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The Hangover

Posted on November 20, 2013 by Kerry Pechter -

Have annuity manufacturers turned the corner? Have they regrouped and repaired and retooled enough to make another strong bid for domination of the Baby Boomer retirement market?

Or have “bad liabilities” and low interest rates forced them to downsize their ambitions? And if so, what will that mean for distributors and for the Boomers themselves?

Questions like those simmered under the cordial surface of the American Council of Life Insurance meeting a few weeks ago in New Orleans—a city that, like the life insurance business, is still recovering from disaster. On the one hand, there are reasons to believe that the worst may be over.

Life insurer stocks have risen by about 40% in 2013, on average. The bull market in equities—itself a by-product of low interest rates—has kept variable annuity subaccounts values high and unlocked some of the insurers’ reserves for deferred acquisition charges.

Insurers have withdrawn, de-risked, re-designed, “bought back” and shut off new contributions to old, problematic annuities and introduced an array of new products that carry less risk and require less capital. Bitter medicine has been swallowed—witness Prudential’s recent $1.7 billion pre-tax charge for adjusted lapse-rate assumptions and AXA Equitable’s costs in trying to buy back in-the-money living benefits.

But annuity issuers—some more so than others—aren’t out of the woods yet. Many have big blocks of in-force variable annuity business that were priced with expectations of higher interest rates and lower lapse rates than we’ve seen. General account revenues have been trending down, a result of persistent low interest rates. Sales of new variable annuities are not benefiting as much from rising stock values as they once did.

Given the big variations in life insurers’ experience in (and responses to) the financial crisis, a one-size-fits-all interpretation of the VA market probably doesn’t exist. But, it appears that, for some companies, binging on sales of generous variable annuities and other products during the boom has led, since the financial crisis, to a kind of hangover.

While it’s easy to say so in hindsight, at least one industry analyst who presented at the ACLI conference believes that things might have turned out better if the VA industry had reacted more pragmatically to the shift from non-qualified to qualified premiums that started in 2002.

At the ACLI conference

That analyst, Colin Devine of C. Devine & Associates, worries that some of the liabilities assumed over the past decade will be millstones around the necks of certain life insurers for a long time.

“Bad assets you can sell. Bad liabilities you’re stuck with forever,” said Devine in an interview with RIJ after the conference. He thinks those liabilities will diminish, though not destroy, life insurers’ capacity to meet the Boomers’ retirement needs.

“I don’t think there’s enough capacity in the industry as it stands today to service the Boomer need for longevity protection,” Devine said. “For one thing, the opportunity is so big. The second piece is the life insurers’ legacy liabilities.

“Whether it’s variable annuities, long-term care (LTC) or no-lapse guarantee universal life, these liabilities similar to the old non-cancelable own-occupation individual disability income polices sold back in the’80s and ’90s will stay around a long time, consume a lot of capital and deliver a low return. Many insurers may find a meaningful portion of their reserves and capital will be committed to supporting these underachieving liabilities and not be available to fund new growth opportunities.”

Another long-lasting problem, he said, has been the decline in general account yields. Life insurers have to make long-term assumptions when they price certain products, like annuities. A significant level of liabilities on insurers’ books today was priced with the assumption that incoming premiums would be invested at much higher rates of return than insurers are able to earn today.

While there may be some ability to adjust for this in terms of the cost of insurance charges and policy dividends, insurers are still feeling their margins being squeezed. Low rates can also adversely impact lapse assumptions (as investors seek better opportunities), which in turn can hurt mortality/morbidity experience, according to Devine.

“Nobody’s crippled, but they are constrained in leveraging the Boomer market opportunity,” he said.

In its own way, the financial crisis and the low rate environment may have changed certain life insurers’ attitudes toward equity market risk almost as dramatically (though less visibly) the way 9-11 changed the way the airline industry handles airport security risk.

Today, it no longer matters whether life insurers should have assumed lower lapse rates or if demutualized companies took too much equity market risk in pursuit of higher returns on equity. Going forward, there are new questions: Having been bitten once by equity risk, will life insurers be doubly shy? And if they are too cautious, how will that affect product design, profitability and competitiveness in the face of challenges from private-equity firms or fund companies, which also want to manage a chunk of the Boomer retirement savings?

A sticky wave of qualified money

Devine’s presentation at ACLI was called “Lots of Opportunities, Lots of Challenges. Looking Ahead at the U.S. Life Insurance Industry.” He was upbeat on the asset side but downbeat on the liability side. “Because of their low lapse rates, it is going to take not quarters, not years, but decades to run down these closed blocks,” he said. In its latest earnings call, Prudential said it has adjusted its VA lapse assumption to 6% per year from 9%.

While higher equity prices help insurers recover VA acquisition costs faster and unlock some reserves, low interest rates are pushing down on lapse rates (and raising reserve requirements) by making the 5% to 7% (of the benefit base) annual payouts of those products look very good by comparison.

If VA issuers calculated that contract owners who delayed income until the end of the deferral period—10 years, for many contracts—wouldn’t live long enough to drain their account values and start dipping into insurers’ pockets, they may have been banking on overly-optimistic equity market expectations and high lapse rates.

Starting in 2002, a reversal occurred: more premium started coming from qualified money than non-qualified money. That meant that more policyowners probably bought their contracts for the lifetime income, and would likely hold onto their contracts until they died.

“In 2000, 60% of VA sales were non-qualified. Let’s look at today: 60% of sales come from tax-deferred money. People are buying them in their IRAs. For the past 10 years they’ve been buying the contracts for retirement income, not tax deferral. All the VA issuers have known this. They have watched the percentage of their deposits that are tax qualified steadily rise,” Devine said.

But the implications of that switch for lapse (and pricing) assumptions were not sufficiently heeded, he suggested. “People who bought VAs with non-qualified money might just let it sit there and never use their living benefit. Nobody stepped back and re-thought their pricing assumptions as the percentage of purchases using qualified funds began to rise.

“Some insurers continued to assume these products would get exchanged every six or eight years [as surrender periods expired]. But qualified customers are different. It’s not a matter of if the tax-qualified buyer will start taking withdrawals; it’s a matter of when. You know that by age 70½ they will have to start taking required withdrawals because that is when the tax code mandates that must begin required minimum distributions or RMDs.”

The mutual insurers and a couple of public life insurers—Protective and Principal, notably, which at mid-year 2013 held only about $11 billion and $7.2 billion in VA separate account assets, respectively—largely sat out the VA arms race, but others “chased sales, even though it was obvious that people bought their living benefits with the full extent of using them,” said Devine.

A more sanguine view

Other observers, however, prefer to focus on the positive. Consulting actuaries at companies like Milliman and Ruark, who get paid to help insurers out of jams like these, take a more sanguine view than Devine, a former equity analyst.

“I don’t necessarily agree that products were ‘mispriced,’” said Tim Paris, CEO of Ruark Insurance Advisors. His company studies lapse rate data and works on reinsurance deals for life insurers with burdensome VA blocks.

“Even before the financial crisis, the manufacturers understood that the cost of the guarantee would be affected by policyholder behavior and surrender rates,” Paris told RIJ. “But they said, ‘We need to make certain assumptions. We’ll do our best.’ Now it looks like it hasn’t turned out the way they might have hoped.

“As we’ve seen since 2008 and 2009, policyholder behavior is turning out to be a lot different from what was anticipated. Directionally, the surrender rates are a lot lower than they used to be, and lower than what companies would have expected.”

Milliman has played a big role in the engineering of managed-volatility portfolios, which reduce VA manufacturers’ equity risk exposure by building equity risk dampeners into the separate accounts themselves. VA issuers like Ohio National and Securian can now afford to bring living benefit riders with rich deferral bonuses to market because they require contract owners to use those portfolios if they want those riders. The crisis has produced that and other product innovations.

“My view is that the life insurance industry will find ways to benefit significantly from the Baby Boomer demographic trend. Looking for a silver lining, the financial crisis taught the life insurance industry that it is critical that guaranteed products are manufactured in a sustainable way,” Milliman principal Ken Mungan told RIJ.

“The industry has made tremendous progress in improving product design and risk management to create VAs that meet customer needs with significantly lower risk profiles. Bit by bit, VA writers are applying the knowledge that they have gained to the management of the in-force as well. It will take longer to make changes to the in-force vs. new products, but I think those efforts will pay off.”

“In my mind, the lesson of the last five or six years, for variable annuities, is that these products may be trickier to deal with than was first hoped. That has spurred creativity in the development of products that meet the challenge of longevity risk management. And that’s a good thing,” Paris said.

Necessity has in fact sparked an explosion of actuarial creativity in the annuity product sector since the financial crisis. Fixed indexed annuities sprouted GLWBs. New York Life launched a new kind of deferred income annuity and sparked a flurry of fast-follower products. AXA Equitable, MetLife and others introduced buffered accumulation products. Jackson National introduced an accumulation-stage VA specializing in alternative investments. Executives at other firms say they are looking for products that don’t require much capital, like life insurance/life annuity hybrids. There’s not a lot of talk about selling equity market protection.

What’s next

Asked to speculate on the future of the VA business in the U.S., Paris said, “The issue of longevity risk management is only going to get bigger. It could be that we will see less focus on capital markets guarantees and more focus on longevity protection.

“With VAs, there was so much emphasis on a bundled product. But there’s another school of thought, and we’re beginning to hear more about this, that it would be reasonable for the life insurers to just stick to covering the longevity risk and not get involved in the investment risk,” he said.

“It’s analogous to the debate between buying universal life insurance and buying term life and investing the difference. Maybe the bundled solution isn’t the way to go. The fact that we’re seeing all these deferred income annuities is some indication of that. Handling longevity risk is what life insurance companies are uniquely qualified for,” Paris added.

Why were the publicly held companies so much more aggressive in VA pricing and asset gathering? “In the mid-2000s, our shareholders told us they wanted equity-type returns, and we went into the equity markets to get them,” a product chief at a major publicly-held life insurer said in a press briefing recently. The S&P Life Index more than doubled between September 2003 and the end of 2007. After dropping steeply in 2008, it has rallied, recovering about two-thirds of its 2003-2007 gains.

Paris was asked if he saw a link between demutualization in the 1990s and the risk-taking that publicly held life insurers engaged in just before the financial crisis, and if the risk-taking was a bad idea. He said it was too soon to tell.

“There’s no question that if you want the higher returns, you have to take more risk. Which means you’re going to have more volatility,” he said. “But we may look back 40 years from now and see that, although there were zigs and zags along the way, and periods when [those companies] may have had to put up a lot of reserves, they did get a 15% return, and that may be more than the returns of a company that just stuck to selling term life insurance.

“Yes, we’ve seen massive changes in the last few years. It may very well have lasting effects on the life insurance companies. But no matter how severe the crisis was, the truth is that these products will stay in force for decades, and we don’t know yet what will happen. It’s still very early.

“Of all the GLWB products that have been sold since the mid-2000s, and among all of the companies whose capacity you’re concerned about, not one has yet paid a claim to a GLWB policyholder. Even contract owners who are taking income are still just withdrawing their own money. None of them have exhausted their own money.”

Which Bubbles Will Burst Worst?

Posted on November 15, 2013 by Martin Hutchinson -

This week the hedge fund SAC was fined $1.8 billion, and will revert to running Steve Cohen’s family money only—still a big job, since he’s worth some $8-9 billion. This raises the question of which forms of investment will be exploded by the next market downturn, just as were subprime mortgages and complex securitizations by the 2008 unpleasantness. Guessing what the next downturn will look like and which forms of wealth will suffer permanent rather than temporary diminution in value is the most important task facing investors as we approach the top of the current bubble.

After the 2000 bubble burst, the value downturn was almost entirely in equities, and a tiny subset of equities at that. While the main share indexes declined less than 50%, and were above their previous peaks within six years, the Nasdaq is still thirteen years later more than 20% below its 2000 peak of 5,048, a loss of more than 40% when inflation is taken into account.

For individual companies, the decline was more comprehensive. Microsoft (Nasdaq:MSFT) and Cisco (Nasdaq:CSCO) are both more than a third below their 2000 highs, even though their assets and profits are much greater than they were in 2000. Some companies have had much steeper falls; the switchgear specialist JDS Uniphase (Nasdaq:JDSU), valued well over $100 billion in 2000, now has a stock price of little more than 1% of its high, even though the company’s operations remain solidly profitable and its P/E ratio is still elevated at 45 times earnings. Finally, a few companies that had taken excessive advantage of easy money and easy ethics went outright bankrupt, the most prominent being Enron, WorldCom and Global Crossing.

Other types of asset saw only a modest downturn after 2000. Emerging market stocks had already been beaten down in 1997-98, so the 2000 crash saw only a hiccup in the beginnings of recovery. The hedge fund that had sold all its tech holdings in March 2000 and reinvested in Russia and Indonesia would have truly deserved its management’s exorbitant fees. Gold and silver too were close to their bottom in 2000, and would prove an excellent investment over the next decade.
For small investors, here’s a tip. It’s true most of the time, but it’s overpoweringly, Biblically true at the top of a bull market: the best investment going forward is not the best-performing fund among a broad family of mutual funds, based on 1-year, 3-year and 5-year track records, but the worst-performing fund, which is almost certainly close to a cyclical low and will shortly rebound sharply.

The next time around in 2007-08 the casualty list was quite different. There were no significant losses in the tech sector, other than stock market declines that were mostly made up when the market recovered. Again, emerging markets were little affected—the world central banks’ policies of ultra-easy money soon reflated their balloons. U.S. house prices declined, by as much as 50% in some over-inflated markets, but real estate in general suffered only modest losses—General Growth, the shopping center operator that went bust in 2009, was soon refloated. General Motors and Chrysler filed for bankruptcy, but those bankruptcies, like the frequent bankruptcies in the airline sector, reflected long-term lack of profits rather than any bursting bubble.

The biggest permanent losses of value were suffered in three areas: housing bonds and the associated securitizations, the financial sector and the PIIGS of southern Europe. All three losses were directly linked to excesses of the preceding bubble. Lending practices in the home mortgage sector had deteriorated to unsustainable levels, largely owing to government encouragement by housing legislation and the Fed, and that bubble had been further encouraged by the practice of securitization and associated derivatives games. The result was a bust that had been inevitable, but was made much worse by government and Wall Street malfeasance.

The financial sector’s losses were largely a spin-off of the losses in the housing sector, but strictly reflected a bubble of easy money and unsound derivatives innovation rather than the housing bust directly. Credit default swaps in particular were poorly managed, dominated by rent-seeking trading practices, and should have caused a lot more damage than they were allowed to (if they had caused more damage in 2008, they would not still be around to plague us in 2014-15).

Finally, the losses in peripheral Europe resulted from the unsound self-deluding structures surrounding the establishment of the euro and the admission of Greece to the EU. Greece, in particular, had been allowed to become a subsidy junkie and had driven its living standards up to unsustainable levels. Its GDP per capita needed to halve, and it could do not do so within the euro without intolerable levels of deflation. Interestingly, the Baltic states, also ahead of themselves in living standards in 2007, were able to solve their problems through deflation alone—the living standards excesses were less than Greece’s and the internal discipline was much better. The other PIIGS: Ireland, Italy, Spain, Portugal, and now Slovenia, had only a mild version of Greece’s problem, so only a bearable deflation and possibly a modest debt write-off should see it solved.

The sectors self-destructing this time round will be those showing most excesses in this bubble, which are not the same as the excesses of the two previous bubbles. Housing is unlikely to cause another major problem directly, at least in the United States, because it hasn’t recovered far enough, although the bloated and overblown London housing market, where prices are now above those of 2007, seems certain to crash. Most emerging market countries have managed their finances much more carefully than Western countries, so are unlikely to see more than modest problems, although every year this bubble lasts will increase the numbers of emerging markets that get into difficulties—the temptation to spend the money being thrown at them is too great. Finally, commodity prices have fallen back a long way from their 2011 peaks; unless that bubble reflates rapidly it is unlikely to cause much trouble—the underlying driver of strength, growth in emerging markets relative to developed ones, is a long-term trend that is not going away.

Having listed assets that won’t suffer a meltdown when the current bubble bursts, it is a melancholy fact that the list of assets that will melt down is much longer.
First, there are the assets located in the BRIC economies of Brazil, Russia, India and China. Far too much money has poured into these economies, drawn by their likely future wealth, but also by the foolish theory of BRIC domination perpetrated by Jim O’Neill of Goldman Sachs. These economies are already showing their cracks, but there’s much more to come. The Batista bankruptcy in Brazil is the first of many; both the consumer debt and government sectors in that ill-run country are hugely overblown and due for a credit crunch similar to that suffered in the 1980s.

In Russia, trouble will accompany an oil price collapse, caused by the plethora of new energy sources currently being developed; with oil at $40-50 a barrel, a perfectly reasonable long-term expectation, Russia’s fiscal and economic position is hopeless. In India, the economy is already showing signs of strain; it’s most likely that fiscal and economic collapse, accompanied by a major balance of payments crisis, will be Congress’s legacy to its successor in spring 2014, a poor recompense for the bright, reformist outlook Congress inherited at its unjustifiable election victory in 2004. Finally, China’s bank bad debt problem is now sufficiently large as to swallow even its $3.4 trillion of international reserves. The four BRICs may well have good long-term prospects, but they are due to suffer a grisly and costly decade before re-embarking on the road to prosperity.

The BRICs are only the tip of the cracking iceberg of bubble credit, albeit a very large one. The U.S. junk bond market has prospered in the last few years with credit standards weaker even than in 2006-07 and interest rates at unsustainably low levels. When interest rates rise, holders of junk bonds will suffer gigantic losses, many of which will be unrecoverable as the underlying borrowers collapse in turn.

U.S. Mortgage REITs, which buy long-term mortgage bonds, financing themselves in the repo market, will be a medium-sized casualty, with losses somewhere under $1 trillion, as short-term and long-term interest rates rise, collapsing their capital structures as bond prices decline. Their death will also kill off the repo market, which is rather more serious, as all kinds of entities depend on it for their short-term liquidity excesses and shortages.
To return to where we opened, hedge funds will also collapse, as their investment returns become heavily negative, their funding dries up and the legal vultures close in, as they have on SAC. The hedge fund and private equity sectors have grown far larger than is justified in a non-bubble economy; their return to their proper size will inevitably involve large losses for their investors. It’s another bubble; therefore it must burst.

There will also be collapses in the too-big-to-fail bank sector. Here the losses and bailout of 2008 have made them more cautious, although they still employ trading desks that are far too large and aggressive for the genuine businesses of the banks. However in the last few months, governments have discovered the political joy of zapping big banks with penalty after penalty, mostly relating to malfeasances that should by now have passed beyond the five-year statute of limitations. A financial system cannot survive continual looting raids by regulators and trial lawyers, out of proportion to any losses directly caused. At some point, one of the majors will find itself unable to attract either further capital or funding and will fail. That failure will drag the other largest banks with it, since they all have similar legal liabilities and are hopelessly intertwined. Only medium-sized banks may survive, since the politicians and lawyers have not yet targeted them to the same extent.

The tech sector, spared in 2008, will crash again this time. The hopelessly over-optimistic valuations given to the likes of Twitter and Facebook will collapse, as Internet advertising revenues prove finite, while teenage and young adult fashions move on from Facebook membership and tweeting to some other activity. This particular part of the movie we have seen before; it will involve only modest credit losses, but a substantial number of ex-billionaires will be created.

A wholly new credit crash will come in the area of college debt, which recently passed $1 trillion as students hocked themselves to the eyeballs to pay for overpriced college courses. With college courses now available for free or close to it over the Internet, much of the college infrastructure, and college debt infrastructure, is hopelessly overpriced malinvestment and will have to be liquidated. The process will be both painful and to the intelligentsia wholly unexpected.

Finally, government bonds are themselves a bubble, which will inevitably burst. However only Japan’s public debt is large enough in terms of the country’s GDP to cause a bursting bubble in the next year or two. U.S., British and most EU public debt is still within historical norms in terms of GDP, although the accompanying deficits often aren’t. My crystal ball is thus clouded on whether the public debt bubble bursts this time around, or whether reflationary policies cause it to grow further, becoming an unimaginably damaging centerpiece of a collapse around 2020. Either way, when it goes it will take the entire banking system with it, because of the Basel regulatory structure’s incredibly foolish zero-weighting of public debt in calculating capital needs.

As you can see from the above discussion, the universe of assets whose price will collapse in the next downturn is considerably better populated than the collection of assets whose price won’t collapse. It is only a question of time, and if you asked me to guess, I’d put the collapse’s onset in the fourth quarter of 2014.

The Uncertain Future of Central Bank Supremacy

Posted on November 15, 2013 by Mohamed A. El-Erian -

History is full of people and institutions that rose to positions of supremacy only to come crashing down. In most cases, hubris – a sense of invincibility fed by uncontested power – was their undoing. In other cases, however, both the rise and the fall stemmed more from the unwarranted expectations of those around them.

Over the last few years, the central banks of the largest advanced economies have assumed a quasi-dominant policymaking position. In 2008, they were called upon to fix financial-market dysfunction before it tipped the world into Great Depression II. In the five years since then, they have taken on greater responsibility for delivering a growing list of economic and financial outcomes.

The more responsibilities central banks have acquired, the greater the expectations for what they can achieve, especially with regard to the much-sought-after trifecta of greater financial stability, faster economic growth, and more buoyant job creation. And governments that once resented central banks’ power are now happy to have them compensate for their own economic-governance shortfalls – so much so that some legislatures seem to feel empowered to lapse repeatedly into irresponsible behavior.

Advanced-country central banks never aspired to their current position; they got there because, at every stage, the alternatives seemed to imply a worse outcome for society. Indeed, central banks’ assumption of additional responsibilities has been motivated less by a desire for greater power than by a sense of moral obligation, and most central bankers are only reluctantly embracing their new role and visibility.

With other policymaking entities sidelined by an unusual degree of domestic and regional political polarization, advanced-country central banks felt obliged to act on their greater operational autonomy and relative political independence. At every stage, their hope was to buy time for other policymakers to get their act together, only to find themselves forced to look for ways to buy even more time.

Central banks were among the first to warn that their ability to compensate for others’ inaction is neither endless nor risk-free. They acknowledged early on that they were using imperfect and untested tools. And they have repeatedly cautioned that the longer they remain in their current position, the greater the risk that their good work will be associated with mounting collateral damage and unintended consequences.

The trouble is that few outsiders seem to be listening, much less preparing to confront the eventual limits of central-bank effectiveness. As a result, they risk aggravating the potential challenges.

This is particularly true of those policymaking entities that possess much better tools for addressing advanced economies’ growth and employment problems. Rather than use the opportunity provided by central banks’ unconventional monetary policies to respond effectively, too many of them have slipped into an essentially dormant mode of inaction and denial.

In the United States, for the fifth year in a row, Congress has yet to pass a full-fledged budget, let alone dealt with the economy’s growth and employment headwinds. In the eurozone, fiscal integration and pro-growth regional initiatives have essentially stalled, as have banking initiatives that are outside the direct purview of the European Central Bank. Even Japan is a question mark, though it was a change of government that pushed the central bank to exceed (in relative terms) the Federal Reserve’s own unconventional balance-sheet operations.

Markets, too, have fallen into a state of relative complacency.

Comforted by the notion of a “central-bank put,” many investors have been willing to “look through” countries’ unbalanced economic policies, as well as the severe political polarization that now prevails in some of them. The result is financial risk-taking that exceeds what would be warranted strictly by underlying fundamentals – a phenomenon that has been turbocharged by the short-term nature of incentive structures and the lucrative market opportunities afforded until now by central banks’ assurance of generous liquidity conditions.

By contrast, non-financial companies seem to take a more nuanced approach to central banks’ role. Central banks’ mystique, enigmatic policy instruments, and virtually unconstrained access to the printing press undoubtedly captivate some. Others, particularly large corporates, appear more skeptical. Doubting the multi-year sustainability of current economic policy, they are holding back on long-term investments and, instead, opting for higher self-insurance.

Of course, all problems would quickly disappear if central banks were to succeed in delivering a durable economic recovery: sustained rapid growth, strong job creation, stable financial conditions, and more inclusive prosperity. But central banks cannot do it alone. Their inevitably imperfect measures need to be supplemented by more timely and comprehensive responses by other policymaking entities – and that, in turn, requires much more constructive national, regional, and global political paradigms.

Having been pushed into an abnormal position of policy supremacy, central banks – and those who have become dependent on their ultra-activist policymaking – would be well advised to consider what may lie ahead and what to do now to minimize related risks. Based on current trends, central banks’ reputation increasingly will be in the hands of outsiders – feuding politicians, other (less-responsive) policymaking entities, and markets that have over-estimated the monetary authorities’ power.

Pushed into an unenviable position, advanced-country central banks are risking more than their standing in society. They are also putting on the line their political independence and the hard-won credibility needed to influence private-sector behavior. It is in no one’s interest to see these critical institutions come crashing down.

Sign of the times: Fidelity adds short duration bond funds

Posted on November 14, 2013 by Kerry Pechter -

Fidelity Investments said it has expanded its line-up of short duration bond mutual funds for investors and financial advisors with the launch of three new products: Fidelity Limited Term Bond Fund, Fidelity Conservative Income Municipal Bond Fund and Fidelity Short Duration High Income Fund (Advisor and retail share classes.)

The three new short duration bond funds are managed with varying degrees of credit and interest rate exposure, from primarily investment grade to below investment grade and with weighted average maturities between six months to five years, Fidelity said in a release.

Fidelity, based in Boston, manages $1.9 trillion, including about $890 billion in fixed income assets.

Vanguard tops mutual fund flow charts in October

Posted on November 14, 2013 by Kerry Pechter -

U.S.-equity mutual funds enjoyed their highest monthly inflow since January, gathering $10.5 billion in October 2013. International-equity funds did even better—leading all category groups with inflows of $12.2 billion, according to Morningstar, Inc.

Total mutual fund inflows, at $17.8 billion for the month, were tempered by continued outflows from taxable- and municipal-bond funds tempered overall inflows. Morningstar estimates net flow by computing the change in assets not explained by the performance of the fund.

Vanguard gathered just over $6 billion in the quarter ($60 billion YTD) to lead all fund companies. American Funds, PIMCO, Columbia and Janus all saw outflows of more than $10 billion each.

Highlights from Morningstar’s report on mutual fund flows:

Active U.S.-equity funds had strong monthly inflows for only the third time in 2013, failing to fulfill expectations of a “great rotation” into active strategies after years of passive-fund flow dominance.
But outflows from active equity funds are only $15.3 billion for the year to date, compared with outflows of $131.5 billion in 2012.
Foreign large blend was the top category for inflows; equity categories took the top three spots in terms of inflow by category.
October was the first month since March that bank loan, nontraditional bond, or world bond did not lead all categories in flows, and the first time in more than a year that the bank-loan category wasn’t in the top five.
Inflation-protected bond funds lost $4.8 billion in October. The average fund in the category has lost 5.9% year to date.
Vanguard dominated inflows at the provider level in October, collecting new $6 billion overall and inflows of $2.1 billion for Vanguard Total Stock Market Index Fund.
Vanguard’s market share of mutual fund assets stands at 17.5%, up from 15.6% three years ago. American Funds’ market share has fallen to 10% from 12% over the same period. PIMCO’s share has dropped to 5.1 percent after peaking at 6.1 percent in late 2012.

Click here for more information about Morningstar Asset Flows.

Hedge fund managers’ eyes are bigger than customers’ budgets: E&Y

Posted on November 14, 2013 by Kerry Pechter -

Hedge fund managers who survived the financial crisis are focusing on growth beyond their original business models, but investors don’t intend to buy multiple products from one manager, according to Ernst & Young’s 7th annual global hedge fund market survey.

One hundred hedge fund managers who manage a combined US$850 billion and 65 institutional investors with AUM of $715 billion and over US$190 billion allocated to hedge funds participated in the EY survey, called “Exploring Pathways to Growth.”

Strategic priorities for hedge funds, changes in revenues and costs, technology, headcount, outsourcing and shadowing, and the future of the hedge fund industry were topics covered in the survey.

The growth ambitions of managers may not be matched by sustained investor appetite,” said Art Tully, EY’s Global Hedge Fund Services co-leader said in a release.

Besides investing in new strategies and products, hedge fund managers are developing non-traditional distribution networks and channels. Managers with less than US$10 billion under management are budgeting for 15% growth in 2013. But 72% of investors expect to maintain current allocation levels.

Two in three hedge fund managers reported an increase in revenues over the past year as performance improved and assets grew, the survey showed. But only half of managers saw improvements in margins. One in three managers said margins declined and another 10% noted margins remained unchanged. Meanwhile, costs rose.

“European managers appear to have a tight control over their costs and anticipate the greatest increase in margins,” said Julian Young, EY’s Europe, Middle East, India and Africa Hedge Funds Leader. “This is probably because they are managing costs by outsourcing, refraining from shadowing and offering less complex strategies.”

Cost increases were reported by one-third of European managers, 58% of Americans and three out of four Asians. But Asian hedge fund managers have been the most successful in raising capital and thereby growing revenue. Margins have improved as a result.

A majority of hedge fund managers continue to fully “shadow,” and the cost of shadowing is high. Hedge funds fully shadow across a range of functions to mitigate the risk of error, and indirectly to provide a contingency plan, if needed. They shadow more in the front office, where sensitivities to error are greatest and timely resolution of errors is critical to avert adverse consequence and reputational risk. It is not surprising that the survey highlights that the majority of hedge fund managers continue to fully shadow. What is surprising is that a growing percent of managers have developed stronger relationships with fund administrators and are paring down full shadows, granting partial oversight to the fund administrator.

Investors agree that the front office is most important, but are more discriminating than managers in what they deem important to shadow. Trade reconciliation and investment valuation are most important, while a number of back-office functions, including partner/shareholder accounting and investor reporting are not. Yet, nearly half of hedge funds fully shadow these latter functions.

When asked what conditions are needed to reduce shadowing, some managers cited a higher level of integration with their administrators. Others admit that they would need agreement among all their investors that they could stop.

More DB sponsors intend to off-load risk

Posted on November 14, 2013 by Kerry Pechter -

More defined-benefit plan sponsors are “formalizing steps to de-risk” their plans, in part because interest rates and equity prices have been moving higher, according to a new survey by Towers Watson and Institutional Investor Forums.

Employers are interested in offering lump-sum buyouts to former employees. A majority of plan sponsors with DB plans still open to new hires said they intend to offer a pension to all employees five years from now.

The survey found that three-fourths (75%) of respondents either have implemented, are planning to, or are considering developing formal “journey” plans to de-risk their DB plan.

A journey plan details actions a plan sponsor will take to de-risk its pension plan once certain trigger points have been reached. Forty two percent of respondents had a journey plan in place before this year; 8% implemented a plan this year.

“Pension plan sponsors remain under tremendous pressure to reduce the financial liabilities of their DB plans,” said Michael Archer, leader of the client solutions group for retirement, North America at Towers Watson.

“Many employers see [lump-sum payments and annuity purchases] as the most viable option to lower their DB burdens and a significant number are planning to take action in the next year or two.”

The impact of the DB plan on financial statements (69%), the impact of the DB plan on company cash flow (58%) and the general cost of the plan (41%) were the most commonly cited factors that led to the development of a formal de-risking plan.

Lump-sum payments remain attractive. The survey found that 28% of respondents are either planning to offer lump-sum payments to former employees next year or are considering doing so in 2015.

That is in addition to the 39% of respondents who did so in 2012 or indicated they were doing so this year. Lump-sum offers are especially appealing to companies whose ultimate objective is to transfer all of their pension obligations.

“We continue to see interest in companies offering lump-sum buyouts to vested former employees who have not yet retired. The success of these programs in 2012 will help drive a significant amount of activity over the next several years,” said Matt Herrmann, leader of retirement risk management at Towers Watson.

“The low interest rate environment coupled with moderate funded status levels limited the options for many plan sponsors over the past several years. However, if the recent improvements in funded status continue, de-risking activity could be strong for the foreseeable future.”

DB plans still open to new hires are largely expected to still be open five years from now, the survey showed. Among the 30% of respondents with DB plans open to new hires, more than 70% expect to offer a DB plan five years from now. Three-fourths of companies with closed plans expect at least some current participants to still be accruing benefits five years from now.

Among other findings from the survey:

DB Plan Funding policy:48% of respondents have not recently changed the amount they plan to contribute to their plan; 23% still contribute the minimum required; 21% have increased their planned contribution.
Investment management:Respondents prefer to focus on risk reduction, not higher returns; 78% plan to increase their focus on risk in the next 2 to 3 years rather than seeking higher returns. Interest is growing in alternative investments and long-dated fixed income.

The Towers Watson/Institutional Investor Forums survey, U.S. Pension Risk Management – What Comes Next, was conducted in June and July of 2013, and includes responses from 180 U.S. companies that sponsor at least one non-bargaining defined benefit program.

The ‘haves’ have retirement plans; the ‘have-nots,’ not so much

Posted on November 14, 2013 by Kerry Pechter -

Among the complex causes of the retirement savings “crisis” in the U.S., the most obvious and important one may be the fact that less than half of working Americans even have the option of deferring part of their paychecks into a saving plan at work.

Only 48.6% of the 156.5 million Americans who worked in 2012 were employed by a company or union that sponsored a pension or retirement plan, but that overall number of workers included not just full-time workers but also the self-employed, part-time workers, those younger than 21 and older than 64, according to an analysis by the Employee Benefit Research Institute of U.S. Census data.
Considering only full-time, full-year wage and salary workers ages 21–64, 60.4% worked for employers sponsoring a plan, and 53.5% of the workers participated in a retirement plan. Most public-sector workers (71.5%) participated in a retirement plan at work, while only 39.1% of private sector workers did so.

People who are most likely to lack sufficient other financial resources in retirement are those least likely to have access to a plan. White, male, well-educated, healthy and married full-time workers are more likely to have access than non-whites, women, single people, the less educated and the less healthy. Geographically, lack of a qualified plan is more likely in the South and West than in the North and East.

Those in rural occupations like farming, fisheries or forestry are also less likely to be covered by a plan. Public employers are most likely to be covered by a plan, but taxpayer-supported public employee retirement plans have been under attack in many parts of the U.S. It increased after the drop in equity prices and interest rates caused or amplified those plans’ underfunded status.

The number of U.S. workers participating in an employment-based retirement plan rose to 61.6 million in 2012 from 61.0 million in 2011. The percentage participating dropped to 39.4% of the workforce in 2012 from 39.7% a year earlier, according to an Employee Benefit Research Institute analysis of U.S. Census data.

Stock market returns and the labor market tend to drive participation EBRI noted. The bull market of the late 1990s, for instance, boosted participation, while the financial crises of the 2000s dampened participation.
EBRI senior research associate Craig Copeland said 2013 would be like 2012, with “a potential for a slight increase.”
The full report, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2012,” is published in the November EBRI Issue Brief, available online at www.ebri.org

FINRA Talks a Good Game

Posted on November 14, 2013 by Kerry Pechter -

Until FINRA published “A Report on Conflicts of Interest” recently, some of us could only guess at the specific opportunities, incentives and temptations to abuse their positions of trust that registered reps contend with in the course of serving the typically under-informed retail brokerage customer.

Now there’s no need to rely on the imagination. The Financial Industry Regulatory Authority’s 44-page report (which one commentator called a stunt designed to further FINRA’s candidacy as the future self-regulatory authority for all financial intermediaries, including fee-only advisors) spells them out. If seamier details exist, we’d have to send the children from room.

Talk about disclosure. The report urges broker-dealer managers, for instance, to be especially watchful for unsuitable sales by brokers who are approaching thresholds for bonuses—bonuses presumably set by the managers themselves. If this report fell into the hands of consumer activists, it might impact brokerages as much as Upton Sinclair’s 1906 expose, “The Jungle,” impacted the meatpacking industry. That’s an exaggeration, but not a huge one.

Most brokers and their organizations are undoubtedly scrupulous. And life is full of conflicts. But if the end-customer ends up paying, directly or indirectly, for sales incentives or revenue-sharing whose purpose is simply to drive volume, that’s hard to justify. Customers patently don’t like what they see (or don’t see, since conflicts by nature have to be hidden). That’s why Vanguard, with its tiny fees and salaried phone representatives, manages $1.8 trillion in assets, netting $60 billion so far this year and a league-leading $6 billion in October alone.

But back to the report. The second sentence of the first paragraph is a sockdolager. “While the existence of a conflict does not, per se, imply that harm to one party’s interests will occur,” it calmly said, “the history of finance is replete with examples of situations where financial institutions did not manage conflicts of interest fairly.” The word “replete” represents a much bigger concession to critics than the traditional “few bad apples” defense ever allowed.

“This report…” the unidentified author writes a few lines later, “emphasizes that firms should do more to manage and mitigate conflicts of interest in their businesses.” We’ve entered mea culpa territory here. The report goes on to mention the many ways that brokers can take advantage of their possession of much more information than most customers will ever have.

Below are references in the report to potential conflicts of interest. (Heaven help the customer whose broker is just shy of a sales threshold.)

“…complex products are sold to less knowledgeable investors, including retail investors.”
“The incentive to increase revenue from product sales by using distribution channels… may not have adequate controls to protect customers’ interests.”
“Pressure to prefer proprietary products to the detriment of customers’ interests.”
“Revenue sharing or other partnering arrangements with third parties.”
“An incentive to favor products with higher commissions because these produce larger payouts. “
“Churning practices, that may be motivated by a desire to move up in the compensation structure and, thereby, receive a higher payout percentage.”
Biased “recommendations as a registered representative approaches the threshold necessary for admission to a firm recognition club (e.g., a President’s Club or similar).”
A temptation “to hire an associated person in spite of a poor regulatory history, if they believe that the individual can boost firm profitability.”
“Incentive for the registered representative to recommend the fund that pays a [higher Gross Dealer Concession] to enhance his compensation.”
“Conflicts, such as their role as a market maker; their trading in a principal capacity; the existence of multiple share classes of a recommended mutual fund; and their receipt of revenue sharing payments.”
“Incentives for hiring personnel to fill a position with a potentially ethically compromised individual in order to meet a hiring target.”
“FINRA remains concerned about the number of firms willing to hire associated persons with problematic disciplinary histories.”
“The increased sale of complex products to retail investors who may struggle to understand the features, risks and conflicts associated with these products.”
“Loosening controls… may exist around a product’s distribution, or incrementally changing existing product features to make the product available to a broader range of investors.”
“Conflicts arise where a manufacturer or its affiliates play multiple roles in determining a product’s economic outcome.”
“An index calculation agent may have discretion in how it calculates the value of an index it uses in a complex product, including, potentially, the authority to change the calculation methodology.”
“The funds for which a firm receives revenue-sharing payments often will be placed on a ‘preferred’ list of funds the firm offers.”
“Proprietary products and revenue sharing arrangements may involve significant financial incentives for firms to favor these products over others.”
“Although registered representatives do not share in the revenue sharing payments directly, they still may favor funds on preferred lists, because of training the issuer provides or because the mechanics of order processing are, in some cases, easier for funds on the preferred list.”
“When ‘the distributor basically acts as a “co-manufacturer’ [it] may have incentives to incorporate features such as high selling concessions or potential higher returns at the cost of a riskier product structure.”
“A clear conflict would exist if a registered representative who is also registered as an investment adviser or advisory representative recommends that a customer purchase a mutual fund that is subject to a front-end sales load and, shortly thereafter, recommends that the customer move those mutual fund shares into an investment advisory account that is subject to an asset-based advisory fee.”
“Key liquidity events [such as when an investor rolls over her pension or 401(k)] may heighten conflicts of interest because of the large sums of money that may be involved. …Firms have a strong incentive to gather assets.”
“[In a ‘net trade’], a market maker, after having received an order to buy a security, purchases the security from another broker-dealer or customer and then sells it to the customer at a different price.”

One person’s conflict-of-interest is another person’s synergy, and at least some of these synergies help make the financial services industry the wonderfully profitable business that it is. The conflicts are fundamental parts of a business model that a fiduciary standard would probably destroy.

Personally, I don’t favor a fiduciary standard for brokerage reps. It’s well intended but, under the timid (or radical, depending on your view) proposal currently on the table, unenforceable. It puts an unfair burden on sales people who are mostly trying to make a living, not practice a profession. Only the self-employed can readily exercise the discretion that fiduciary behavior demands. Buyers simply need to be reminded that when they enter a brokerage, they should beware.

Driven by VA de-risking, managed-vol funds grow

Posted on November 7, 2013 by Kerry Pechter -

There’s nothing volatile about the flow of assets into funds that use managed volatility strategies, according to a report from Strategic Insight. The flow has been strong and steady—largely because of the ongoing flight from risk by issuers of variable annuities.

Assets in funds in this not-very-well-defined category reached $200.1 billion by mid-2013 after rising to $153.9 billion at year-end 2012 from $30.9 billion at year-end 2006, an annualized growth rate of 31%. About 64% of the assets, or $127.9 billion as of mid-year 2013, were in variable annuity separate accounts and the rest in mutual funds.

Mutual funds held just $72.3 billion, or 36% of managed volatility assets, even though MV funds outnumbered variable annuity portfolios by 229 to 180. After the financial crisis and the huge equity price drop, VA issuers realized they had given contract owners too much ability to take risk under the lifetime income guarantee and sought to reduce their exposure.

THey did it by raising fees, limiting the investment options in new contracts, requiring clients who chose a lifetime income guarantee to put some or all of their money in managed volatility portfolios, requiring larger bond allocations, or some combination of those moves. Some companies stopped selling variable annuities entirely because the risks embedded in their existing VA books of business required so much capital.

Strategic Insight recognizes two categories of managed volatility strategies: “tail risk managed” and “low volatility,” with 248 funds ($149.2 billion) and 161 funds ($51.0 billion), respectively. Tail-risk managed funds predominate in VAs—in both assets and number of funds. Low volatility funds are more likely to be mutual funds.

The growth of managed volatility in the retail fund space is also being shaped by the new “alternative” investment styles, along with managers who are new to the retail fund business. The number of managed volatility players has grown to 101 on August 31, 2013 from just 12 in 2006.

The alternatives market includes hedge fund-type strategies that fall within Strategic Insight’s definition of managed volatility. For example, risk parity is a low volatility strategy and many individual portfolios include low volatility management mechanisms.

“The retail fund space has become a fertile market for new concepts and the proliferation of a wide variety of managed volatility designs,” the release said.

Cincinnati voters opt to reform, not replace, an underfunded public pension

Posted on November 7, 2013 by Kerry Pechter -

“Issue 4,” a ballot initiative that would have frozen Cincinnati’s public employees pension plan and offered new employees a 401(k)-style retirement system, was defeated on Tuesday, with 78.4% of about 55,500 voters opposing it. Elsewhere in the U.S., similar initiatives have succeeded.

Cincinnati voters apparently reacted negatively to a part of the proposed initiative that would have required the city on the Ohio River to pay off the pension’s $862 million in promised benefits over just 10 years while phasing in the new defined contribution system.

Supporters of the initiative said that a DC plan would relieve the city and its taxpayers of the burden of large annual required pension contributions. They also argued that the initiative would remove the pension from manipulation by elected officials. They had accused City Council of choosing not to fully fund the program over the last 10 years.

About 3,500 active and 4,500 retired city employees are covered by the municipal pension fund on the ballot. Cincinnati’s policemen and fireman have separate pensions, according to Gary Greenberg, spokesman for Cincinnati for Pension Reform, which collected over 8,000 signatures to put the initiative up for a vote.

Both mayoral candidates and all members of Cincinnati City Council opposed the measure, as did many business and labor groups. Opponents argued that the accelerated, 10-year payoff proposal would have meant higher taxes, cuts in city services or both during that period.

The precise wording of an initiative can have a big effect on behavior in the voting booth, and Issue 4’s advocates had contested the original wording. Earlier this year, they sued over the Hamilton County Board of Elections’ first proposed description of the initiative. The case went to the Ohio Supreme Court and the language was modified, but the final language included a reference to the city’s need to raise taxes or cut services to fulfill the amendment.

Chris Littleton, campaign manager for Cincinnati for Pension Reform, wasn’t sure whether the pension reform committee would try again for a voter-approved charter amendment. “One thing’s for sure, “We have absolutely zero faith that the politicians who put us into this mess will pull us out of it,” he told the Cincinnati Enquirer. “Not fixing it is not an option. What are we going to do, let Cincinnati go bankrupt?”

Ohio Auditor David Yost told reporter Jim Pilcher, “Elections don’t change the math that Cincinnati is facing. The pension crisis in Cincinnati is not going to go away, and it will never be easier to fix than it is right now.” It only gets harder from here, and the numbers only get bigger.”

The board overseeing the city’s retirement system had previously voted to recommend a freeze in cost-of-living adjustments for current and future retirees, a increase in the city’s annual payments into the plan to as much as $45 million, and a $30 million lump-sum contribution from the parking lease fund into the municipal pension fund.

The Issue 4 initiative was similar to other proposals in several other U.S. cities. Pension reform initiatives have been approved in San Jose, Calif., San Diego and Phoenix. Last month, the mayors of five California cities filed to have a pension-reform initiative placed on the statewide ballot there.

MetLife and ING benefit from Romanian pension growth

Posted on November 7, 2013 by Kerry Pechter -

Romania’s compulsory second-pillar (defined contribution) pension funds have surged in size and profitability this year, largely because of an increase in the contribution rate to 4% from 3.5% of gross wages, according to IPE.com.

MetLife and ING both manage collective retirement fund assets in that market, and stand to benefit from the growth. MetLife bought the Romanian insurer Alico from AIG in 2010 and acquired Aviva’s Central and Eastern European business (CEE) in 2012. MetLife now manages about one-sixth of the Eastern European nation’s second-pillar assets.

Dutch insurance giant ING, with the biggest Romanian DC fund by assets and membership, recorded the highest profit so far this year, of RON146.7m (€33.1m). As of the end of June, total profits in the second pillar grew 43% y-o-y to RON440.4m (€99.3m).

Romania’s retirement system has three components or “pillars”: a tax-funded entitlement program, a mandatory employer-based program funded with individual contributions, and a voluntary workplace savings program. (In the U.S., Social Security, employer-sponsored plans and personal savings are sometimes referred to as our pillars.)

The total net asset value of the eight second-pillar funds totaled RON12.8bn (€2.9bn), a y-o-y rise of 45.6% and participation grew to 5.95 million, a 3.2% increase, according to the country’s pension regulator, the Private Pension System Supervisory Commission (CSSPP).

“Out of the RON4bn increase in net assets, 73% represents the contributions directed to the second pillar, and the difference (RON1.05bn) is explained by the investment performance of the funds,” said Catalin Ciocan, executive secretary of the Romanian Private Pension Funds Association.

“The total performance since the system’s inception remains very strong: the funds posted a net annualized average return of 11.7%, meaning a net gain (net assets minus gross contributions) of RON2.28bn since their inception in 2008,” he added.

Current legislation for the second pillar entails yearly increases in the contribution rate. Since 2008, the national DC plan has been mandatory for those up to age 35 but voluntary for those ages 35 to 45. The government has not yet finalized the 2014 budget.

“The most important action to support the continuation of these very good results would be to increase the contribution rate to 4.5%, and we are waiting for official confirmation from the government,” Ciocan said.

The weighted annual average return rose over the year from 6.2% to 10%, according to CSSPP. The gain was helped by heavy investment in state bonds—an average 76% as of the end of September—whose prices rose significantly this year.

In the case of the smaller, third-pillar pension fund system, in operation since 2007, assets grew by 35.2% to RON750.1m and membership by 8% to 305,796 as of end September.

Returns for the balanced funds rose to 9.6% from 5.3%, and those for the higher-risk dynamic funds to 10.5% from 5.3%. The total profits of the 10 funds grew by 7.8% to RON22.4m as of end June.

Vanguard consolidates three managed payout funds into one

Posted on November 7, 2013 by Kerry Pechter -

The same low interest rate environment that has forced annuity issuers to reduce their payout rates has also affected the world of payout mutual funds, as evidenced by Vanguard’s recent decision to consolidate its original three payout mutual funds into one fund that pays out at a target annual rate of just 4% of the account value, down from its previous 5%.

The $804 million Vanguard Managed Payout Distribution Focus Fund and the $110 million Vanguard Managed Payout Growth Focus Fund will merge with the $531 million Vanguard Managed Payout Growth and Distribution Fund to create the $1.45 billion Vanguard Managed Payout Fund. The merger is expected to be complete by January 2014. Investors in the phased-out funds will become investors in the consolidated fund.

The new fund-of-funds will allocate its assets across Vanguard funds that invest in stocks, REITs, bonds, cash, inflation-linked investments, and selected other exposures, such as commodities and market-neutral investments.

“Vanguard research indicates that a 4% payout offers a higher probability of providing a stable income stream that can be sustained over the 20-30 year retirement period of the typical retiree,” the company said in a release. The payouts consist of earnings and, if earnings fall short, they will be topped up with a return of principal. The funds aren’t guaranteed against loss of principal or against the risk that the owner might outlive the payments.

Vanguard originally launched the three funds to offer Vanguard investors a way to supplement their retirement income that was more structured than pure systematic withdrawal but not insurance-based. Each fund featured specific payout and principal objectives. Promoting payout funds makes sense for Vanguard, which has a much bigger stake in mutual funds than in annuities. Although Vanguard distributes white-label annuities that are issued by life insurance partners, it doesn’t own an insurance company. Vanguard competitor Fidelity Investments also offers managed payout funds.

Since the 2008 launch of the first managed payout funds, market conditions have not favored the concept. “The funds have faced challenges in meeting their objectives, given a financial market environment marked by a prolonged period of historically low bond yields,” said the release. “The funds also encountered difficulties gaining investor acceptance and understanding, given that the managed payout concept is relatively new, coupled with the complexity of the funds’ strategies and payout formulas.”

The Bucket

Posted on November 7, 2013 by Kerry Pechter -

What middle-class retirees like/don’t like about Obamacare

The Affordable Care Act’s elimination of pre-existing condition exclusions, provision of free annual Medicare check-ups, and initiatives to cut Medicare costs are the aspects of the new health care law that middle-income U.S. retirees like best, according to a survey by Bankers Life and Casualty Company Center for a Secure Retirement.

Just over half (52%) of retirees surveyed disliked the law’s so-called personal mandate—the requirement that individuals own health insurance or pay a penalty, the survey showed. A nationwide sample of 800 retired Americans ages 55+ with annual household incomes of $25,000 to $75,000 participated in the internet-based survey.
Only about half of middle-income retirees say they understand how the ACA affects them. Women are the least familiar with “Obamacare”. Three times as many women do not feel confident in their understanding of ACA as compared with those who say they understand how the law affects them (56% to 17%, respectively).

Two aspects of the ACA that affect retirees are not well understood by retirees. One in six (18%) retirees doesn’t know that ACA caps health insurance premiums for older people relative to rates for younger people. The same percentage doesn’t know that ACA the “donut hole” in Medicare Part D prescription drug coverage.

Retirees and insurance exchanges

Nearly one-fourth (23%) of middle-income retirees say they retired for personal health or disability reasons, suggesting that they will need the ACA until they reach age 65. Of the 27% of middle-income retirees ages 55 to 64 who don’t receive any type of government insurance coverage, 15% have purchased their own private health insurance policy and 12% don’t currently have health insurance.

A slightly greater total percentage of retirees ages 55 to 65 find themselves as potential beneficiaries of the state health insurance exchanges than the percentage of the working population. More than four in ten (42%) middle-income retirees ages 55 to 65 say they either have or will investigate the cost of health insurance through an exchange.
The research for this report was conducted in September 2013 for the Bankers Life and Casualty Company Center for a Secure Retirement by The Blackstone Group conducted the research for the report for Bankers Life in September 2013. The full report is online at CenterForASecureRetirement.com. All survey participants had heard of the Affordable Care Act (Obamacare) and were not enrolled in Medicaid.

New York Life claims dominance in SPIA and DIA markets

New York Life said in a release this week that it has a 33% share of the U.S. market for fixed immediate annuities and a 44% share of the market deferred income annuities, according to LIMRA.

According to the company, its overall income annuity sales rose 13% in the first half of 2013 over the same period in 2012. This year is the first time that deferred income annuities have their own category in the leading industry rankings.

The release said that, according to LIMRA (the life insurance marketing and research association), there is a “growing interest in this market,” and it estimated that “collectively consumers age 45-59 have almost $10 trillion in financial assets so we anticipate these products will to continue to have remarkable growth.”

RICP designation gains momentum at The American College

With more than 3,000 licensed advisors and insurance agents registered so far, and about 250 graduates, The American College of Financial Services said its program for offering a Retirement Income Certified Professional (RICP) designation is the fastest-growing financial advisor credential program launched in the school’s 87-year history.

“Many consumers don’t have pensions to rely on, and there is deep confusion about the safety of government bonds and how Medicare and Social Security may change in the future,” said Larry Barton, president and CEO of the Bryn Mawr, Pa-based university, in a release.

“The three, intense courses that are delivered strictly online, with detailed case studies and challenges on how to help all clients, from those at-risk for poverty all the way to the ultra affluent, has delivered unlike anything we have seen over nine decades.”

The program addresses such questions as:

What is the best strategy for meeting a client’s income needs in retirement?
What is the safe withdrawal rate from a portfolio?
How should portfolios be managed differently during the course of retirement?
How can clients maximize income in a low-interest-rate environment?
What is the most tax-efficient withdrawal strategy?
How can clients choose the best Social Security claiming strategy?
How do income annuities and employer-sponsored benefits fit into the mix?

The RICP curriculum contains college-level courses on:

Retirement Income Process, Strategies and Solutions
Sources of Retirement Income
Managing the Retirement Income Plan

Head of Vanguard fixed income group to retire

Robert F. Auwaerter, principal and head of the Vanguard Fixed Income Group, today announced his intention to retire after 32 years with the firm, effective in March 2014. He joined Vanguard in 1981 when the company internalized the management of its money market and municipal bond funds, which then had assets of about $1.3 billion.

Today, the Vanguard Fixed Income Group manages nearly $750 billion invested in 70 taxable and tax-exempt bond, taxable and tax-exempt money market, and stable value funds. The Group oversees about $450 billion in actively managed funds and approximately $300 billion in bond index and exchange-traded funds.

Mr. Auwaerter, who plans to step down in March 2014, is responsible for the portfolio management, strategy, credit research, trading, and planning functions for the Fixed Income Group, which comprises 120 investment professionals and support staff.

Gregory Davis, CFA, will assume the position of head of the Vanguard Fixed Income Group. Mr. Davis, 43, currently serves as chief investment officer of the Asia Pacific region and is a director of Vanguard Investments Australia.

Mr. Davis joined Vanguard in November 1999 and, prior to his current position, served as a senior portfolio manager and head of bond indexing in the Vanguard Fixed Income Group. Mr. Davis and his team then managed more than $200 billion in bond index fund portfolios.

Mr. Davis earned a B.S. in insurance from Pennsylvania State University and an M.B.A. in finance from The Wharton School of the University of Pennsylvania.

Mr. Auwaerter began his career in 1978 at Continental Illinois National Bank and Trust Company. He serves on the Fixed Income Forum Advisory Board and the Credit Roundtable Advisory Board. In 2012, the Fixed Income Analysts Society elected Mr. Auwaerter to its Fixed Income Hall of Fame.

Mr. Auwaerter earned a B.S. in finance from The Wharton School of the University of Pennsylvania and an M.B.A. from the Kellogg Graduate School of Management of Northwestern University.

MassMutual to pay record $1.49 billion dividend

MassMutual will pay its largest dividend in 150 years—$1.49 billion—to eligible participating policyowners in 2014, the company announced this week. The payout reflects a dividend interest rateof 7.1% for eligible participating permanent life and annuity blocks of business, up from last year’s rate of 7% even.

The approved estimated payout represents an increase of $101 million – or about 7.3% – from the 2013 estimated payout and reflects updated investment, mortality, morbidity, expense and other experience, the company said in a release.

Strong performance by MassMutual’s asset management subsidiaries—OppenheimerFunds, Babson Capital Management and Baring Asset Management—and its non-participating businesses (retirement services and non-participating product lines) were key contributor to the strong dividend, the release said.

The estimated record payout comes at a time when MassMutual maintains among the highest financial strength ratings² in its industry and is reporting very strong levels of surplus of approximately $12 billion and total adjusted capital over $14 billion; both are key indicators of the company’s overall financial strength. The 2014 payout marks the 16^th consecutive year that MassMutual’s estimated payout exceeds $1 billion, and the company has paid $20 billion in dividends over the past 20 years.

Of the total dividend payout, an estimated $1.47 billion was been approved for eligible participating owners of whole life policies. More than 99% of eligible participating life policies will receive a dividend in 2013 that is the same or higher than they received in 2013. Whole life policyowners can use dividends in cash or use them to pay premiums, purchase paid-up additional insurance coverage, accumulate at interest, or repay policy loans and policy loan interest.

Investors want trustworthy advisers: Jackson National

Jackson National’s inaugural 2013 Jackson Investor Education Survey was released week, revealing the opinions of 500 representative U.S. pre-retirees between ages 45 and 65 about retirement, investing and financial education.

Examples of findings from executive summary include: 2013 Jackson Investor Education Survey Executive Summary.

“Having an advisor whom I trust and who really gets me” was the answer chosen most frequently by men (42%) and women (44%) to the question, “What would make the most positive difference in your current financial outlook?” (Less than half of all respondents were currently working with an advisor.)
“Honesty, financial/investment knowledge and track record” are more important than “ability to communicate” and “responsiveness to needs” in an advisor, men and women agreed.
33% of women and nearly 40% of men said they would benefit from professional financial advice, even though they said they understood the fundamentals of investing.
5% of women and 3% of men classified themselves as “Ostriches,” or those who just bury their heads in the sand and hope for the best.
Less than one percent of both genders classified themselves as “Socializers;” i.e., those who based financial decisions on information from social media outlets.
Financial education was considered a top educational priority by fewer than half of those surveyed.
“Saving enough for retirement” was the top financial concern for 74% of women and almost 76% of men.
14% of men and 13% of women said they don’t have a good understanding of financial/investment products.
11.8% of women respondents and 4.3% of men said they would need intensive education to feel “even remotely confident” making investment decisions.

Jefferson National touts the savings made possible by its Monument Advisor VA

Jefferson National estimates that its flat-fee Monument Advisor variable annuities have reduced insurance fees for Registered Investment Advisors (RIAs), fee-based advisers and their clients by over $60 million since it was launched in 2005.

An exchange from a traditional VA with insurance fees averaging 1.35% per year to Jefferson National’s flat-fee VA of $20 per month can save an average of $2,500 in one year and $144,794 over 20 years, based on tax-deferred compounding.

Unlike most variable annuities sold in recent years, which emphasis their lifetime income benefits, Monument Advisor is sold to advisers who want to take advantage of the ability to invest almost unlimited of after-tax money in an account where the assets grow tax-deferred until withdrawal.

Alternative investments drive hiring by asset managers

Almost half (47%) of asset managers expect to hire dedicated marketing personnel and 41% expect to hire dedicated sales personnel in the next 12 months to support alternative investments, according to new research from Cerulli Associates, the Boston-based global analytics firm.

Firms have hired more dedicated sales professionals than any other alternatives-related position in the past year, Cerulli said in a release. The number of sales personnel dedicated to alternative products increased 54% from 2012 to 2013 among managers that distributed alternatives to both retail and institutional clients.

As alternatives are becoming an increased focus and a larger business line for some firms, Cerulli recommends continued evaluation of support levels to ensure that the appropriate resources are committed to alternative product lines on an ongoing basis.

Quote of the Week

Posted on November 7, 2013 by Kerry Pechter -

A Second Look at the ‘Floor-Leverage Model’

Posted on November 7, 2013 by Kerry Pechter -

A little controversy always helps draw attention to an important topic that might otherwise go unnoticed.

Our cover story from two weeks ago about using a triple-leveraged ETF fund for upside in an otherwise low-risk retirement portfolio strategy (‘The Floor-Leverage Model,” October 22, 2013) elicited a note of admonishment from Laurence B. Siegel, the director of the Research Foundation of the CFA Institute.

The RIJ article reported on a retirement investment strategy that Jason Scott and John Watson of Financial Engines described recently in the Financial Analysts Journal. They recommended investing 85% of savings in safe assets (for stable income) and the rest in one of the off-the-shelf, daily-rebalanced triple-leveraged exchange-traded funds that are currently offered (for upside).

Siegel, the author and co-author of many scholarly articles on retirement income and related financial themes, copied RIJ on an email saying that the strategy wouldn’t work as advertised—or not as many readers were likely to believe it would work. We forwared Siegel’s remarks to Jason Scott. Scott responded that the 3x ETFs that he used have an internal mechanism that might resolve Siegel’s objection.

Here’s Siegel’s original note:

“One problem (among many) with the triple-leveraged strategy is that the 3x leveraged portfolio does not deliver 3x the market return! It’s less, and can be much less, and can even be negative when the market return is positive.

“Take a hypothetical $100 investment in the 3x leveraged exchange-traded fund. Say the market falls 10% on the first day. The portfolio delivers a minus-30% return so you have $70 left. The next day, the market returns to its original level, which means it experiences a positive 11.11% return.

“The 3x portfolio delivers a +33.33% return so the $70 now grows to $93.33, not $100. If the market is this volatile (a standard deviation of 10% per day), the erosion of value takes place at 6.67% every two days until you have essentially no money left, while the market itself is unchanged. In practice, the market’s volatility is a little less than 1% per day, not 10%, so the erosion is slower.

“Note that it’s possible to take advantage of this mathematical property of leveraged ETFs. After the market has fallen 10%, you “top up” by buying $30 more of the 3x leveraged fund. When the market then rises 11.11%, the portfolio grows from $100 to $133.33. You are now beating the market! Your cost basis is $130 but your portfolio value is $133.33, again while the market has gone nowhere. But this takes a lot of trading and a lot of spare cash, and almost nobody does it.”

Here’s Scott’s reply:

“I completely agree that the 3x leverage fund does not deliver 3x the market return. Beyond a single day’s return, 3x the market is not an appropriate benchmark given the fund is short (i.e., has borrowing costs) and is rebalanced daily.

First, borrowing costs are clearly a drag on the leveraged return. Logically, without alpha, a $1 investment can’t generate the returns of a $3 investment. You have to consider the costs associated with borrowing the other $2.

The other factor, beyond borrowing costs, is the daily rebalancing of the 3x fund. Simple compounding dictates that the 3x leveraged fund won’t deliver 3x the market return over longer periods.

A quick example: Suppose the return on the market for one day is R and the next day is S. The cumulative market return is (1+R)*(1+S) – 1, or R + S + 2*R*S. The cumulative return on the 3x fund rebalanced daily is (ignoring borrowing costs) (1+3R)*(1+3S) – 1, or 3R + 3S + 9*R*S

Note that the 3x leveraged fund’s two-day return isn’t three times as large as the market’s two-day return. The cross-term from compounding (R*S) is different. This becomes a bigger and bigger factor as the time horizon expands.

Given the difference in returns, which investment is better? Neither is better per se, but if you want to implement a CPPI strategy, the daily-rebalanced fund is the appropriate choice.

A CPPI strategy is conservative when you are near the floor and aggressive when you are better able to absorb losses. For instance, if you have 1% of wealth above the floor, a CPPI-3 strategy would hold a 3% equity position. Similarly, if you have 15% of wealth in excess of the floor, a CPPI-3 strategy would hold a 45% equity position. The daily-rebalanced 3x fund provides this consistent triple exposure. A 3x-the-market strategy doesn’t.

Another illustration of this point: Suppose you take $1, borrow $2 and invest the entire $3 in the market with a buy and hold strategy. Without borrowing costs, your returns will be 3x the market. If the market drops by 20%, your $3 investment in the market drops to $2.40. Because you are using a buy and hold strategy, you don’t change a thing. The result is that you have $0.40 in value controlling a $2.40 portfolio.

In other words, your leverage ratio after a 20% market drop has ballooned to 6! This is much riskier than the CPPI target surplus leverage of 3. You risk losing the remaining $0.40 of surplus (and perhaps erode the floor as well).

The daily-rebalanced leverage fund starts off the same way. You have $2 in borrowed money and $3 invested in the market. A 20% market drop results in a $2.40 market exposure. Because of the rebalancing, however, the daily 3x fund uses $1.20 to retire debt. After this rebalance, the positions look just like they would have had the initial investment been $0.40—$0.40 invested, $0.80 borrowed and $1.20 market exposure. The target 3x exposure is retained.

The Floor-Leverage Rule approach does not suggest investing in the 3x leverage fund because it somehow will deliver long-term performance equal to 3x the market (it obviously does not and cannot). Rather, the purpose of the 3x leverage fund is to combine with the risk-free investment to deliver buy-and-hold CPPI returns. (Author’s emphasis.) In that regard, the 3x fund delivers the expected performance.

Let me put it a different way. Suppose you take a CPPI-3 strategy and decompose it into a risk-free portfolio that guarantees the CPPI floor and a residual portfolio. The returns from the residual portfolio will be the same as the returns generated by a daily-rebalanced 3x leverage fund. The residual portfolio will not generate three times the market return over any time horizon.

The historical performance section of the paper and the CPPI discussion cover this in detail. I should underscore again that this research reflects my views and those of my co-author, and may or may not reflect the views of Financial Engines.

“A very high level summary of the paper is:

A theoretical model suggests that an annually-reviewed CPPI strategy should appeal to an average-risk retiree with a preference for sustainable spending.
The desired CPPI strategy can be implemented with minimal transactions (annual) and a guaranteed floor if a 3x leverage fund is available for investment.
Such an investment has been recently introduced.
One possible outcome: the Floor-Leverage Rule for Retirement.

In a follow-up email, Scott responded to a question from RIJ about the timing of transfers of profits from the 3x leveraged ETF to the flooring account. His reply:

“Harvesting should occur only if the leveraged account exceeds 15% of the total portfolio value. As such, harvesting should never exhaust the leverage account. Poor markets could result in the leverage account failing to provide any income increases. In principle, the value of the leverage account shouldn’t go to zero unless the share price of the leverage ETF goes to zero.

“I haven’t investigated whether harvesting more often than annually would improve efficiency. I would guess the impact is marginal. More frequent harvesting might be warranted in a large market run-up. Taking money off the table immediately seems like a better strategy than being potentially over-exposed to the market.”

In Finland: Saunas are Hot, Retirement is Cool

Posted on November 7, 2013 by David Lindorff -

Helsinki—Mikko Kautto, impeccable in a blue suit and open-collared shirt, was sitting at a table in the cafeteria of the modern Centre for Pensions building on the outskirts of Finland’s capital city, answering questions about the operation of his Nordic country’s retirement system.

How, he was asked, does Finland—with its own graying bulge of Baby Boomers, low immigration rate and low birth rate—plan to deal with its version of the impending global retirement crisis?

Kautto (below, right), the director of research at the Centre for Pensions, looked surprised and a bit bemused. “We don’t see it as a crisis,” he said. “We see it as having a lot of older citizens that we need to make sure have a comfortable retirement, and we have been planning for that for years. It’s certainly a challenge, but it’s not a crisis.”

If Finland finds itself more confident than the U.S. in the face of the Boomer retirement wave, it’s not because their demographics are more favorable. More than a quarter of the country’s 5.4 million people are already over age 60 and almost five percent are over age 80, compared to 19.1% over age 60 and 3.8% over age 80 in the U.S. Life expectancy at birth in Finland is about 80 years. In the U.S., it’s about 79 years.

The difference may simply involve better planning and less-politicized public discourse. The U.S. has historically dealt with its Social Security system on a crisis-by-crisis basis. The crisis du jour stems from the projected exhaustion of the system’s so-called Trust Fund. If that fund—which contains special-purpose Treasuries purchased with surplus FICA taxes—zeros out in the mid-2030s (and nothing changes U.S. demographics, such as an influx of hard-working young immigrants), the pay-as-you-go system’s ongoing tax revenues are expected to cover only about 75% of future retirees’ promised benefits.

In contrast, Finland’s government and its rival political parties, together with workers, employers and retirees, have long collaborated to create a sustainably solvent public retirement system whose payments are intended to replace close to 60% of pre-retirement income (higher for those who are poor or were unemployed for long periods).

“In the early 1990s, Finland began preparing in earnest for the large aging population we saw coming,” Kautto told RIJ. National studies showed that most retirees would need about 60% of their final pre-retirement income to maintain their standard of living in retirement, he explained. “Consumption smoothing” became the goal of the program. (Sixty percent replacement is ample in Finland because certain costs are low. Health care, including long-term care, is essentially free, and children who go to college pay no tuition and in fact receive a €450 ($600) monthly stipend for living costs.)

Compulsory defined contribution

Finland has a two-tier publicly-sponsored retirement system. The first tier, known as the National Pension, is designed for non-workers and the working poor and provides a basic means-tested pension, supplemented by a housing allowance. Finland’s parliament, or Eduskunta, sets the benefit level. The benefit is paid to those whose pre-retirement earnings were below €1300 ($1800) per month, beginning at age 65. (It also is paid to the disabled.)

The average National Pension recipient gets about €1800 ($2450) a month, plus the household allowance. A couple would get double that amount. Most workers, however, have incomes that exceed the cutoff for the National Pension. They participate in the second tier pension—a employment-based program in which participation is mandatory.

This second tier pension is funded by compulsory contributions from both workers and employers in the private sector. Instead of contributing to Social Security through a payroll tax (6.2% of pay, or half of the payroll tax) and to individual accounts (via an optional matching contribution), as U.S. employers do, Finnish employers must contribute 17% of payroll to a professionally-managed group insurance contract. Workers contribute an additional 5% to 6% of their pay, for a total of up to 23%. Benefits are based on years worked and worker’s required contributions, not on the performance of the fund.

Despite the cap on deferral percentages, there’s no limit on the amount of income to which those percentages are applied, so high-earning workers can build up proportionately high benefits. “About a quarter of the revenues paid into the [employment-based] system come from the wealthy,” Kautto said, “and about a quarter of the payments go to the wealthy.”

The percentage of wage or salary paid by employers and by employees is periodically adjusted by negotiations between the country’s unions and a group that represents employers. The adjustment is then ratified by parliament and applied to all workplaces and all employees. Finnish pension benefits are adjusted according to where one lives, Kautto noted, with urban dwellers, whose cost-of-living tends to be higher, receiving bigger checks than those living in small towns or the countryside.

The contributions to the employment-based pension system by workers and employers are invested and managed collectively. The Centre for Pensions manages a fund for public employees. A handful of large private insurance companies contract to manage the private workers’ funds and guarantee the future lifetime payout. These insurers are barred from offering other insurance or engaging in speculative ventures, and are overseen by a board that by law includes 50% beneficiary representation.

Both the publicly and privately managed funds buy international stocks bonds and other securities as well as Finnish government and corporate bonds. Only about 20% of the equity investment assets are in domestic equities. Between 2004 and 2013, the total amount invested internationally—primarily in Europe—rose to €105 billion from €50 billion, with about half of that in bonds, a third in equities and the rest in money market funds, real estate, hedge funds and private equity investments..

Envious of Finland

Last year the Centre for Pensions hired Nicholas Barr, a professor of public economics at the London School of Economics, to study of the system’s adequacy, sustainability and system design. While giving it high marks, Barr also recommended that the current average retirement age of 61 was too low, given Finns’ rising life expectancies.

Barr suggested offering older workers incentives to work longer, to prevent any future pressure to reduce benefits or raise worker and employer payments into the system. (There’s already a 4.5% boost in annual benefits for each year offered to workers who delay benefits after 65 until age 68, but he says this should be increased.) Barr also suggested allowing people to draw partial pensions while they continue to work, and then increasing their later pension benefit.

“In a way, I’m very envious of Finland,” Barr told RIJ. “We in the UK and in the U.S. come from very adversarial political systems. Finland is a more consensual political culture.” Finland has been working for decades to ensure the ability of its system to pay for a wave of elderly retirees, while the US has “created a Social Security crisis for political reasons,” he said.

Peter Diamond, an emeritus professor of economics at MIT, who has studied the US Social Security system, agrees. “When Social Security was created, Republicans were heavily opposed,” he told RIJ. “When President Clinton [in 1999] proposed putting some Trust Fund monies into an index fund, [Federal Reserve chairman] Alan Greenspan said it ‘threatened our freedom.’ So whatever we do with Social Security will be the usual compromise between what people want as beneficiaries, and those who are ideologically opposed to the program.”

In 1977, Social Security faced a more imminent crisis than the one we face today. “The Trust Fund was five years away from being depleted,” Diamond said. A few years later, President Reagan signed a bill that significantly raised the FICA tax in steps. Diamond predicts that the current “crisis” will be solved too, “again probably at the last minute.”

In contrast to Finland’s retirement goal of “consumption smoothing” in the transition from work to retirement, America’s Social Security program was never designed to pay for a large portion of Americans’ retirement costs, Stephen C. Goss, chief actuary of the Social Security Administration told RIJ. “In the U.S., we’ve always said that Social Security is meant to provide a floor of protection. The usual adage is that it should be only one leg of a three-legged stool, along with company plans and private savings,” he told RIJ.

The typical Social Security benefit, Goss said, replaces only about 30% of pre-retirement income—which doesn’t come close to matching the 80% of more of pre-retirement income that many advisers recommend. For higher-income Americans, the low FICA-limit and the mild progressivity of the benefit calculation tend to hold down replacement rates. For lower-wage workers, their tendency—often due to ill health—to claim at age 62, when annual benefits are lowest, works to minimize their replacement rates.

Much as they relish their steaming saunas (especially when interspersed with a cold shower or, ideally, a bare-skinned leap into an icy lake or snowdrift) Finns seem to like their retirement system. “If you work 35-40 years you can expect to end up with a fairly comfortable retirement,” said Kautto. “We tend to debate reforms of the existing system here, like maybe capping the pensions for the wealthy, which is very controversial. But there’s no talk here of moving to a defined contribution approach.”

Send MetLife’s ‘regards to Broadway, remember it to Herald Square’

Posted on November 1, 2013 by Kerry Pechter -

MetLife, Inc. announced that it is breaking ground in North Carolina’s Research Triangle area for a new global technology hub.

The giant insurer’s entry into Cary, N.C., coupled with its new U.S. retail headquarters in Charlotte, represents a $125.5 million investment in North Carolina. MetLife has already invested $1.2 billion in insurance funds in North Carolina housing, agriculture, commercial real estate, health care and utilities.

As announced last March, MetLife intends to create 2,600 jobs in North Carolina by the end of 2015, the largest employment initiative in recent state history. Over the next 18 months more than 1,000 engineering, development, app maintenance, IT risk & security and tech support positions will open, according to a release.

Construction on MetLife’s new technology hub is slated for completion in 2015. MetLife is targeting LEED (Leadership in Energy & Environmental Design) Gold certification or higher for the state-of-the-art workplace, which will feature an environment designed to facilitate collaboration and innovation. The campus will consist of 427,000 square feet in two 213,500 square foot office buildings with structured parking.

The buildings will be situated on 26.5 acres fronting the 520-acre Lake Crabtree, which is adjacent to I-40 and the nearby Raleigh-Durham International Airport. In addition, the campus will feature sprawling outside space including a great lawn, amphitheater, patio and places to engage in activities such as basketball and volleyball.

American General launches ‘Power Index Plus’ FIA

Posted on November 1, 2013 by Kerry Pechter -

American General Life Insurance Company has issued a new fixed index annuity, Power Index Plus, that offers a guaranteed lifetime income rider with a 10-year, double-your-benefit-base roll-up, if no withdrawals are taken.

The product is designed for distribution by financial institutions and independent broker-dealers, but it will also be available to brokerage general agencies (BGAs).

The new FIA offers three interest-crediting strategies:

A one-year fixed interest account.
An annual point-to-point index interest account.
A monthly point-to-point additive index interest account.

The second two are pegged to the S&P 500, excluding dividend yield.

With the product’s Lifetime Income Plus rider, the benefit base is raised to double the amount of premiums paid in the first 30 days of the contract, as long as no withdrawals are taken before the 10th contract anniversary. The benefit base will increase by 7% each year that withdrawals are not taken in the first 10 contract years. The maximum withdrawal rate is 6%, starting at age 75.

Power Index Plus will be issued by American General Life Insurance Company (AGL) in 49 states.

Low COLA: The pause that doesn’t refresh

Posted on November 1, 2013 by Kerry Pechter -

With the 2014 cost-of-living adjustment (COLA) for Social Security payments set at just 1.5%, the annual boost has fallen to about half the rate that it averaged for the period from 1980 to 2010, according to an analysis by The Senior Citizens League (TSCL).

The record low COLAs are reducing the Social Security income of future as well as current beneficiaries, according to the TSCL. “Retirees have lost almost a third of the buying power of their benefits, and low COLAs will also result in lower initial retirement benefits even if seniors haven’t filed claims yet,” says TSCL Chairman, Ed Cates.

Since 2000, Social Security benefits have lost 31% of their buying power, according to TSCL’s 2013 Survey of Senior Costs. During that period, benefits rose 38% but typical expenses for the elderly rose an estimated 81%.

Seniors who haven’t claimed benefits yet are also affected Because COLAs are used in the benefit formula to determine the initial benefit amount, future Social Security beneficiaries will also be affected, the group said in a release. Because COLAs compound over time, the impact of low COLAs today reduce total lifetime benefits geometrically.

TSCL calculates that seniors with an average monthly benefit of $1,200 would lose about $2,667 over the first ten years, and the benefit after 10 years would be $1,439 instead of $1,482. In 20 years, the cumulative benefit loss would reach $11,981, and the monthly payment would be $1,833 instead of $1,943. By the end of 30 years the aggregate loss in benefits would be $31,747 and the monthly payment would be $2,346 instead of $2,561.

Social Security has already begun paying out more than it receives in payroll taxes, and relies on interest earned on the Trust Fund’s $2.7 trillion in U.S. Treasuries to cover the shortfall. But with the overall federal budget is in deficit, the government must borrow in order to pay that interest.

Enter the debt ceiling. “That borrowing is subject to the debt limit,” Cates said in the release. “The government will again hit the debt limit by February 7^thand seniors should be concerned.”

TSCL opposes cutting the COLA or basing COLAs on a less generous “chained CPI.” According to a TSCL survey, over 78% of seniors “favor, or somewhat favor” a requirement that the Social Security taxes should be levied on all wages, not just wages $113,700 or less. Such a change could reduce Social Security’s financing debt by up to 90%, according to Social Security’s Office of the Actuary.

Under current law, workers pay Social Security taxes of 6.2% on 100% of income (and employers match that amount) up to $113,700 per year. Those earning $320,000, for instance, will pay Social Security taxes on just $113,700, or only 36% of earnings.

“Congress should not ask seniors to take deep cuts while continuing to hand out a huge Social Security tax break to high income earners,” Cates says.

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Head of Vanguard fixed income group to retire

MassMutual to pay record $1.49 billion dividend

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Alternative investments drive hiring by asset managers

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