-to-date intake to $25.7 billion, equal to more than half the inflows into US equity funds without an explicit focus on sustainability. As of September, sustainable funds within the international-equity and sector-equity category groups posted trailing 12-month organic growth rates of 57% and 122%, respectively.

Taxable bond funds’ $40 billion intake led all US category groups for the sixth consecutive month, with 70% of all long-term net flows in September. Their year-to-date intake of $464 billion more than doubled the next-closest, international-equity funds’ $203 billion. Short-term bond funds led all taxable-bond funds by gathering $7.1 billion in September. Bank loan funds added $3.2 billion, their 10th consecutive month of inflows, and inflation-protected bond funds extended their streak of positive flows to 17 months after collecting $5.6 billion in September.

Vanguard collected $19.8 billion in September, which marked its lowest monthly inflow of the year but still led all fund families for the 10th consecutive month. The firm’s lineup of index funds represented the majority of September’s intake and has now claimed over 90% of the firm’s inflows year to date. Fidelity and iShares saw the second- and third-most inflows, respectively, with over $9 billion apiece in September.

Allianz Life to offer a VA for fee-based advisers

To help registered investment advisers (RIAs) manage transition and longevity risks in client portfolios, Allianz Life Insurance Company of North America (Allianz Life) announced has launched an advisory version of its Allianz Index Advantage Income Variable Annuity.

The Allianz Index Advantage Income ADVSM Variable Annuity offers an advisor-centric product design with seamless integration, low fees, greater control and enhanced fee billing.

In a recent Allianz Life study, 88% of financial advisors said it is more important to effectively manage risk in client portfolios than generate the highest gains. The product can help address retirement risks associated with the rising cost of living over a longer retirements by offering indexed return potential with a level of protection through multiple crediting methods (also called index strategies), tax deferral, a variety of lifetime payout options, and a choice of death benefit options within the accumulation phase.

In addition to the robust product benefits, advisors can leverage their preferred financial planning and portfolio management tools to help demonstrate the value of integrating insurance solutions to clients. 

© 2021 RIJ Publishing LLC. All rights reserved.

Another Annuity Issuer Enters the ‘Bermuda Triangle’

Posted on October 21, 2021 by -

The completion of a $10 billion partnership between American Equity Investment Life Insurance company (AEL) and Brookfield Asset Management Reinsurance (BAM Re), which was announced last week, is significant in many ways—for AEL, Brookfield, and the US annuity industry.

For American Equity Investment Life, the deal marks the realization of its “AEL 2.0” strategy. CEO Anant Bhalla announced the strategy not long after he joined AEL from Brighthouse Financial in March 2020. His goal: to release surplus capital, raise investment yields, and please impatient shareholders. 

“We are taking what would be a spread business focused on return-of-equity and turning that into a fees business focused on return-on-assets,” Steven Schwartz, head of Investor Relations at AEL, told RIJ. “A spread business requires us to hold significant capital. A fees business requires holding less capital. That’s what AEL 2.0 is all about.”

For BAM Re, created only months ago by Toronto-based Brookfield, which manages $626 billion in alternative investments worldwide, the deal makes it a player in the gold rush to manage “sticky” annuity assets. Its competitors—Athene/Apollo, KKR, Blackstone and other private equity firms—are already there.

For the annuity industry, the deal embodies what RIJ has named the “Bermuda Triangle” strategy. It involves a US life insurer, an offshore reinsurer, and an asset manager. For small to mid-sized publicly traded annuity issuers squeezed for years by the Fed’s low interest rate policy, this strategy represents nothing short of survival and independence, at least temporarily. 

The fruition of ‘AEL 2.0’

The deal with BAM Re gives AEL, which has an A- rating from AM Best, what it wants and needs. Reinsuring about $4 billion (of AEL’s $55 billion in assets) in existing “IncomeShield” fixed indexed annuity (FIA) contracts with surrender periods of up to 10 years with BAM Re’s North End (Cayman) reinsurer releases about $200 million.

That’s on top of the $350 million AEL gained by reinsuring about $5 billion in a deal with Värde Partners and Agam Capital Management in 2020. To free up more capital over the next six or seven years, AEL will send another $6 billion in assets (75% of projected FIA sales) to BAM Re and North End Re for reinsurance.

Technically, the annuity assets and liabilities will stay on AEL’s balance sheet. But when it moves $3.8 billion to a trust account at North End Re, it will receive a “reserve credit.” Because the capital requirements are lower in the Cayman Islands, AEL only has to move $3.8 billion to North End Re to back $4 billion in liabilities. That’s where the $200 million in released capital comes from.

North End Re’s parent, BAM Re, will manage the money. (AEL’s chief investment officer said in September that AEL intends to allocate” 30% to 40% [of its money] to private asset strategies.”) Out of what BAM Re earns on those assets, it will pay AEL a “ceding commission” of 49 basis points (bps) and an “asset liability management” fee of 30 bps (0.30%). On the $6 billion in future transfers, BAM Re will pay AEL a ceding commission of 140 bps and a 30 bps asset liability matching fee.

Transformative 

“This transforms a piece of AEL’s $55 billion spread business into a fee-based business without capital requirements. It’s an important step in diversifying their earnings mix,” Ryan Krueger of Keefe, Bruyette & Woods told RIJ. “AEL will retain over $50 billion of annuity business not being reinsured to Brookfield, of which a portion will be reinsured to a new captive reinsurer” called Project Ray Re. The reinsurer is mentioned in AEL’s December 2020 Form 8-K filing with the Securities and Exchange Commission.

CEO Anant Bhalla of AEL

“Like most of publicly traded life insurance companies, AEL wants to return capital to shareholders,” said JP Morgan analyst Pablo Singzon. “Reinsurance transactions can help them do that. They also need to bring up investment yield. Lower yields mean less attractive products and less profits for the insurer. So they’re updating their investment strategy.”

“AEL had to evolve,” Erik Bass, an analyst at Autonomous Research, said in an interview. “The old formula wasn’t going to work. They were at a disadvantage on the asset side and they were using almost all the capital they generated to support new business growth. They’ve had to issue equity capital in the past to fund some of that growth. They also had a lot of credit risk on their balance sheet.”

AEL’s new strategy also keeps it independent at a time when other small to mid-sized public traded life insurers are being scooped up by private equity (PE) firms. Fending off a takeover bid from Athene Re and MassMutual earlier this year, AEL chose to go its own way. Instead of letting one PE firm manage all of its assets, it will use several.

The stable of asset managers now includes Värde Partners, Agam Capital Management, and now Brookfield. AEL engaged Brookfield to manage only the assets that North End Re reinsures, and not the rest of AEL’s assets. In September, AEL outsourced the management of its traditional fixed income holdings to BlackRock and Conning. “Their goal is to have a diverse mix of best-in-class asset managers,” Bass told RIJ.

BAM’s gambit

BAM Re’s parent, Brookfield Asset Management, the $626 billion Toronto-based alternative asset manager, wanted this deal as much as AEL needed it. Best known as a real estate investor, BAM saw rivals Apollo, KKR, Blackstone and others setting up reinsurers and reeling in chunks of the $500-billion FIA asset pool. It created BAM Re in late 2020 (spinning it off in June 2021) to do the same.

In its first foray into the annuity business, BAM Re paid $5.1 billion for American National Insurance Group, acquiring the Galveston, TX-based, publicly traded insurer’s $30.4 billion in assets (against $23.6 billion in liabilities). American National Insurance Co. had $436.2 million in FIA sales in the first half of 2021, for 17th place on LIMRA SRI’s top-20 list of FIA issuers. American National also sold $468.4 billion in fixed deferred annuity sales, and $53.8 million in income annuity sales.

“The private equity industry is drawn to sticky, low-cost liabilities. FIAs are the most popular right now,” Krueger told RIJ. “The [PE firms] also like funding agreements and pension liabilities with low acquisition costs, which generates assets to invest at more favorable spreads.”

Asset managers have begun referring to FIA assets as “permanent capital.”

FIAs are seen as sticky or permanent because they have terms as long as 10 years. Many of them include surrender charges and market value adjustments that discourage or sterilize withdrawals by policyholders. While contract owners can withdraw 10% per year without penalty, there’s negligible risk of “runs” that would force the asset managers to liquidate illiquid assets like collateralized loan obligations (CLOs). 

‘Flow reinsurance’

The AEL-BAM Re relationship, while not exclusive, is meant to last awhile.  To “cement” its relationship. BAM Re has already purchased 9.9% of AEL, or about 9.1 million of its common shares. S&P Global reported that BAM Re paid $287.1 million for the shares. BAM Re is waiting for regulatory approval to buy another 10% of AEL, according to press reports.

CEO Sashin Shah of BAM Re

The “flow reinsurance” aspect of the deal extends the BAM Re-AEL partnership out for at least six years. That’s how long the 170 bps fee arrangement is guaranteed for. BAM Re will reinsure new IncomeShield contracts as quickly as agents and advisers sell them. The prospect of AEL receiving steady fees (170 bps on $6 billion is $102 million) for the next several years may comfort AEL shareholders.

Flow reinsurance appears to be on the rise. Lincoln Financial Group, which signed a flow reinsurance deal with Athene in 2017, entered into another one last month with Talcott Resolution Life Insurance Company. Talcott will reinsure up to $1.5 billion in sales of Lincoln’s flagship variable annuity with living benefit riders. (Living benefits are capital-intensive. They are tied to the equity markets and are optional. It’s difficult to predict how many contract owners will exercise them.) The transaction covers business issued from April 1, 2021, through June 30, 2022.

What could go wrong?

As noted above, the AEL-BAM Re deal epitomizes the Bermuda Triangle strategy. The strategy requires a publicly traded US-based life insurer to gather long-term fixed annuity premiums, a Bermuda or Cayman Island reinsurer that saves capital by estimating the annuity liabilities at a lower value, and a deep-pocketed asset manager with expertise in originating bespoke loans to leveraged companies. For the life insurers, there may be tax advantages to reinsuring offshore as well.

The companies at the points of the triangle are often related. The asset manager or the US life insurer may set up and capitalize the reinsurer. In some cases, the asset manager, the US life insurer, and/or the offshore reinsurer are affiliated or co-owned. Indeed, annuity issuers owned by or partnering closely with private equity firms have already captured almost half of the FIA market in the US, according to data from LIMRA’s Secure Retirement Institute.

Analysts see credit risk as the biggest hazard in these deals. As in the run-up to the Great Financial Crisis, the asset managers are securitizing bundles of below-investment grade loans and valuing some of their “tranches” as investment grade securities that life insurers are allowed to own. And when the same company controls all three points of the triangle, the deal may lack the safeguards that unrelated counter-parties might require.

The analysts who spoke with RIJ didn’t seem overly concerned. 

“The asset managers may take more risk with the assets than the ceding company did. That’s part of the strategy,” said Bass. “But the asset managers say they’re taking liquidity risk, not more credit risk. They’re investing in, for instance, private corporate loans, private direct mortgages, and aircraft leases instead of publicly traded bonds. And they’re increasing the spread by doing so. But the rating assigned for the assets, and the capital charge for the credit risk on those assets is the same as publicly traded BBB corporate bonds. The credit risk is the same, but they’re taking liquidity risk.”

“They’re investing in assets that AEL previously would not have,” JP Morgan’s Singzon said. “The net effect will be higher yields, which will make AEL more competitive. They haven’t been uncompetitive. But if they want to stay in the FIA market, they have to offer higher crediting rates. It’s all tied to earning more yield on what they have. Now they can ‘drive in both lanes.’ They can be competitive with their policyholders and earn enough profits for their shareholders.”

“Will these higher allocations to private assets produce risk-adjusted returns as good as companies think, or is there more risk than they expect?” Krueger asked rhetorically. “The evidence to date has been positive. There have been no material problems. Lots of smart companies and individuals are adamant that these private assets will continue to generate strong risk-adjusted returns.”

Analysts expect AEL’s 2.0 strategy to help widen its spreads to the neighborhood of 4% and to increase its return-on-equity. “This has been a transition year for the company,” said Krueger. “They’ve been making business investments and holding excess liquidity. We expect an 8% return on equity [ROE] in 2021. But, with the refreshed strategy and completion of various transactions, we’re projecting 11.3% in 2022 and 11.7% in 2023.”

In its December 2020 8-K, AEL bullishly predicted a potential (15+%) ROE over time, “even in a low interest rate environment.” If so, 2.0—and the Bermuda Triangle strategy—will be validated.

© 2021 RIJ Publishing LLC. All rights reserved.

Inflation, Debt, Debt, Interest Rates, Taxes: They Can’t All Be Low

Posted on October 20, 2021 by -

My “foreign car” mechanic used to tell me, when I asked how long it would take to repair my Fiat: “You can have it fast, cheap or good. Pick two.” He liked using that phrase, as if it embodied some eternal truth.

It did, in a way. Right now, many Americans worry about the possibility of higher interest rates, higher inflation, higher taxes and higher federal debt. I would bet you the price of a 30-weight oil change that we’re not going to get all four.

If we have higher interest rates and/or higher taxes, we probably won’t have high inflation.  Allowing rates to rise would quell inflation. Taxing the wealthy would also be anti-inflationary, assuming they didn’t find a way to avoid it.  

(How can you tell if you are wealthy enough to afford higher taxes? If a $1,000 car repair bill doesn’t spoil your afternoon, you’re wealthy.)  

We can indulge in low taxes and low interest rates, but we will only increase the national debt by doing so. The least painful solution is to raise taxes. There’s no easy way to do it. We can restore higher marginal rates,  raise the limit on salary subject to payroll taxes, and find an acceptable way to tax extreme wealth.

Personally, I would love to see a 3% 10-year Treasury in a more balanced equity/fixed income world. But a rate hike would put people out of work, and there are few things worse for the poorest 75% of America than layoffs. And, of course, higher rates would cause an instant mark-down in the value of assets. In 2018, when 10-year T rates touched 3% for the first time in years, Wall Street threw a tantrum, the Fed stopped tightening.  

Raising taxes, on the other hand, won’t kill anybody. It won’t cause unemployment. It won’t reduce the value of existing assets. It won’t even impair the banks’ ability to lend, since government spending replaces what taxes remove from bank reserves.  

I don’t like taxes any more than anyone else. Four times a year, I write large checks to the federal government. That’s one of the less pleasurable aspects of self-employment. But I’ve made my peace with the tax man. After a deep dive into economic history, I now understand that taxes are the cost of money.

Taxes, inflation, debt, interest rates. Like my mechanic said, Take your pick. They can’t all be low.

© 2021 RIJ Publishing LLC. All rights reserved.

What to Do in Case of Sustained Inflation

Posted on October 20, 2021 by -

We have a relatively sanguine view on the likelihood of inflation becoming ingrained in the system (much as it pains us to agree with the Fed). However, the dark arts of macroeconomics are notoriously tricky, and we have often talked of the need to build robust (as opposed to optimal) portfolios – effectively, portfolios that can withstand multiple outcomes. As such, it behooves us to consider how to deal with inflation in the context of your portfolio.

The first choice you must make is to determine whether you are interested in an inflation hedge (something that closely tracks inflation) or a store of value (something that will preserve purchasing power). For long-term investors, the latter is probably of more interest. A focus on the store of value naturally leads to a search for real assets. Despite conventional wisdom, commodities in general haven’t been a good store of value.

The ‘best’ real asset we have found is equities. They make a terrible inflation hedge but over the long term publicly traded companies are the businesses that charge prices and pay wages, so their cash flows should be real if these two elements are roughly matched. Thus they act as a store of value in the longer term. Of course, you can do better than simply buying equities, you can buy cheap equities. This is like being offered inflation insurance at a discount.

Hedging Inflation Risk Today

We have a relatively sanguine outlook on inflation, as discussed in “Part 1: Inflation – Tall Tales and True Causes.” Perhaps you don’t share our view. Or perhaps like us you are always interested in how to build a robust portfolio (one which can survive a lot of different outcomes). Either way it is time to turn our attention to how to protect your portfolio from an inflationary outcome.

As with all ‘tail risk’ insurance you need to ask yourself three questions.

1.What are you trying to hedge?

In this case, we need to consider the sources of inflation. Unfortunately inflation seems to follow the Anna Karenina principle. As Tolstoy put it, “Happy families are all alike; every unhappy family is unhappy in its own way”. The ‘good’ news is that the labour market dynamic is truly key for an inflation to take hold so pondering this aspect may make it slightly easier to think about, rather than trying to find the proximate cause.

2. How will you hedge?

We will explore some of the options that you might choose to pursue in the next section of this paper.

3. How much will it cost to hedge?

As always, it is important to remember that insurance is as much a value-based proposition as anything else in investing. So you need to be sure to analyse the cost of the insurance that you are buying.

Before we look at the potential ways you might try to hedge inflation, we need to make a distinction between what we might call hedging and a store of value. We think this is a vital distinction. To us, the term hedge implies a tight correlation with inflation (and therefore takes you into the world of swaps and caps, etc.). The concept of store of value is probably more important to a long-term investor.

We think of this as an asset that should outperform inflation but isn’t necessarily closely correlated with inflation (especially in the short term). Equities (assuming fair value for a second) are a real asset and we should expect their underlying cash flows to keep pace with inflation over the long term. As such, they meet the criteria for a store of value. However, due to behavioral issues, sometimes valuations get compressed in inflationary times, so they don’t correlate well with inflation as a hedge. Hence, they are a store of value but not an inflation hedge. Figuring out which of these two dimensions is important to you is vital when it comes to the choices you will make.

Let’s turn to the various instruments that might be thought to act as either a hedge or a store of value when it comes to inflation.

To read this story in its entirety, click here.

Seven questions that reveal financial biases

Posted on October 20, 2021 by -

US investors held nearly $55 trillion in financial assets as of year-end 2020, up from $46 trillion in 2019, according to Cerulli Associates. In its latest report, the Boston-based consulting firm suggests that advisers use behavioral finance techniques to help retain investor trust—and assets.

“As investors navigate perpetual unease resulting from the pandemic, advisors should pay increased attention to clients’ emotional biases through the lens of behavioral finance to acquire, retain, and grow financial assets,” said the report, US Retail Investor Advice Relationships 2021: Navigating Perpetual Unease.

According to the research, advisers most commonly see three so-called information-gathering biases among investors: availability bias (91%), confirmation bias (80%), and recency bias (71%).

“The fact that investors realize they rely on things that they just read, that were easy to find, and reinforce what they already think underscores the challenge with investor ‘research,’” said Scott Smith, director of retail investor advice relationships, in a release. “Instead of seeking out a variety of inputs from independent experts, consumers are predisposed to choose the path of least resistance.”

Investors’ behavioral biases evolve as they age, Cerulli found. Investors ages 40–49 report the highest incidence of acute behavioral bias—confirmation bias (47%) and overconfidence (42%). To advise an “emerging affluent” investor, advisers should “start early to help investors understand their biases and nudge them toward better outcomes,” Smith said.

Investors with more than $5 million in investable assets report elevated levels of confirmation (39%) and availability (39%) bias. “These investors have frequently made long-term decisions about the direction of their portfolios and are reluctant to be swayed by new information.

“While they should not overreact to short-term changes, they should also be open to the reality that the landscape of finance is one of constant evolution and refinement, necessitating ongoing portfolio oversight,” said Smith.

“Increased attention to clients’ emotional biases through the lens of behavioral finance can be an impactful tool in helping set goals, maintain investment discipline, and reduce decision fatigue,” he added.

“Advisors need to ensure that investment decisions are being optimized for the financial betterment of the investor. Understanding their underlying biases and mitigating suboptimal investment decisions is critical for advisors in a digitally pervasive environment.” 

© 2021 RIJ Publishing LLC. All rights reserved.

The New Table Stakes: ‘Unified Managed Income’

Posted on October 14, 2021 by -

Smart people have been writing retirement income planning software for over a decade, much of it very useful. But most of it falls short of what the market demands today: easy-to-use web-based software that checks all the boxes and makes the complex simple.   

The difficulty is that there are a lot of boxes to check, and complexity often defies simplification. Complexity is funny that way.

Satisfying retirees—who need to turn a “stock” of savings into a “flow” of income, as MIT’s Jim Poterba put it in a webcast this week—isn’t necessarily the biggest lift. The software has to meet the business needs of the wealth managers, recordkeepers or broker-dealers.

To the extent that those enterprises are buying, building or licensing software or “robos” with income planning capability—and the major ones are—they want those tools to do more than “optimize” a client’s withdrawal rate on the basis of a growing number of variables and preferences.

They want it to encompass or integrate with every step in the client service process, from the online hand-shake to customer relationship management to documentation of due diligence to fulfillment of a monthly paycheck—and, ultimately, to enhance productivity, asset under management (AUM), market share and profitability. Manish Malhotra calls this capability “unified managed income,” or UMI.

Malhotra

“It’s a must-have,” Malhotra told RIJ this week. He’s the founder of Fiducioso Advisors, a registered investment advisor (RIA) whose flagship technology is Income Discovery. Over the past decade, it has evolved into a UMI. He’s been pitching it—at $99 per retail client per year—to recordkeepers, asset managers and broker-dealers.

Malhotra spoke with us this week about the growing demand for this type of product and what makes his stand out. “Our competitors have planning capabilities, but we go beyond planning and issue the paycheck instructions,” he said. “The wealth managers don’t have paycheck capability, and their advisers are asking for this.”

The parts of Income Discovery

Malhotra sent me a few short video demonstrations of the Income Discovery platform and three of its modules: Safe Income Portal, Income Planning 2.0, and Paycheck. The Safe Income Portal provides a digital front-door for attracting prospects and establishing leads. Income Planning 2.0 is the drawdown optimizer itself. Paycheck is the fulfillment function, deciding how much money to send to clients, when to send it and what accounts to source it from. The service mark for the artificial intelligence powering all this is “AIDA.”

In the Income Planning module, a pre-retired client sees three possible options displayed. On the left, there’s a playing card-shaped window displaying the client’s current strategy—retirement date, Social Security claiming date and benefit, investment asset allocation—and the bad news: that his desired spending rate comes with a 50% chance of portfolio failure at the desired spending rate, which the portfolio can’t safely sustain until the end of retirement.

In the middle, there’s a field that gives the client a reality check. It shows the (lower) level of income that the current strategy could support with a negligible risk of failure. On the right, there’s a panel revealing the good news: that the client could spend even more than the initially desired rate by working longer and/or changing the Social Security claiming date.

Once the client approves a specific plan, the adviser can set up planned disbursals such as monthly income, unplanned disbursals for a large purchase, as well as time-sensitive disbursals for Roth conversions.

The Paycheck program includes automatic communications after each disbursal and a year-end report. If the client is withdrawing more than the system says he can afford, he gets a warning in the report. The idea is to help advisers “grow their retirement decumulation business” and automate “a tedious ad hoc chore” for the adviser.

“We come up with a tax-targeted plan,” Malhotra told RIJ. “Based on that, we would issue instructions on how much money will go out, and who will issue the checks. If the money is an account ‘held away’ from the adviser, the client will let the outside institution know and do self-service. We estimate the client’s taxes. We set up a disbursal schedule. We say, ‘This is the amount you should taken from each source.’”

The capacity to direct all this traffic lies with AIDA (not to be confused with the tragic heroine of Verdi’s opera or the famous marketing acronym). As a mere user, however, I was focused on interface. I saw a presentation of information in a choice pattern that allows clients to reach a decision on their own. It also positioned the adviser as the bearer of good news.These steps are arguably as important as the achievement of an ideal income plan—if such a thing can even be said to exist. 

The future is UMI

Malhotra created Income Discovery in 2010. It is already used as a white-labeled algorithm by two of the largest financial services companies. The competition for contracts with the largest institutions is intense, but there’s opportunity in any venue where there are older clients with substantial assets who are transitioning from accumulation to decumulation.

In a recent white paper (“US Retirement Strategies Shift to Decumulation and Mass Personalization”) that Income Discovery and Capgemini, the global IT services and consulting firm, co-produced, the authors survey a varied competitive landscape and its emerging opportunities for decumulation wizardry.

If you’re interested in this complex space, it makes worthwhile reading. The geography includes old and new entrants. They tend to be on one side or the other of the 401(k)/brokerage IRA divide, although some, like Fidelity and Vanguard, are in both. Tens of trillions of dollars of retirement savings are in play.

In 401(k) plans, the QDIA (qualified default investment alternative) providers, like target date fund managers (e.g., BlackRock, Capital Group, T. Rowe Price) and managed account providers (e.g., Financial Engines, GuidedChoice or Morningstar), need income tools to distract participants from rolling their money over to IRAs at retirement, and to adapt to the anticipated introduction of in-plan annuities. The Department of Labor has mandated estimates of future income from plan balances to encourage participants to think about their savings in terms of income. Plan providers will feel pressure to support it.

“The appeal for recordkeepers and plan sponsors and target date funds is the retention of assets in the plan. The recordkeepers can use this to win new plans and keep existing plans as clients. They are building private wealth management services, and this will lead to asset consolidation,” Malhotra said.

On the brokerage side of the rollover border, wealth managers (Merrill Lynch, Morgan Stanley) who want to attract participant rollovers, win older clients and consolidate all their investable assets, are now required by the Department of Labor to justify their rollover recommendations. Retirement income optimization services fit the bill. Tighter DOL regulation of rollovers also brings a need for the kind of documentation that income planning software can furnish.

“If you’re a wealth management firm, you reduce regulatory risk, because all your advisers are using the same software,” Malhotra said. “You don’t have each adviser using a different tool. UMI makes you the go-to place for retirement income advice. It deepens your advisers’ relationships with clients, which will make clients more likely to bring all their assets to you.”

© 2021 RIJ Publishing LLC. All rights reserved.

Jackson issues its first structured annuity (RILA)

Posted on October 14, 2021 by -

Jackson National Life Insurance Company has entered the structured variable annuity market with two versions of a new registered index-linked annuity (RILA), one for securities-licensed advisers who earn sales commissions and one for those who charge asset-based fees.

The two contracts, Jackson Market Link Pro (JMLP) and Jackson Market Link Pro Advisory (JMLPA), represent Jackson’s first RILAs. The company, which recently separated from its long-time parent company, Prudential plc, which sells more traditional variable annuities by premium value in the US than any other insurer.

Like Jackson’s traditional variable annuity contracts, these contracts give advisers the flexibility they like. For instance, these RILAs offer owners a choice of a buffer (exposure only to loss beyond a certain percentage) or a floor (exposure only to loss up to a certain percentage. Some RILAs offer only a buffer.

Advisers can use Jackson’s “Market Link Pro Suite Tool” to input personal client data and “generate hypothetical scenarios” showing how the contracts would work. The tool is available on Jackson’s website and on the Halo Investing platform.

RILAs are structured products, like fixed indexed annuities (FIAs), whose returns are dictated by the purchase of options on an equity index. These options define a range of index returns—gains or losses—to which the policyholder will have exposure. 

Unlike FIAs, RILAs do not protect the policyholder against any investment loss. Instead, they offer downside protection as defined by the floor or buffer. RILAs, like FIAs, use equity indexes whose performance includes dividend yields; options on total return indexes would be more expensive. 

RILAs are the fastest growing product segment of the annuity market, with $9.8 billion in sales in the second quarter of 2021 by 14 providers, according to Wink. (LIMRA Secure Retirement Institute estimated first-half 2021 sales of RILAs at $19.2 billion, up from $9.4 billion in first-half 2020). Equitable’s Structured Capital Strategies Plus was the top-selling structured annuity for all channels combined, for the second consecutive quarter.

Equitable Financial, which introduced the structured annuity in 2010, led all others with a market share of 19.3%, according to Wink, followed by Allianz Life, Lincoln National Life, Brighthouse Financial, and Prudential. RILAs have been a kind of lifesaver for publicly held life insurers who used to sell a lot of variable annuities with income benefits; the low interest rate environment has made those products—some $2 trillion worth remain in force—capital-intensive and therefore expensive to manufacture. 

The Jackson Market Link Pro product suite includes five index crediting options: S&P 500, Russell 2000, MSCI EAFE, MSCI KLD 400 Social (an Environmental, Social and Governance, or ESG, option) and MSCI Emerging Markets indexes.  

Clients can allocate money in any proportion to either of two crediting methods:

  • A cap crediting method offers a positive index adjustment up to a stated cap rate if the index return is positive at the end of the Index Account Option Term.
  • A performance trigger crediting method provides the opportunity to receive a positive index adjustment equal to a stated trigger rate if the index return is flat or positive at the end of the Index Account Option Term. Contract owners can change selections and allocations without penalty at the end of each Index Account Option Term (1-year or 6-year terms are available).
  • Protection options: Clients may select from buffer or floor protection options.
  • The buffer protects investments from market loss up to a stated percentage (10% or 20%).
  • The floor provides a specific maximum loss limit of 10% or 20%.
  • There’s a built-in death benefit with no additional fee. 

© 2021 RIJ Publishing LLC. All rights reserved.

Breaking News

Posted on October 13, 2021 by -

Biden DOL gives green light to green funds in retirement plans

The Trump administration’s Labor Department leaned against the inclusion of Environment, Social and Governance (ESG) investments in qualified plans. President Biden’s DOL is leaning even harder the other way.

The move reflects the Biden administration’s desire to stem the progress of global warming. ESG funds often include shares of companies specializing in “green” technologies, or funds that exclude shares of companies whose products or processes contribute to climate change. 

If the proposed rule becomes part of DOL regulations, retirement plan advisers and managers of ESG mutual funds will be able to work with each other to satisfy the evident demand for the funds among participants without fear of crossing the DOL. 

According to a DOL release (and a document published in the Federal Register) this week:

The US Department of Labor announced a proposed rule that would remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance factors when they select investments and exercise shareholder rights.

The proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” follows Executive Order 14030, signed by President Biden on May 20, 2021. The order directs the federal government to implement policies to help safeguard the financial security of America’s families, businesses and workers from climate-related financial risk that may threaten the life savings and pensions of US workers and families.

“The proposed rule announced today will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments—and chilling effect on environmental, social and governance investments—caused by the prior administration’s rules,” said Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar.

“A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”

The NPRM’s comment period will run for 60 days after publication in the Federal Register and will include instructions on submitting comments through www.regulations.gov. Commenters are free to express views not only on the provisions of the proposal but also on any issues germane to the subject matter of the proposal.

Morningstar announces a ESG Pooled Employer Plan

Morningstar Investment Management LLC, a subsidiary of Morningstar, Inc. (Nasdaq: MORN), and Plan Administrators, Inc. (PAi), a retirement plan administrator and recordkeeper, today announced plans to offer the industry’s first Pooled Employer Plan (PEP) intentionally designed to limit exposure to material environmental, social, and governance (ESG) risks. The Morningstar ESG Pooled Employer Plan is expected to launch in early 2022, pending final guidance from the U.S. Department of Labor on the use of ESG factors to select investments for retirement plans.

PEPs allow employers of any size or industry to band together to participate in a single retirement plan. This helps relieve administrative and compliance burdens and potentially reduces fees, making it easier for small- to mid-sized companies to offer a 401(k) plan so their employees can save for retirement. The PEP from Morningstar Investment Management and PAi will feature funds that meet Morningstar Investment Management’s rigorous investment selection criteria and pursue investment strategies designed to limit ESG risk.

Morningstar Investment Management’s investment team uses both the Morningstar Sustainability Rating™ and interviews with fund managers to ascertain the ESG risk of investments under consideration. The objective of the Morningstar ESG PEP will be to create as close to a complete ESG lineup as possible, though certain asset classes (such as TIPs or money market funds) where no ESG investment option exists in the market may be represented to help participants diversify their portfolios.

PAi Trust Co. will oversee the plan as the pooled plan provider, and the PEP will be offered on PAi’s CoPilot recordkeeping platform that focuses on outcomes by engaging participants using event-based alert messages. In addition to those timely alerts and nudges, CoPilot provides a Years of Retirement tool that shows participants how many years their savings will last, not just how many dollars they’ve saved.

Morningstar Investment Management will select and manage the investment lineup for the Morningstar ESG PEP, using its expertise from building and overseeing 20,415[1] lineups for its fiduciary services program and drawing from Morningstar’s independent research and ratings. Morningstar Investment Management will also create a custom ESG target-date portfolio for the PEP, designed as an option for the Qualified Default Investment Alternative.

More information about the Morningstar ESG PEP is available here. 

After 45 years, two of the initials in the acronym ‘KKR’ step aside 

Joe Bae and Scott Nuttall have been appointed co-CEOs of KKR, the global investment firm that owns Global Atlantic, the eight-largest issuer of annuities in the first half of 2021. KKR’s co-founders, Henry Kravis and George Roberts, will remain executive co-chairmen of KKR’s board. Board of Directors. The change is effective immediately.

Founded in 1976 by Jerome Kohlberg and first cousins George Roberts and Henry Kravis, KKR is a global financial services enterprise that invests in private equity and other alternative asset classes, including leveraged and alternative credit, infrastructure, real estate, growth equity, impact, core, and energy.

The firm also has a capital markets business, a retirement and life insurance business through Global Atlantic, and hedge fund partnerships, including with Marshall Wace. Bae and Nuttall both joined KKR in 1996 and have served as co-presidents and co-chief operating officers of KKR since July 2017. Since then, KKR’s stock price has tripled.

KKR also announced that in 2022 it will combine with KKR Holdings L.P., which is an entity through which certain current and former employees hold interests in KKR. If regulators approve this transaction, unitholders of KKR Holdings L.P. will receive one share of KKR common stock for each unit they hold in KKR Holdings L.P. as well as their pro rata share of an additional 8.5 million shares of KKR common stock.

In addition, KKR will eliminate its Series II preferred stock and terminate its tax receivable agreement with respect to units of KKR Holdings L.P. that are not previously exchanged. Second, on December 31, 2026, subject to exceptions that would accelerate this date, KKR will eliminate its controlling Series I preferred stock and also acquire control of KKR Associates Holdings L.P.

These reorganization transactions are expected to increase the rights of our common stockholders, further align the interests of the current and future leadership of KKR with our common stockholders, enhance corporate governance at KKR, and simplify KKR’s corporate structure, a KKR release said.

Social Security benefits to rise 5.9% for 2022

Social Security and Supplemental Security Income (SSI) benefits for approximately 70 million Americans will increase a 5.9% cost-of-living adjustment (COLA) in 2022, the Social Security Administration announced this week. The increase is tied to the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

The increase will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Increased payments to approximately eight million SSI beneficiaries will begin on December 30, 2021. Some people receive both Social Security and SSI benefits.

Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $147,000 from $142,800.

Social Security and SSI beneficiaries are normally notified by mail starting in early December about their new benefit amount. Most people who receive Social Security payments will be able to view their COLA notice online through their personal my Social Security account. People may create or access their my Social Security account online at www.socialsecurity.gov/myaccount.

Information about Medicare changes for 2022, when announced, will be available at www.medicare.gov. For Social Security beneficiaries receiving Medicare, Social Security will not be able to compute their new benefit amount until after the Medicare premium amounts for 2022 are announced.

Final 2022 benefit amounts will be communicated to beneficiaries in December through the mailed COLA notice and my Social Security’s Message Center. The Social Security Act provides for how the COLA is calculated. To read more, please visit www.socialsecurity.gov/cola.

Advisers, Beware of PTE 2020-02: Wagner Law

Posted on October 13, 2021 by -

New interpretations voiced in the Department of Labor’s (“DOL”) Prohibited Transaction Exemption 2020-02 (the “Investment Advice PTE”) could be a bomb that hits squarely on unwary wealth managers who give investment advice to IRA owners.  In the Investment Advice PTE, effective as of February 16, 2021, the DOL announces that most recommendations to make a rollover are considered fiduciary investment advice. 

The PTE lists a number of inherent conflicts of interest you need to consider addressing, including receiving variable compensation or compensation from a third party in connection with that fiduciary advice in order to avoid a prohibited transaction. The good news is that the Investment Advice PTE provides ready relief. 

Rollover Advice is Conflicted Investment Advice if the Adviser is paid from the IRA

Many may be surprised to learn that this ruling impacts all wealth managers who recommend rollovers, even if the advisers had no advisory relationship with a plan itself. This is a major departure from past practice, since historically advice to roll assets out of a Title I Plan, even when combined with a recommendation as to how the distribution should be invested, did not constitute investment advice.

Now, any fiduciary adviser who recommends that a client move assets from a plan to an IRA risks engaging in a prohibited transaction if the adviser is paid as a result of the recommendation. This is true, even for new clients, if the rollover is recommended with an expectation that the adviser will get paid additional compensation sometime in the future. A one-time recommendation by a fiduciary adviser is enough.

Advisers who engage in prohibited transactions can be punished severely, including a whopping excise tax of up to 100 percent of the amount involved, compounded over time. The IRS might disqualify the IRA, resulting in the entire value of the IRA being included in the income of the IRA owner in the year of the breach.

How did we get here? 

Long-standing ERISA law forbids an investment adviser from receiving additional compensation as a result of a recommendation to a plan or plan participant, unless an exemption is available. Under the new interpretation, the rollover advice is itself likely conflicted. This is true even if the adviser goes from receiving no compensation when the recommendation is made (because the adviser does not advise the plan) to any compensation in the future from the IRA (which makes it “additional compensation”). The advice is considered fiduciary investment advice because it is necessarily a recommendation to liquidate or transfer the plan’s property interest in the affected assets and the participant’s property interest in plan investments. More transactions than what are traditionally thought to be rollovers are considered, however.

The New Rules Extend to IRAs and Five Different Types of Rollovers

The Investment Advice PTE and its preamble broadly define the DOL’s views about what is fiduciary investment advice for both IRAs and ERISA plans. 

As noted, a recommendation to make a rollover is fiduciary investment advice. The Investment Advice PTE defines a rollover to include a transfer of assets from a(n):

  • ERISA-covered plan to an IRA,
  • ERISA-covered plan to another ERISA-covered plan,
  • IRA to an ERISA-covered plan,
  • IRA to another IRA, to the extent permissible under the Code (including an Individual Retirement Account, Health Spending Account, Archer Medical Savings Account, Coverdell Educational Savings Account to another similar account), or
  • different account type, such as converting from a brokerage account to an advisory relationship or from a commission-based account to a fee-based account.

The final item, change in account type, follows the earlier, withdrawn fiduciary rule but may lay the path to a trap for an unwary wealth adviser. Recommending a move from a brokerage account to an advisory arrangement is likely fiduciary investment advice under the rule. Wealth managers commonly recommend such transfers, believing them to be in the best interest of the client. These recommendations are now subject to the DOL’s new interpretation of what is a prohibited transaction.

Is an IRA Now an ERISA plan?

This does not mean that IRAs have now become ERISA plans. Many years ago, the DOL was granted authority to interpret what is a prohibited transaction for ERISA plans and IRAs. This eliminated the need to have both the IRS and the DOL ruling on essentially the same subject matter. The new guidance confirms that the DOL has authority to conclude what is “investment advice” for either type of retirement program so that it can properly evaluate whether a prohibited transaction has occurred. The IRS, however, remains the sole enforcer of the tax rules that affect IRAs.

Conflicts of Interest Can Be Resolved by Strict Compliance with the Investment Advice PTE. 

Fortunately, relief available under the Investment Advice PTE is broad-based, extending to conflicts created by all types of compensation that would otherwise be prohibited. It forgives the receipt of third-party compensation such as 12b-1 fees, revenue sharing, and sub-TA fees, as well as commissions, bonuses and other forms of unlevel compensation. The cost for this clemency is that:

a.     Any recommendation must meet the Impartial Conduct Standards, meaning that it must be in the best interest of the client, that all compensation the adviser receives as a result of the recommendation is reasonable, and that the adviser makes no materially misleading statements. 

b.     Extensive disclosures be made in writing to the client, including a written acknowledgement that the adviser acts as a fiduciary and specific descriptions of the services to be provided, and a description of any major conflicts of interest. 

c.      All rollover recommendations must be specially documented and presented to the client before the transaction. The recommendation must describe the alternatives to the rollover and compare the investment options, fees and expenses, both in the current plan or arrangement and in the recommended IRA or other arrangement. The disclosure must explain why the adviser’s recommendation is in the best interest of the client and whether the employer pays for any of the administrative expenses. It should also compare the different services available in the current arrangement to what is recommended.

d.     The adviser must maintain effective policies and procedures to comply with the above and to mitigate any conflicts of interest. 

Your firm is to be commended if you adopted forms to comply with the prior rule’s standards for the Best Interest Contract Exemption (“BICE”). You may continue to use them until December 20, 2021. After that date, you must replace the BICE forms with forms that meet the requirements of the Investment Advice Exemption.

Recommended Actions

Prudent advisers will prepare to meet the requirements of the Investment Advice PTE. This includes:

a.     Review all current disclosures, including Form ADV-2a, Form ADV-2b, Form CRS, 408(b)(2) reports and other documents to be certain that the proper disclosures are made, including all conflicts of interest.

b.     Reassess all sources of compensation so that they be may disclosed. Check your own accounting records for payments you receive, 408(b)(2) disclosures, selling agreements and other documentation.

c.      Prepare a new rollover form for each rollover type that specifically compares the current arrangement to the proposed arrangement regarding services, fees and expenses, as well as the investments, plus lays out what the proposed arrangement is and why it is in the best interest of the client.

d.     Revise compliance manuals to provide an effective program to meet the Impartial Conduct Standards, describe services and compensation and acknowledge fiduciary status.

e.     Test, track and maintain records of how effective your compliance program is. Include what kinds of mistakes are made, who made them, and what corrective action was taken.

f.       Report annually the results of your compliance program to a senior executive officer appointed for this purpose who must certify that you have an effective program, designed to maintain compliance with the Investment Advice PTE. Keep those records for six years. The DOL will likely request this report upon any audit.

g.     For all advisers, examine your investment advisory arrangements with care.   The PTE provides protection for a broad range of conflicts, including conflicts arising from variable compensation, third party compensation, proprietary products, and principal trading. Be aware that these conflicts apply to both discretionary and non-discretionary investment services but the relief of the PTE is available only to non-discretionary advice. Discretionary management is expressly excluded. Accordingly, advisers should take care to see that any conflicted discretionary management arrangements satisfy other exemptions or DOL guidance or they will be left without any relief from prohibited transaction penalties. 

h.     Train, train, train all levels of the firm to understand and appreciate the importance of these rules.

© 2021 RIJ Publishing LLC. All rights reserved.

Deferred annuity sales up 10% in 2Q2021: WINK

Posted on October 13, 2021 by -

Total second quarter sales for all deferred annuities were $64.4 billion; an increase of more than 10.0% when compared to the previous quarter and an increase of 40.4% when compared to the same period last year, according to Wink’s Sales & Market Report for the second quarter of 2021.

Total deferred annuities include the variable annuity, structured annuity, indexed annuity, traditional fixed annuity, and MYGA product lines. Jackson National Life was the top-seller overall in deferred annuities, with 7.5% of the market, followed by AIG, Equitable Financial, Allianz Life, and New York Life. Jackson National’s Perspective II, a variable annuity, was topped overall sales for all channels for the tenth consecutive quarter.

Total second quarter non-variable deferred annuity sales were $31.5 billion, up 11.1% from the previous quarter and up 22.0% from the same period last year. Non-variable deferred annuities include indexed, traditional fixed, and multi-year guarantee (MYGA) annuities. 

Sixty-six indexed annuity providers, 46 fixed annuity providers, 70 MYGA providers, 14 structured annuity (aka Registered Index-Linked Annuities or RILAs) providers, and 43 variable annuity providers participated in the 96th edition of Wink’s Sales & Market Report for the second quarter of  2021.

AIG ranked as the top carrier overall for non-variable deferred annuity sales, with a market share of 8.1%, followed by Global Atlantic Financial Group, MassMutual, New York Life, and Allianz Life. The Allianz Benefit Control indexed annuity was the top-selling non-variable deferred annuity, for all channels combined in overall sales for the second consecutive quarter.

Total second quarter variable deferred annuity sales, including sales of registered index-linked annuities (RILAs or “structured annuities”) were $32.9 billion, up 9.4% from the previous quarter and up 63.5% from the same period last year. 

Jackson National Life ranking as the top carrier overall for variable deferred annuity sales, with a market share of 14.6%, followed by Equitable, Lincoln National Life, Nationwide, and Brighthouse Financial.

Structured annuity sales in the second quarter were $9.8 billion; up 8.9% as compared to the previous quarter, and up 117.9% as compared to the previous year. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccounts.

Equitable Financial ranking was the top seller of structured annuity sales, with a market share of 19.3%, followed by Allianz Life, Lincoln National Life, Brighthouse Financial, and Prudential. Equitable’s Structured Capital Strategies Plus was the top-selling structured annuity for all channels combined, for the second consecutive quarter.

“Structured annuities are definitely the darling of the deferred annuity market,” said Wink CEO Sheryl Moore, in a release. “Everybody’s doing it. If a company isn’t selling it today, they’re doing R&D on it. Structured annuities are here to stay.”

Indexed annuity sales for the second quarter were $16.6 billion; up 14.5% from the previous quarter and up 29.9% from the same period in 2020.  Allianz Life ranking as the top-seller of indexed annuities, with a market share of 10.7%, followed by Athene USA, AIG, Fidelity & Guaranty Life and Sammons Financial Companies. Allianz Life’s Allianz Benefit Control Annuity was the top-selling indexed annuity, for all channels combined for the third consecutive quarter.   

Traditional fixed annuity sales in the second quarter were $462.0 million, down 3.1% from the previous quarter but up 8.5% from the same period last year. Traditional fixed annuities have a fixed rate that is guaranteed for one year.

Multi-year guaranteed annuity (MYGA) sales in the second quarter were $14.4 billion; up 8.6% when compared to the previous quarter, and up 15.2% when compared to the same period last year. MYGAs have a fixed rate that is guaranteed for more than one year.

New York Life ranked as the top-seller with a market share of 13.0%, followed by MassMutual,  Global Atlantic, AIG, and Western-Southern Life Assurance Company. MassMutual’s Stable Voyage 3-Year was the top-selling multi-year guaranteed annuity for all channels combined.

Sales of traditional variable annuities in the second quarter were $23.0 billion, up 9.6% from the previous quarter and up 47.8% from the same period last year. Variable annuities have no floor, and potential for gains/losses that are determined by the performance of the subaccounts that may be invested in an external index, stocks, bonds, commodities, or other investments.

Jackson National Life was the top seller of variable annuities, with a market share of 20.9%, followed by Nationwide, Equitable Financial, Pacific Life Companies, and AIG. Jackson National’s Perspective II contract was the top-selling variable annuity for the ninth consecutive quarter, for all channels combined.

Variable annuity sales in the second quarter were $23.0 billion, an increase of 9.6% as compared to the previous quarter and an increase of 47.8% as compared to the same period last year. Variable annuities have no floor, and potential for gains/losses that are determined by the performance of the subaccounts that may be invested in an external index, stocks, bonds, commodities, or other investments.

© 2021 RIJ Publishing LLC. All rights reserved.

Retirement Parachutes, in Different Colors

Posted on October 7, 2021 by -

The 401(k) annuity and the “contingent deferred annuity,” or CDA—two concepts related to the provision of retirement income, but with different audiences in different distribution channels—were in the news this past week. One bundles and the other unbundles.

BlackRock announced that five 401(k) plan sponsors have signed on to offer its “LifePath Paychcck” program. The program, unveiled in May 2020, helps participants buy single premium immediate annuities (SPIAs) from Equitable and Brighthouse Financial with a portion of their plan balance at retirement.

RetireOne, the distribution platform for fee-based advisers, announced that it would offer advisers a CDA (aka Stand-Alone Living Benefit, or SALB), underwritten by Midland National Life. Advisers can wrap a CDA around a client’s mutual fund or ETF portfolio and give them the same type of income safety-net (a “guaranteed lifetime withdrawal benefit”) that variable and fixed indexed annuities offer—but without buying an annuity.

The two concepts first surfaced in the retirement income world over a decade ago. But the problems they solve and the demand for their benefits—from asset managers, plan sponsors, advisers and pre-retirees—have arguably only grown.

They solve the savings-to-income transition in two different ways. The SPIA offers irrevocable fixed income for life. The CDA promises that if the client’s account goes to zero before he or she dies, the insurer will pick up the remaining payments.

https://retireone.com/wp-content/uploads/2021/09/33428Y-PRT-8-21-MNL-Constance-CDA-ConB-MF.pdf

A CDA named ‘Constance’

RetireOne and Midland National Life have collaborated to produce “Constance,” a zero-commission CDA or SALB. In effect, Constance unbundles an annuity’s income rider from the annuity’s investments. Advisers can bundle that rider with a portfolio they choose.

“Constance allows Registered Investment Advisors (RIA) flexibility to wrap client brokerage accounts, Individual Retirement Accounts (IRA), or Roth IRAs with this lifetime income protection,” a release from RetireOne and Midland National Life said this week.  

Advisers don’t have complete freedom to build the portfolio they wish to wrap. Midland National’s vice president of product development and risk management, Kirk Evans, told RIJ in an email that Constance would entail the use of “asset allocation tiers.” These prevent advisers from taking too much risk with their CDA-protected portfolios. 

Constance “is priced consistent with how VA GLWBs are priced. We take into account the guardrails in the permitted asset allocation tiers in assessing the risk for the various asset allocation tiers and setting the CDA fee,” he said.

As a Constance brochure shows, the annual fee for the rider is fixed at between 1.10% and 2.30% of the initial account value of the portfolio, depending on the level of income protection they want (Core, CorePlus, or CorePlusX) and the amount of equities in their portfolio. (A Tier A portfolio can have up to 45% equities, Tier B 60%, and Tier C 75%.) If the adviser wants to draw an annual advisory fee from the account, the expense ratio is slightly higher to offset the fact that fewer assets will be backing the guarantee.

“Each year we revisit the CDA fees for new issues based on the current market conditions and update the fees accordingly, if there is a meaningful impact,” Evans added. “They may change their investment mix within their chosen asset allocation tier without an impact to the CDA fee.  If they move their asset allocation from one asset allocation tier into another, their CDA fee will be updated to reflect the current asset allocation tier for their chosen coverage plan and advisory fee election.”

Selected ETFs and mutual funds from BlackRock, Dimensional Fund Advisors, Franklin Templeton, Vanguard, and other leading managers are available within Constance as investments  that the CDA can be wrapped around. RetireOne expects to vet and approve more investments for inclusion in the program.

RetireOne’s technology provides the infrastructure behind the development of Constance by consolidating data from insurance companies and custodians for servicing and administration. Advisors can keep covered assets with the custodian in either qualified or non-qualified accounts. 

“Unlike funding a traditional annuity by selling out of existing positions, advisors may simply cover client’s existing mutual fund or ETF investments with Constance without enduring the impact of a capital gain tax event,” a RetireOne release said.

‘LifePath Paycheck’

BlackRock, which manages $9.5 trillion in assets, announced this week that has signed five 401(k) plan sponsors as the first adopters of its LifePath Paycheck program, whose concept was announced in May 2020 and reported in RIJ at that time.

“Five large plan sponsors representing over $7.5 billion in target date investments, including Tennessee Valley Authority Retirement System (TVARS), have elected to implement the LifePath Paycheck solution as the default investment option in their employees’ retirement plans, subject to plan-specific timing and other implementation considerations,” a BlackRock release said.

Another of the five plan sponsors was Advance Auto Parts, Inc., the Wall Street Journal reported yesterday. The identities of the other three plan sponsors have not yet been made public, according to BlackRock.

With initial plan adoptions expected in 2022, this action will provide the option and opportunity for over 120,000 U.S.-based 401(k) plan participants to obtain a guaranteed income stream in retirement.

Here’s how LifePath Paycheck works:

A participant in an employer-sponsored retirement plan invests in (or is defaulted into) an age-appropriate LifePath Paycheck TDF, which uses the standard TDF allocation strategy of starting with a high equity allocation and gradually shifting toward 60% fixed income by the time the participant reaches age 65.

At age 55, part of the participant’s bond allocation begins moving into a group annuity contract that provides participants with the option to purchase a lifetime income stream in retirement—payable by insurers selected by BlackRock (currently, Equitable and Brighthouse). 

The gradual transfer process, which takes five to 10 years depending on when the employee retires, mitigates interest rate risk. Eventually it amounts to about 30% of the employee’s TDF assets.

When participants retire (at age 59½ or later), BlackRock makes it easy for them to use the group annuity assets to buy an individual income annuity (single or joint, 10-year period certain or cash refund) with assets they roll out of the plan to an IRA. (BlackRock allocates money to both annuity providers. It plans to expand the number of insurers over time.)

Participants’ remaining retirement plan savings that are not used to purchase the annuities can be invested in a target date product that is designed to complement the lifetime income stream paid by the insurers.

This product is a diversified portfolio that has an asset allocation of about 50% equities and 50% fixed income, and provides daily liquidity so that participants can make withdrawals whenever they’d like, subject to their retirement plan’s rules.

Participants can also elect to have their remaining retirement plan savings that are not used to purchase the annuities directed to another investment option in their retirement plan or redeem for cash.

© 2021 RIJ Publishing LLC. All rights reserved.

2011-2020 FIA Returns Were Modest, Data Suggests

Posted on October 7, 2021 by -

While studying a table of annual fixed indexed annuity (FIA) cash flows, I noticed a row labeled “Investment Returns.” The table came from LIMRA’s Secure Retirement Institute (SRI). It covered the flows for fixed annuities, variable annuities and FIAs for the period from 2007 to the first quarter of 2021. SRI had collected the in-flow, out-flow data from US annuity issuers.

It’s almost pointless to try and draw conclusions about the potential yield of any type of financial asset class from historical averages. But it’s rare to find data on the yields of FIAs, so these numbers were noteworthy.

There was another reason to zone in on these numbers. FIA contracts have a current combined account value of about $520 billion. Even today, that’s a large sum. The low interest rate environment makes buying FIAs attractive to older investors looking for better, safer yields can deliver. For different reasons, it makes selling FIAs attractive to advisers, life insurers, and big private equity firms like Blackstone and KKR that want to manage FIA assets. 

FIAs can’t lose money over a specified crediting term. Their growth potential is measured by the exposure they offer to a given equity index or hybrid index. The carrier uses a small percentage of the investor’s premium to buy options on the index. If the index goes up, the investor gains a portion of the index gain.

The amount of upside an FIA contract can offer is sensitive to interest rates. The life insurer’s budget for buying options on the index is limited by the yield on its general account investments, which are mainly in bonds. If yields are low, options budgets may shrink. The FIA contract won’t offer as much potential upside.

My calculations, using the LIMRA SRI data, suggested an average return of 3.23% for the period from the start of 2011 to the end of 2020. I took the FIA investment returns for each year, and divided them by the average of the year’s beginning and ending asset levels. The range of annual averages was 1.59% to 3.99%. (See below). Over the same period, the S&P 500, the most popular FIA index, lost money in only one calendar year—a negative 4.38% in 2018—while rising to 3,756 from 1,286 over those 10 years.

The S&P 500 Index includes dividends, but most FIAs offer a no-dividend version of the S&P 500 Index to policyholders. Options on the no-dividend version of the index cost less, so carriers can offer higher caps or participation rates. 

That 3.23% is an average of annual averages, so it might mean nothing. It might well be misleading. It may also mean that contract owners didn’t use the contracts optimally. Or it might suggest that the typical owner of a typical FIA over the decade from 2011 to 2010 would earn about the same yield over that period as a person investing in a total bond market index fund—albeit without fear of ending the decade with a loss. 

Todd Giesing, assistant vice president, SRI Annuity Research, explained the data to RIJ. “The investment returns represent what was paid into the contract owners’ accounts based on the crediting formulas specific to the contracts. There are a lot of variables [that affect the year’s returns], including when the credits get paid; some contracts have a two-year or five-year crediting term,” Giesing said.

He noted that the data is based on reports from life insurers accounting for about 75% of the FIA market. LIMRA  “grosses it up” or extrapolates from that to create what it believes to be a “reasonable” reflection of the industry’s overall returns to policyholders per calendar year.

The data is based on flows into and out of all FIAs, including those with and without commission, and with and without living benefit riders. No-commission FIAs for fee-based advisers tend to have richer crediting rates than traditional FIAs, because the adviser charges the client an advisory fee instead of receiving a commission from the carrier. FIAs with lifetime income benefits tend to have less rich crediting rates, because of the emphasis on income. The data includes the roughly 10% of assets that typically are allocated to the contract’s fixed account, which would pull down average returns. The LIMRA data is based on calendar years, while an individual’s contract years—the dates that determine returns–depend on the date when he or she happened to buy the contract.

As with any investment product, FIA historical returns do not predict future returns. These averages also don’t reflect the range of returns that individuals  might receive—although the range of returns across a period of 10 years might—but wouldn’t necessarily—shed light on that.

“You’ll have some people making seven or eight percent in a year, and other people, especially if they invested in the fixed account, making one percent,” Giesing told RIJ.

“Although investors could earn much more than those returns, it is not surprising that investors have difficulty selecting an appropriate mix of strategies that could result in higher returns,” said Jeremy Alexander of Beacon Research, which tracks annuity sales data.

Sheryl Moore, founder of Wink, Inc., which collects data from issuers of all types of annuities, said my numbers don’t match her experience. She thinks they’re too low. “Until I can validate the source of LIMRA’s data, I cannot comment really,” she told RIJ this week. “This information has not existed before. As recently as six months ago, insurance companies were telling me that this data did not exist.” She did not offer competing data. 

Bryan Anderson, an FIA agent and founder of AnnuityStraightTalk in northwest Montana, looked at the data as well. “At first glance the numbers look low. But then I realized that over the time period, most contract were sold with income riders,” he told RIJ.

“Income contracts don’t typically have a high growth factor and the fees along with distributions would further drag down asset values,” Anderson added. “I’m not sure there would be any way to factor those for calculations. But I am certain it would make a meaningful difference. I do my calculations for effective yield for each client on contract anniversaries, but don’t keep a working copy of all combined.”

Another FIA watcher, who asked not to be quoted by name, said the LIMRA data “lines up with the very limited actual policy return data I collected for a few years. My guess is, overall, you’re in the ballpark.”

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on October 7, 2021 by -

American Equity partners with BlackRock and Conning on its AEL 2.0 strategy

American Equity Investment Life Holding Company (NYSE: AEL) (American Equity) announced today it will partner with BlackRock and Conning, for core fixed income and syndicated private placement investments. The transitions to these two managers will be initiated in the fourth quarter of 2021.

American Equity plans to “migrate to a 30-40% allocation to private asset strategies,” said Jim Hamalainen, Chief Investment Officer (CIO) for American Equity, in a release. “In parallel to successfully migrating core fixed income investments to these firms in the coming months, we will continue to transform American Equity’s approach to investment management through nuanced expertise in asset allocation and private assets investment management.”

Last year, the company launched a new business strategy, dubbed as AEL 2.0. This week’s development is part of the continued execution of that strategy. With the eventual migration of its core fixed income management to BlackRock and Conning by early 2022, AEL’s internal investment management capabilities will focus on private assets, cash & derivative trading, unique asset allocation for insured client solutions and asset liability management with team offices located in Des Moines (IA), New York City and Charlotte (NC).

Go big (in alternative assets) or go home, KKR tells insurance CIOs

The CIO) of KKR’s Balance Sheet is urging insurance company CIOs to “dream big” and buy more alternative assets in order to cope with the stress of a low-interest rate environment that he and others predict will last up to ten more years.

“The opportunity to create scale advantages in sourcing, portfolio construction, and risk management can accrue outsized economic ‘rents’ that should offset ongoing spread and rate pressures,” said Henry McVey, the head of Global Macro and Asset Allocation (GMAA) at KKR, which owns Global Atlantic, a big issuer of indexed annuities. “We see a continued migration towards non-traditional products that can offer both enhanced returns and improved diversification.”

McVey has just issued a new white paper, called “Dream Big.” Based on a proprietary survey of 50 CIOs managing some $7 trillion in assets, the report analyzes the extent to which insurance industry CIOs “are optimizing their portfolios in today’s low-yield environment.”

“Thoughtful asset allocation, including bigger thematic investing tilts, will become key differentiators in a world of excess savings amidst lower expected returns,” a KKR release said. It predicted that the low-rate environment “will likely persist over the next five to ten years” and require greater investment in private equity.

Primary findings from the report include:

  • Intensifying interest rate pressure will keep pushing average investment yields down. Survey participants saw their average investment yields fall to 3.2% in 2021 from 4.2% in 2017. The GMAA team does not see portfolio yields increasing until 2023.
  • The GMAA team is lowering its 10-year interest rate forecast to 1.5% from 1.75% for 2021 and to 1.75% from 2.0% in 2022.
  • CIOs have made substantial changes in their asset allocations to offset the negative impact of Quantitative Easing. Non-traditional investments account for 31.8% of survey respondents’ portfolios, up from 20.3% in 2017.
  • A net 48% of respondents said they intended to increase their allocations to private equity, a net 60% planned to allocate more to infrastructure and a net 48% planned to allocate more to private credit.
  • US monetary policy is the key concern for CIOs. Two-thirds of respondents cited inflation/deflation as their most worrisome macro risk factor.

“Scale players” who “embrace complexity” by capitalizing on “mega themes” like the “global energy transition and digitalization” are most likely to succeed, the release said.

Allianz Investment Management launches new six-month ‘buffered outcome’ ETF

Allianz Investment Management LLC, a wholly owned subsidiary of Allianz Life, today has launched a new buffered outcome ETF with a six-month outcome period: The AllianzIM US Large Cap 6 Month Buffer10 Apr/Oct ETF (NYSE: SIXO).

AllianzIM’s new ETF seeks to match the returns of the S&P 500 Price Return Index up to a stated cap, while providing downside risk mitigation through a buffer against the first 10% of S&P 500 Price Return Index losses for SIXO over a six-month outcome period. SIXO seeks to meet its investment objective using flexible exchange (FLEX) options.

“The buffered outcome ETF market has grown dramatically, increasing from zero to almost $8 billion of assets in just three years,” said Johan Grahn, vice president and head of ETF Strategy at AllianzIM.

SIXO, which has an annual expense ratio of 0.74%, is designed to create more opportunity for investors with two outcome periods per year, as well as provide additional applications within an investment portfolio. SIXO provides the potential for greater downside mitigation with a 10% buffer over a shorter period and can serve as a potential alternative to short-term, low-yielding investment vehicles.

The six-month outcome ETF joins the existing AllianzIM Buffered Outcome ETFs, which offer a 10% and 20% buffer and a one-year outcome period. The AllianzIM U.S. Large Cap Buffer10 Oct ETF. and the AllianzIM U.S. Large Cap Buffer20 Oct ETF began a new one-year outcome period with new upside caps on October 1.

Great American annuities now on the Halo platform

Annuities issued by Great American Life Insurance Co., recently acquired by MassMutual, the giant mutual life insurer, will be carried on the Halo Investing digital annuities platform. Financial advisers will be able access, purchase, and manage Great American Life’s annuities through Halo, Great American announced this week.

“The addition of Great American Life adds to the growing number of leading carriers and annuities offerings on Halo’s platform for financial advisers. In addition to providing an expanded lineup of annuities, Halo has an outsourced insurance desk that can serve as the licensed agent of record for advisors,” a Halo release said.

Halo streamlines the execution and management across the annuity lifecycle for advisers and offers different annuity options and strategies from Great American Life, Allianz Life, AIG Life & Retirement, and others.

“Partnering with Halo demonstrates our commitment to growing within the fee-based annuity space,” said Tony Compton, Great American Life’s Divisional Vice President of Broker/Dealer and RIA Sales.

Halo Investing is a technology platform for protective investment solutions, including annuities and structured products. Headquartered in Chicago, with offices in Abu Dhabi, Zurich, Dubai, and Singapore, Halo was co-founded by Biju Kulathakal and Jason Barsema in 2015.

Through the Halo platform, financial advisers and investors can access structured notes, market-linked CDs, buffered ETFs, and annuities, as well as a suite of tools to educate, analyze, customize, execute, and manage the most suitable protective investment product for their clients’ portfolios.

Vanguard acquires ‘direct indexing’ vendor

Vanguard has completed its acquisition of Just Invest, a provider of tax-managed, tailored wealth management technology. Just Invest’s Kaleidoscope technology adds “direct indexing” or “personalized indexing” to Vanguard’s investment product and service lineup.

For an explanation of direct indexing, click here.

Founded in 2016, Just Invest saw its assets under management surpass $1 billion this year. Just Invest leverages large-scale data analysis, quantitative algorithms, and risk modeling to deliver scalable portfolio and tax management through its direct indexing platform.

Just Invest’s platform uses portfolio management tools traditionally available only to institutional or ultra-high-net-worth investors. The tools allow advisers to tailor portfolios to their values, financial objectives and tax-loss-narvesting needs.

Demand for PRT will persist, MetLife poll shows

New poll results from MetLife, a leader in Pension Risk Transfer (PRT) deals, indicate that PRT activity will remain strong for the foreseeable future, despite COVID-19. The poll showed that 93% of defined pension sponsors with de-risking goals intend to eventually divest all of their company’s DB plan liabilities, up from 76% in 2019.

The MetLife poll found that among those plan sponsors who plan to fully divest their defined benefit plan liabilities at some point in the future, 32% have DB plan assets of $1 billion or more, 35% have assets in the $500-$999 million range, and 33% have assets in the $100-$499 million range.

© 2021 RIJ Publishing LLC. All rights reserved.

Royal Mail adopts ‘Collective’ DC; NEST to hold private equity

Posted on October 5, 2021 by -

The Royal Mail, Britain’s mail and parcel delivery service, aims to launch the UK’s first occupational “collective defined contribution” (CDC) plan next year, if government regulations on the new vehicle are published as expected this autumn, according to a report in IPE.com.

The CDC will supersede the Royal Mail Pension Plan, a defined benefit (DB) plan with £11.4 bn in assets and 124,000 members. It closed to accrual of career salary benefits in March 2018. A CDC plan is an alternative to a group annuity purchase as an exit strategy for DB plan sponsors. CDCs are used in Canada, Denmark and the Netherlands.

The company’s pensions team, advised by Willis Towers Watson and Aon, designed the CDC in collaboration with the Communication Workers Union (CWU), advised by First Actuarial. The legislation necessary to make CDCs possible, the Pensions Act 2021, became law earlier this year.

The RSA CDC Pensions Forum was formed earlier this year to support the development of CDC pensions in the UK. The Forum’s sponsors include Aon, First Actuarial, the Institute and Faculty of Actuaries, CMS and Lane Clark Peacock. From TheRSA.org website:

Collective Defined Contribution (CDC) are a type of pension that allow workers an option of paying into one giant pot with other people from any company they have a pension with. This collective pot is then invested in a way which is designed to provide everyone with an income from the time they retire until the time they die, dependent on how much they have saved.

Often workers can only save into an individual pot, and are then left to fend for themselves, not knowing how long they will need their pension savings for. The only current alternative to this is to buy an annuity which is very expensive.

CDC pensions offer that guarantee. They can make longer term investments and offer economies of scale by pooling the pensions of workers across and between large companies. As a result, they offer much higher pensions than are available by buying annuities.

Royal Mail Group plc, a member of the FTSE 100 Index, is a British multinational postal service and courier company. It was established by King Henry VIII in 1516. Its Royal Mail Group Limited unit operates a letter delivery service (Royal Mail), a parcel delivery service (Parcelforce Worldwide), and a global logistics company (GLS Group). 

For most of its history, the Royal Mail was a public service, operating as a government department or public corporation. In 2013, after the Postal Services Act 2011, a majority of the shares in Royal Mail were floated on the London Stock Exchange. The UK government initially retained a 30% stake in Royal Mail, but sold the last of its shares in 2015.

The new pension scheme will be made up of a CDC section and a cash lump sum section (similar to the existing DB cash lump fund, currently worth £1.2bn), with virtually all employees in both. Members will contribute 6%, and the Royal Mail 13.6%, of pensionable pay. Members will accrue 1/80 pensionable pay each year in the CDC section, and 3/80 in the cash fund. The benefits will be a guaranteed minimum lump sum from the cash fund plus a wage in retirement, which will fluctuate depending on investment returns and demographics.

“We won’t be using capital buffers to help reduce the unpredictability of income levels, as buffers can place unfair burdens on particular cohorts of members,” Gough told IPE. The pension fund’s high-level investment strategy, agreed between management and unions, is to target global equity returns with lower volatility.

British national DC plan to allocate 5% of assets to private equity

Defined contribution master trust NEST has decided to allocate 5% of its assets under management (AUM) to private equity—but it won’t be following the traditional private equity fee model that involves an annual management charge and carried interest.

“We cannot afford 2 and 20,” Mark Fawcett, NEST’s CIO, previously told IPE. “We don’t think that sort of fee model is value for money for our members.”

The publicly sponsored pension plan (AUM £19.4bn, €22.6bn, $26.2bn) is expecting to invest a total of about £80bn in private equity on behalf of its members over the next 20 years. NEST targeted a private equity allocation of £1.5bn ($2.04bn) by the end of 2024.

“We want private equity to play an important role in our portfolio, offering strong returns and diversification,” said Stephen O’Neill, NEST’s head of private markets. “As ever, we’re looking for bidders to present global solutions that will be evergreen and scale with NEST over time,” added O’Neill.

Once awarded, the new private equity mandate will be added to the existing range of Retirement Date Funds that make up NEST’s default strategy. 

The launch of the tender comes after a period of market engagement during which the pension scheme challenged asset managers to come up with a less expensive private equity fee model. A spokeswoman for NEST said that to protect its commercial interests and those of bidders, it could not provide specifics about what fees NEST would accept.

NEST also said that successful fund managers would need to demonstrate that they could offer a robust risk management framework and integration of environmental, social and governance factors into their investment and asset management processes.

NEST has steadily added private market assets in recent years. Its first move into unlisted markets was with private credit, with three mandates awarded in 2019. Since then NEST has also hired managers for direct infrastructure equity investments.

© 2021 RIJ Publishing LLC. All rights reserved.

Use of bond ETFs for retirement income expected to rise: Cerulli

Posted on October 5, 2021 by -

Fixed-income ETFs are poised to become a more common source of retirement income, according to the latest issue of The Cerulli Edge – US Monthly Product Trends.

A Cerulli survey showed that nearly all US ETF issuers believe that increased use of fixed-income ETFs will either be a “major” driver (71%) of ETF asset growth or “somewhat” of a driver (26%) going forward. “The emergence of niche ETF strategies will allow income-seeking investors a variety of new ways to access reliable income,” a Cerulli release said.

The number of ETFs on the market increased 4.7% in 2020, leading Cerulli to believe that sector- and thematic-specific ETFs may become a key portfolio addition. “New solutions are coming to market to meet perceived demand, largely backed up by increased fixed-income ETF flows,” the release said.

Mutual fund assets grew 1.9% during August and pushed closer to the $21 trillion asset threshold, while ETF assets gained nearly 3.0% to end the month above $6.8 trillion. Net flows were positive for both vehicles; ETFs added $50 billion and mutual funds collected $27 billion.

Cerulli’s report, which analyzes mutual fund and exchange-traded fund (ETF) product trends as of August 2021, also explores how marketplaces are selling annuities to fee-only advisors. “Eighty-four percent of independent registered investment advisors (RIAs) sold no annuities in the last 12 months… despite significant work in the last decade by variable annuity (VA) carriers to offer no-commission I-share annuities,” the release said.

Fee-only financial advisors have expressed interest in outsourced third-party annuity marketplaces, where they can access VA products from top carriers without the operational and compliance burden of getting an insurance license. “While marketplaces are an important access point for carriers to work with fee-only advisors, carriers must do additional work to educate advisors around fees and how their products fit in with a broader retirement income portfolio,” the release said.

© 2021 RIJ Publishing LLC. All rights reserved.

Prudential’s new approach to the DC world—and to the income challenge

Posted on September 30, 2021 by -

PGIM, the $1.5 trillion global investment asset management business of Prudential Financial, has launched a new group called PGIM DC Solutions. Having sold its retirement plan recordkeeping business to Empower last July, Prudential has repositioned itself from a full-service plan provider to a defined contribution investment-only (DCIO)vendor.

But its mission evidently includes creating retirement income solutions as well as investment options.

“The market is increasingly demanding a comprehensive approach to retirement income, which requires a range of new thinking and solutions, deployed in a flexible way,” Gibson said in a release. “We have created PGIM DC Solutions to spearhead that effort and target market leadership in this new arena.”

Last spring, PGIM hired leading retirement expert David Blanchett as managing director and head of retirement research for PGIM DC Solutions. Blanchett was formerly head of retirement research at Morningstar Investment Management.

Gibson will be CEO of PGIM’s $119 billion quantitative equity and multi-asset solutions specialist, QMA, starting October 15. She joined QMA in July 2019 as chief business officer. The CEO change comes as QMA announced it is rebranding to PGIM Quantitative Solutions and its launch of the dedicated Defined Contribution unit, PGIM DC Solutions. 

Linda Gibson

Gibson joined QMA in mid-2019 having previously served in a variety of executive leadership positions at BrightSphere Investment Group, a publicly traded asset manager with more than $225 billion of client assets at the time of her departure. QMA’s current CEO, Andrew Dyson, has stepped down for personal reasons unrelated to the business. He will stay on as special adviser and acting head of PGIM DC Solutions until the end of March 2022.

Even though Prudential divested its recordkeeping business, a Prudential spokesperson said that Prudential’s Institutional Investment Products business will “continue to participate in the institutional and individual retirement market, serving retirees, annuitants and employers.” 

That business “will include Pension Risk Transfer, longevity and international reinsurance, stable value investment only and structured settlements, as well as income and investments solutions delivered by the individual annuities business and PGIM,” the spokesperson said.

With offices in 17 countries, PGIM’s businesses offer retail and institutional investors public fixed income, private fixed income, fundamental equity, quantitative equity, real estate, and alternatives. PGIM Quantitative Solutions, a release said, “seeks to help solve complex investment problems with custom systematic solutions across the risk/return spectrum. Our modular portfolio construction simplifies our design of client-specific solutions. We can customize down to the stock level for portfolio considerations, with product offerings that range from core solutions and systematic macro to multi-asset portfolios and overlays. All of our options can be harnessed to provide stable return streams uncorrelated with existing strategies.”

Prudential expects to use the proceeds from the transaction for general corporate purposes. Prudential now expects to return $11.0 billion to shareholders through 2023, up from the $10.5 billion announced in May 2021, and intends to reduce financial leverage and enhance its financial flexibility.

Last July 21, Empower Retirement and Prudential Financial, Inc., announced that Empower would acquire Prudential’s full-service retirement business for a total transaction value of $3.55 billion. The business will be supported by $2.1 billion of capital through a combination of the balance sheet of the transferred business and Empower capital and surplus.

At closing, Empower will acquire Prudential’s defined contribution, defined benefit, non-qualified and rollover IRA business in addition to its stable value and separate account investment products and platforms.

Prudential’s full-service retirement recordkeeping business comprises more than 4,300 workplace savings plans, through which approximately 4 million plan participants have saved $314 billion in assets. It also includes more than 1,800 employees who provide a comprehensive suite of retirement recordkeeping and administration services to financial professionals, plan sponsors and participants.

The transaction, which is expected to close in the first quarter of 2022 pending customary regulatory approvals, will increase Empower’s participant base to 16.6 million and its retirement services recordkeeping assets to approximately $1.4 trillion administered in approximately 71,000 workplace savings plans.3

Empower will acquire Prudential’s retirement services businesses with both a share purchase and a reinsurance transaction. Great-West Life & Annuity Insurance Company will acquire the shares of Prudential Retirement Insurance and Annuity Company and business written by The Prudential Insurance Company of America will be reinsured by Great-West Life & Annuity Insurance Company and Great-West Life & Annuity Insurance Company of New York (for New York business).

© 2021 RIJ Publishing LLC. All rights reserved.

Let’s Get This (Income) Party Started!

Posted on September 30, 2021 by -

“It’s big. It’s real. It’s here. It’s now. The demand is strong.” So said Matt Soifer of BlackRock a webinar this week. It was hosted by the Georgetown Center for Retirement Initiatives. The topic was “Key Trends in Defined Contribution Plans.”

The virtual discussion was led by Angela Antonelli, Research Professor and Executive Director, Center for Retirement Initiatives, Georgetown University’s McCourt School of Public Policy. The panelists included Kathleen Kelly, founder and managing partner, Compass Financial Partners, a Marsh & McLennan Agency LLC Company, Michael Kreps, Partner, Groom Law Group, Soifer, who is managing director, Retirement, BlackRock, and Tina Wilson, senior vice president and Chief Product Officer, Empower Retirement.

BlackRock recently completed its annual Retirement Pulse Survey, which elicits plan participants’ desires from their retirement plans and employers, as well as how plan sponsors and financial advisors are responding. The panel explored:

  • The systemic weaknesses of the current retirement system
  • The need to address demographic inequality, improve outcomes, and secure the financial future of millions of American workers
  • The importance of financial wellness and resiliency
  • The demand for access and savings options
  • Plan design
  • Retirement income   

In truth, the topic of retirement income was the last topic up for discussion. But it generated a spirited, if somewhat nebulous, discussion.

Soifer pointed out the need for certainty in retirement. “When you have more uncertainty, you have to hedge more, and when you have to hedge more, you have a suboptimal retirement,” he said in support of protected or guaranteed income products. Hear, hear.

The BlackRock survey found that 89% of participants want their employers to provide a retirement income option, and almost all plan sponsors want the same. The mission of such products should be to “maximize spending, minimize volatility, and address longevity,” Soifer said.

“You need to focus on all three and embed lifetime income in a target date fund,” said Michael Kreps of Groom Law Firm, an expert on retirement-related legislation. Exactly how that might be done, he did not elaborate. But he noted, “All the pieces are there on the regulatory front” for the inclusion of retirement income solutions in retirement plans.

We’ve been in this holding pattern for a long time, with respect to income options in retirement plans. Life/annuity companies would like to capture defined contribution assets before participants roll them over. Some asset managers would like to see assets stay in the plan.

For the plan sponsors, choosing an income option doesn’t just involve picking a financially strong annuity provider. The challenge for employers trying to serve a diverse audience is that every retiree needs a customized solution. No single size fits all. The SECURE Act gave plan sponsors more flexibility in choosing an income solution. But plan participants are likely to need a much wider range of options than any individual employer can provide. Participants are likely to have to roll their assets out of the plan to get the range of options and degree of customization they need. Yet rollovers to retail brokerage IRAs drawbacks too. They’re usually more expensive than in-plan solutions.

In Australia and Israel, to name two examples of countries with mandatory DC programs, employees can choose their own financial service providers instead of limiting themselves to the employer’s choice. Our system would have to change radically to adopt that policy. But Australia also struggles with making it easier for participants to convert DC assets to lifetime income. (See today’s Research Roundup for more on that.)

The webinar was engaging but, as such discussions often are, inconclusive.

When I shared my thoughts about the webinar on LinkedIn, however, many people quickly joined the discussion. Some recommended specific solutions to the income puzzle. Richard Fullmer, a former senior executive at Russell Investments and T. Rowe Price, recommended tontines as a solution. He’s now in that business at Nuovalo.  Similarly, actuary Larry Pollack spoke in favor of “a 401(k) longevity pooling option to provide lifetime income without insurance company guarantees, like VPLAs in Canada, the QSuper superannuation fund in Australia and US 403(b)(9) annuity plans” such as CREF at TIAA.

Many people are eager to see the DC income party finally get started. And maybe it has. Prudential Financial this week announced the launch of a DC Solutions group in its PGIM (Prudential Global Investment Management) division. 

PGIM named eminent retirement income researcher David Blanchett (lately of Morningstar) as one of the new group’s five senior team members. And here’s what the new CEO of DC Solutions, Linda Gibson said in a release this week: “The market is increasingly demanding a comprehensive approach to retirement income, which requires a range of new thinking and solutions, deployed in a flexible way,” Gibson said. “We have created PGIM DC Solutions to spearhead that effort and target market leadership in this new arena.”

We’re watching and waiting to see what develops there.

© 2021 RIJ Publishing LLC. All rights reserved.