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Sizing Up the DIA’s Sales Potential

Posted on September 12, 2013 by Editor Test -

Does the deferred income annuity, or DIA, have strong enough legs to carry the big life insurance companies to their rightful domination of the retirement income market?

To me, the idea of buying a personal pension in advance of retirement makes sense. It involves planning ahead, which is what grown-ups are supposed to do (and what children don’t). But the devil’s-advocate question still needs to be asked. And people in upper-floor rooms with walnut-paneled walls and wool-carpeted floors are probably asking it.

“Yes” might seem like the obvious answer. Eight or nine major annuity issuers have introduced DIAs in the past two years. Six more are planning to offer them in the near future, according to Donnie Ethier of Cerulli Associates. (One recent entrant is Americo Financial Life and Annuity, which has taken an existing DIA, brushed it off, and reintroduced it as Platinum Provider.)

And for good reason. Sales growth has been spectacular, at least in percentage terms. According to LIMRA, sales of DIAs in the first half of 2013 were 150% higher than in the first half of 2012. DIAs were a $50 million-a-year business before mid-2011, when New York Life announced its Guaranteed Future Income DIA. In 2013, first half sales were almost $1 billion.

On the other hand, what appears to be mass migration might just represent a lot of fast-follower and me-too activity rather than a real sea-change. Sometimes you’ve got to offer a product just to avoid giving customers a reason to go somewhere else. From what I hear, the DIA is simple enough, cheap enough and safe enough for almost anybody to bring to market pretty quickly.

In absolute terms, sales are still modest. DIA sales would have to keep doubling for several years in a row before volume approached the sales of fixed indexed annuities ($36 billion a year), let alone sales of variable annuities ($150 billion a year, about half of which is exchanges and about 10% of which represents net growth, according to Cerulli).

Here’s the rub. Sales of DIAs are, at least so far, concentrated in one type of issuer (mutually-owned) and in one distribution channel (captive/career). According to Beacon Research, 67.1% of DIAs have been sold by captive agents. Another 25.1% by brokers in large/regional broker-dealers, whom the mutuals can rely on not to compete with the captives, Beacon CEO Jeremy Alexander told RIJ.

Just two companies currently account for more than half of DIA sales. New York Life, the largest mutual in the U.S., claims to have 44% of the DIA market in the first half of 2013. Northwestern Mutual Life, which this year introduced a DIA that accrues annual dividends, claims to have another 25%. MetLife and Lincoln Financial, two public companies, are also marketing DIAs, but it remains to be seen how passionate they will be about it.

Mutual companies vs. public companies

In short, the DIA looks like a sure winner for the mutual insurers and the career/captive agent distribution channel. But does a spread product like the DIA offer a big enough profit margin to arouse the publicly held life insurers, who face insatiable demands for higher earnings?

And does it offer enough compensation to beguile the agents and reps in the IMO/independent agent channel or independent broker-dealer channels, who for years have been spoiled by the high commissions of fixed index annuities and variable annuities?

I consulted a couple of smart industry watchers about this. Jeremy Alexander, for one, thinks that DIAs have a big future. He said the trend started in the captive channel mainly because the agents are a captive audience; mutual insurers can teach them the DIA story quickly. “I do think the other carriers will get traction – it just may take some time. Remember captive producers are a lot more “trainable” then other producers,” he wrote in an email.

Jay Robinson of Financial Independence Group (FIG), an insurance marketing organization, also believes DIAs have cross-over potential. “That’s going to be a huge market, not just among the captives. MetLife has entered that space. You’ll see the direction of the industry go away from variable annuity to the FIA with a GLWB and DIA,” he said. FIG is promoting the defined income annuity and the Thrive Income method of using it in retirement planning to its agents.

As for profitability, Robinson thinks the deferral period of the DIA gives carriers plenty of opportunity to put the money to work, and he believes that compensation for DIAs will be “comparable with SPIAs, at about 3% or 4%.” It could be even higher for long-deferred contracts, he said. Americo’s single-premium deferred income annuity, Platinum Provider, which offers single or joint life payouts with an optional death benefit and a 2%-5% annual inflation adjustment, pays a very competitive commission, he told RIJ.

On the other hand, DIAs arguably only make sense in the context of a careful, long-range retirement planning framework. So it remains to be seen whether they will catch the imagination of fast-paced intermediaries who want to quickly “drop a ticket,” who are commission-driven or AUM-driven and who are strangers to the insurance culture. DIAs are susceptible to the same “annuicide” objection—the loss of fee-generating AUM following an annuity sale—that compels reps to reject immediate annuities.

Perhaps a deferred variable income annuity with an income floor—a DIVA—would be more appealing to publicly owned insurers and independent distributors than a fixed DIA. Sun Life recently introduced such a product in Canada. (See today’s story on “Nominees.”) Lincoln Financial’s i4Life product has DIVA-like characteristics. According to Moshe Milevsky of York University, there’s no reason why a DIVA couldn’t work, from a manufacturer’s point of view.

The frustrating truth, however, is that different types of manufacturers and different types of distributors have tended to align themselves with different products and different compensation regimes. Because of that, the DIA’s ability to make the leap beyond its current sweet spot is still open to question.

The Elephant in the Room

Posted on September 12, 2013 by Kerry Pechter -

The annuity story should be a simple one. In fact, everyone in the business knows one version of it by heart. There will be waves upon waves of Baby Boomers. They crave guaranteed lifetime income. Only life insurers can scratch that itch. Yadda yadda yadda.

If only it were that simple. Different insurers emphasize different products, with differing costs, risks, and profit margins, through different distribution channels to different consumers, depending not least on whether the insurers are owned by public, mutual, or private equity companies.

Such differences, along with the essential unpredictability of the economic and regulatory weather, make it difficult if not impossible for anyone to describe the entire the entire annuity-slash-retirement income business with any authority, let alone its future course.

But certain people are tasked with trying to make sense of it all, and who make an effort to illuminate the path ahead. Among the current annuity market analysts are Donnie Ethier of Boston-based Cerulli Associates and Scott Hawkins of Conning Inc., which is based in Hartford, Conn. Cerulli has just published Ethier’s latest report, called “Annuities and Insurance 2013: Balancing Shrinking Supply and Increasing Demand for Guarantees.”

The view from Cerulli

Looking at the variable annuity business, Ethier sees a bunch of s-curves and switchbacks in the road ahead. The problem won’t be shortages in supply, he said. According to Cerulli’s data, life insurers have the capacity to sustain about $142 billion a year in sales of variable annuities with living benefits, with an optimistic range of $153 billion and a conservative estimate of $132 billion. Any consumer who wants to buy a variable annuity with a GLWB will be able to find one, Ethier told RIJ.

But there’s not much room for growth, he added. Life insurers will have to look for other sources of new business, such as selling contingent deferred annuities (CDAs) and VAs without living benefits to the $2.8 trillion managed account market, or picking up defined benefit pension assets as Prudential did with General Motors, or hopping on the deferred income annuity (DIA) bandwagon currently led by New York Life. Six more of the major annuity sellers intend to roll out DIAs, he said, in addition to the eight or nine life insurers that already have.

One potential threat to the industry is the possibility of a reverse arm’s race, he said. As major annuity sellers discourage new sales of VAs with GLWBs by shrinking their value proposition, sales could spill over onto smaller issuers, who might react by shrinking their value proposition, thus sparking a downward spiral that further degrades the reputation of the whole industry.

“Protective Life is a great example. As their products became more relatively more attractive, sales went up. But at the end of last year, they said they wouldn’t accept any more [1035] exchanges, just new money,” Ethier said. He sees little potential for a new arm’s race, even if the economy, the equity markets and interests rates reach a more benign new normal—unless it’s driven by competition from aggressive new private equity players.

“As the economy and markets stabilize, you have to wonder if the major VA issuers will feel pressured to get back into this space. Being able to say ‘we’re number one’ isn’t as important to them as it used to be. But we know that there’s private money circling the industry. If they believe they can manage these books of annuity business better, will they enter the market? I don’t think that trend [of private equity companies buying life insurers or blocks of annuity business] is over,” he said.

A bigger threat, which annuity issuers have tried but not succeeded in defusing, is the ongoing shift of advisors in the independent broker-dealer channel from commission-based to fee-based compensation. Since most variable annuities are sold by commission through that channel, this represents a direct challenge to VA sales.

Insurers should not take solace in the fact that there are still lots of reps at independent broker-dealers who can sell VAs, Ethier said. Many of them are now dually-registered (as both reps and RIAs). In fact, the dually-registered channel is the fastest growing channel, with a 22% increase in assets from 2011 to 2012, or twice the average channel growth rate, according to his data. While many remain with broker-dealers and can still take commissions, they are leaning toward the RIA side. According to Cerulli, dually-licensed advisors expect 62% of their revenue to come from fees by 2015, up from 51% today.

By the same token, annuity issuers have had little success cracking the $2.8 trillion managed account market. The I-share variable annuity, which has the compensation element stripped out of the mortality and expense risk fee, was designed to appeal to advisors in this space. But the I-share represented only 4.2% of total VA sales in the second quarter of 2013 and the biggest seller by far was Fidelity ($607.5 million), a direct marketer.

Contingent deferred annuities were once believed to be life insurers’ ticket into the managed account market, but CDAs aren’t really out of the starting gate yet. “Some of the insurers say there’s no way they’ll get into the CDA space until their regulatory status [as securities and/or life insurance products] are determined. Others say they are comfortable with the product but they won’t dedicate resources to it until other companies prove that there’s a demand for it. But the CDA has a higher probability of succeeding in the RIA channel than an I-share variable annuity does.,” Ethier said.

The view from Conning

Scott Hawkins has been tracking annuities and the life insurance industry for years. Conning has just released his report, “Individual Life and Annuity Distribution and Marketing Annual: Analysis and Developments 2013.”

Like most financial products, annuities are related to life-cycle events, Hawkins said. “We see the industry as having two bites at the apple. By that we mean two points in time where Baby Boomers will be primed to listen to a discussion about retirement income. The first bite will be at the day they retire. The second bite will be when they reach age 70½ and have to think about taking required distributions from retirement accounts,” he told RIJ.

In terms of product-related prognostications, Hawkins holds views that many readers will find familiar. “We think SPIAs will hold some appeal for a certain type of consumer,” he said. “We think variable annuities will thrive to the extent that insurers will want to write them. We think that there might be a cross-over of insurers wanting to partner with 401(k) plan providers, offering a GLWB or a CDA or a SPIA or whatever the choice of in-plan solution might be.”

For clues about the future of annuity distribution in the U.S., Hawkins has been watching the drama over Retail Distribution Review unfold in the United Kingdom. Beginning last January 1, advisors in the U.K. had to begin conforming to more consumer-centric level of conduct. Advisors now have to reveal all fees prior to offering advice and meet higher professional standards. The change has all but broken the commission-based business, because product providers are no longer allowed to influence what an advisor charges a client.

“In the United Kingdom and the European Community, you can already see how the shift away from commission-based sales is affecting sales of retirement income products. Commission-based distributors went to a fee-based planning model, which has limited them to clients who can pay the fees. That will drive distributors toward the ultra-high net worth customers and away from the mass consumer. You can expect similar effects here.

“The independent broker-dealers will need to replace their variable annuity revenue stream. They will have to ask themselves, Do we go only to the high net worth customer? As for the insurers, will that encourage insurers them to go direct to the public, and will the variable annuity need to get simpler?”

Like Ethier, Hawkins believes that life insurers will need to look for growth someplace other than variable annuities. “I’m not seeing any return to a strong appetite for VA business among manufacturers. There’s not going to be a new arm’s race, unless it’s on the fixed indexed annuity (FIA) side,” he said.

“Our three-year forecast through 2015 is that VA sales will drift down because of lack of appetite to write new business, less rich guarantees and less incentive for rollovers to new contracts. The manufacturers have also antagonized some of the distributors. We think sales of fixed annuities will drift down unless interest rates recover strongly. We predict that current conditions will continue. FIAs will still have appeal. SPIAs will grow, driven by Boomer retirees.”

The good news for life insurers is that the trend is their friend. Though buffeted by headwinds and headaches, a lot of that resistance is neutralized by the tailwind of the Boomer retirement wave. A healthy level of demand is almost inevitable. “Annuities” are currently tied with Roth IRAs as the “most unsolicited product requests made by investors to their financial advisors,” according to Cerulli’s report. Hawkins told RIJ, “We think the retirement market is just beginning.” Life insurers may or may not make as big a killing from the Boomer wave as they originally hoped, but they should at least be able to make a living.

The nexus of marriage, child-rearing styles, and wealth

Posted on September 9, 2013 by Editor Test -

As cohabitation became more acceptable over the past 60 years and as women have become more financially independent, the “importance of investment in children” has emerged as the most important motive for marriage in the U.S., according to a new paper from the National Bureau of Economic Research.

The paper, entitled “Cohabitation and the Unequal Retreat from Marriage in the U.S., 1950-2010,” identifies linkages between college education, marriage, and the “concerted cultivation” of children, primarily among more advantaged couples, and a link between less education, cohabitation and “natural growth” child-rearing among poor or working-class couples.

These patterns, coupled with higher spending on the enrichment of children by the wealthier, better educated and more stable couples, reinforce and are reinforced by the larger trend toward greater income inequality in the U.S., the authors believe.

“The growing divergence in marriage, cohabitation, and fertility behavior across educational groups has potentially important implications for inequality and the intergenerational transmission of economic disadvantage,” wrote Shelly Lundberg of the University of California at Santa Barbara and Robert A. Pollak of Washington University in St. Louis.

“Cohabitation became an acceptable living arrangement for all groups, but cohabitation serves different functions among different groups. The poor and less educated are much more likely to rear children in cohabitating relationships. The college-educated typically cohabit before marriage, but they marry before conceiving children and their marriages are relatively stable.

“We argue that different patterns of child-rearing are the key to understanding class differences in marriage and parenthood, not an unintended by-product of it. Marriage is the commitment mechanism that supports high levels of investment in children and is hence more valuable for parents adopting a high-investment strategy for their children,” the paper said.

Among the paper’s more startling revelations was the correlation between a mother’s education and her likelihood of having a baby outside of marriage. Among white, Hispanic and black female college-graduates, respectively, 5.9%, 17.4% and 32% of all births were “non-marital.”

For mothers with some college, the non-marital percentages increased to 31%, 45.3% and 68.7%. For mothers with high school educations or less, the percentages were 53.6%, 59.6%, and 83.5%.

MoneyGuidePro’s newest feature encourages client action

Posted on September 9, 2013 by Editor Test -

MoneyGuidePro, the web-based financial planning software, has been enhanced by the addition of Executive Summary, an interactive tool that allows advisors to automate the review of ongoing actions related to a financial plan.

The new tool is designed to help advisors in “more deeply engaging their clients around plan actions. Investors will benefit from a consolidated view of their specific next steps in the financial planning process,” the Powhatan, Va.-based firm said in a release.

Clients can select action items from a list of pre-determined tasks, such as:

Decreasing cash exposure
Increasing 401(k) contribution
Purchasing additional insurance
Refinancing a mortgage
Updating an estate plan

Action items can have a status and completion date based on a household view of the plan. Investors can access Executive Summary in a view-only format via their MoneyGuidePro Snapshot, allowing them to see what items they must complete as well as their status. Executive Summary can be accessed through any device with a browser.

MoneyGuidePro is the flagship product of PIEtech, Inc.

The Bucket

Posted on September 9, 2013 by Editorial Staff -

Cetera acquires two MetLife broker-dealers

Cetera Financial Group has completed its acquisition of MetLife’s two independent broker dealer firms, Tower Square Securities and Walnut Street Securities.

According to a release from Cetera, the firm now serves approximately 7,400 advisors with more than $141 billion in total client assets, including more than $33 billion in fee-based advisory assets.

Tower Square and Walnut Street will join one of Cetera’s four firms, Cetera Advisor Networks. Its team-based, regional structure offers a strong cultural fit to advisors from Tower Square and Walnut Street who operate within a similar regional structure. Their advisors are located throughout the country, and will expand Cetera’s footprint in the Midwest and Northeast.

The new advisors will use Cetera’s broker-dealer and RIA (registered investment adviser) resources, which include a wealth management and technology platform, a fee-based financial consulting programs, and the Connect2Clients and C2CSocial marketing platforms.

Cetera Financial Group, based in El Segundo, California, encompasses about 7,400 independent financial professionals and nearly 600 financial institutions nationwide. Cetera Financial Group consists of Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, and Cetera Investment Services LLC (Cetera Financial Institutions).

Cetera CEO Valerie Brown had previously been president, then CEO of ING Advisors Network, overseeing four broker-dealers. She also served as president of ING U.S. Retail Annuities and was chief of staff for ING Group’s Executive Committees, Americas and Asia/Pacific.

Nationwide Financial introduces simplified small plan 401(k)

Nationwide Financial has introduced Nationwide Retirement Innovator Advantage, a small plan 401(k) product that offers a streamlined investment menu and a built-in 3(21) fiduciary service from Morningstar Associates at no additional cost to the plan sponsor.

Features of the plan, besides the Morningstar fiduciary service, include:

More than 400 investment options, including target-date funds, lifestyle funds and a variety of fixed investment choices, including the Nationwide Bank FDIC Insured Deposit Account and the Nationwide Fixed Select Contract.
A self-directed brokerage account, fund window and managed accounts from multiple providers.
End-to-end sales support, plan reporting, participant education and an ERISA/regulatory online resource for advisors.

Nationwide’s other simplified retirement plan product, Flexible Advantage, emphasizes flexibility and control for plan advisors. It has attracted $3 billion in sales since its launch in 2011. Innovator Advantage is designed for ease and simplicity.

Nationwide Financial Fiduciary Series, Fiduciary Warranty and a 3(38) Investment Fiduciary service from IRON Financial provide additional fiduciary support for Flexible Advantage and Innovator Advantage.

New York Life’s stable value fund passes $2 billion milestone

New York Life Retirement Plan Services’ Guaranteed Interest Account, a pooled stable value option for defined contribution plans, has surpassed $2 billion in assets, the mutual insurer said in a release.

The GIA was introduced on the company’s bundled recordkeeping platform in July 2009, and as an investment on third-party recordkeeping platforms in July 2011. GIA is available on 13 defined contribution retirement platforms and is available for 401(k), 403(b), 401(a) and 457 retirement plans.

More than one of every 10 dollars on New York Life’s recordkeeping platform is allocated to a stable value option, the company said. Stable value allocations increase as participants age, with baby boomers allocating nearly 20% of new contributions to stable value.

New York Life Retirement Plan Services recently expanded its stable value sales team, adding Kevin Mansfield as director of stable value distribution. He joined New York Life on July 15 and reports to Patrick Murphy. Previously, he served as managing sales director for stable value and DCIO markets at Metlife.

Reporting to Mansfield will be Debbie Vince, stable value sales director for the western region, Glenn Macdonald, stable value sales director for the eastern region, and Joe Simmons, stable value sales director for the mid-west region.

“Twenty to One”

Posted on September 9, 2013 by Editor Test -

Advisors and individual investors often say they won’t recommend or buy income annuities today because interest rates and payout rates are so low. But would the average person know what constitutes a “high” or a “low” payout rate?

A recent finding from Cerulli Associates suggests that most people would not. In a survey earlier this year, Cerulli asked active 401(k) participants age 55 and older (“retirement income opportunity” clients) how large a lump sum they would be willing to pay for a lifetime income of $500 per month starting at age 65.

Assuming that the subjects were trying to come close to the actual cost of a $500/mo. annuity, rather than basing the estimate purely on their willingness to pay, then most of them wildly underestimated the necessary amount.

“Nearly three-quarters (72%) replied $25,000,” said a Cerulli report. Another 18% said $50,000. Only 3.8% came close to the right answer of $100,000. A handful (less than one percent) said $200,000.

“In reality, even among the most aggressive SPIAs, the same 65-year-old female would most likely need to spend between $90,000 and $100,000 to generate the $500, without receiving a death benefit guarantee,” Cerulli said. “This data also helps verify why annuities remain advisor-sold products and why less than 3% of 2012 VA sales were derived via the direct-to-consumer channel.”

Presumably, the Cerulli survey sample included many well-educated people. A high percentage of them should have been capable of deducing that $500 a month equals $6,000 per year. Had they thought about it for a moment or two, they could easily have seen that $25,000 would only buy about four years’ worth of income.

I don’t think lack of ability prevented them from finding a more plausible answer. They probably just weren’t used to doing that sort of calculation. In all likelihood, no one had ever taught them, challenged them, or forced them through the mental exercise of translating savings to retirement income.

Given that less than half of adults (42%, according to the Employee Benefits Research Institute) have tried to figure out how much they need to save for retirement, the frequency of this type of error should come as no surprise. But it’s far from a harmless error. It will lead people to underestimate the cost of lifetime income. As a result, they’ll probably save too little, and perhaps run out of money before they die.

To help solve this problem, the Department of Labor has proposed that 401(k) plan sponsors and plan providers add a section to participants’ quarterly statements where this calculation has been done for them. Participants would see how much income in retirement (based on best estimates) their current savings (or possibly their projected savings at age 65, based on their current trajectory) would generate if it were used to purchase an immediate income annuity.

I’m not sure how effective this type of reform would be. Few participants look at their statements. Few people buy income annuities at retirement. Retirement plan sponsors have already tried to show participants that a slight increase in their contribution rate can produce a significant increase in their savings over time. I haven’t seen any evidence that these efforts have been wildly successful.

Maybe there’s a cheaper, easier way to educate people. There’s already a rule of thumb that says a retiree can spend roughly 4% to 6% of savings per year during retirement, depending on the markets and whether they use a systematic withdrawal method or buy a life-contingent annuity.

We can therefore say that the ratio of final savings to annual income, at current interest rates, is roughly 20 to one. Twenty-to-one is an easy ratio to remember; why not publicize it? Put it on billboards along the nation’s highways. Paint it on the sides of barns in farm country. If more people knew and used that heuristic, a much higher percentage might have been able to answer Cerulli’s survey question more or less accurately.

FRA IRA Rollover Conference Ad300

Posted on September 8, 2013 by Editor Test -

Lots of Little VA Changes in Q2

Posted on September 8, 2013 by John McCarthy -

Annuity product developers accelerated their activity during the second quarter of 2013. Continued low interest rates kept pressure on carriers and hampered any ability to ratchet benefit levels back up. Most of the changes were “low impact,” consisting of adjustments to fees, benefits, and lower volatility subaccount options.

During the second quarter carriers filed 182 changes, compared to 97 annuity product changes in the first quarter of 2013 and 168 in Q2 of last year.

The most common changes were consolidations of age bands on the lifetime withdrawal benefit. The most significant changes were those related to de-risking by carriers—namely the asset reallocation directed to clients by Hartford, and the announced living benefit buyback offer by AXA (quarter 3 impact). Hartford also closed a number of contracts, further solidifying their pullout of the VA market.

Q2 Product Changes
AXA closed the Retirement Cornerstone 12.0 series, leaving the 13.0 series as the latest Retirement Cornerstone line open.

Hartford closed a slew of contracts in the Personal Retirement Manager and Leaders IV series of products in May. The move finalized Hartford’s pullback from the VA market, with no remaining Hartford contracts open.

Hartford continues to reduce its exposure to variable annuities, this time by re-allocating investment assets. In May the company filed a change requiring certain contract owners with the Lifetime Income Builder rider to reallocate their investments by October 4th, or face losing the living benefit. This requirement affects selected owners of the Director M lineup. Contract owners will be required to place a minimum 40% of assets in fixed income and a risk-based asset allocation model. This follows last quarter’s cash buyout offer covering the same contracts and benefits.

That offer went to owners of the Lifetime Income Builder II rider, who were offered the greater of the contract value on the surrender date, or, if the account is under- water, the contract value plus 20% of the benefit base (capped at 90% of the benefit base). Contracts affected include the Director M series and the Leaders series.

Jackson National Life updated the Lifeguard Freedom Flex lifetime withdrawal benefit. The Freedom Flex series mixes together a variety of withdrawal percentages, step-up and bonus features. These step up combinations were adjusted this quarter. The base bonus option offers a 5% annual bump, and the fee was increased by 0.10%. The fee went up by 0.15% for the Freedom Flex version with the optional death benefit. Jackson National also adjusted the Lifeguard Freedom 6 Net lifetime withdrawal benefit. The fee was raised by 0.15%.

For all Freedom Benefits, the withdrawal percentages for older ages (age bands starting at 75 and 81) were reduced by 0.50% and 1.00%, respectively. These benefits offer a 4.75% lifetime withdrawal at age 65 with the three types of steps ups: HAV; a 5%, 6% or 7% simple fixed bonus; and a doubling of the benefit base after 12 years of no withdrawals (up from 10 years). These and other JNL changes affected the single life benefits, as joint life versions were dropped last quarter.

Lincoln reduced the withdrawal rate on the joint version of its i4LIFE Advantage w/GIB. The lifetime withdrawal rate for a 65-year-old is now 3.5% (joint), down from 4.0%. The carrier also consolidated the number of age bands from seven to six. Lincoln also limited additional payments to its joint life riders after the first anniversary of rider issue. Additional payments are limited to $50,000 per benefit year if cumulative purchase payments exceed $100,000.

Lincoln also reduced the withdrawal on its Lifetime Income Advantage 2.0 Protected Funds. The single version had an age band added and dropped the withdrawal for 55-year-olds to 3.5% from 4.0%. The payout for a 60-year-old remains at 4% and a 65-year-old still gets 5%. The joint life version dropped the withdrawal from 5.0% to 4.5% for a 65 year old and added an age band at 75+.

For the entire Lincoln Lifetime Income Advantage 2.0 series, the carrier pushed up the eligibility age to 70 from 65 for the feature that doubles the withdrawal percentage in the case of a contract owner requiring nursing home admittance.

Monumental Life consolidated age bands on their guaranteed lifetime withdrawal benefit. A 65-year-old received 5% for life (4.5% for the joint life version). Those contract owners age 70+ now receive 0.50% less. The fee was raised 0.25%.

Nationwide issued the Destination Architect 2.0, and I-share costing 0.40%. There are 110 subaccount options including a number of alternative asset classes. The contract carries a lifetime GMWB costing 0.80% that offers a 4.5% lifetime withdrawal guarantee (which moves to 5.0% after the 5th anniversary). The joint version offers 4.25% lifetime at age 65 for a 0.95% fee. It has a highest anniversary value step up.

Ohio National raised the fee of its single-life GLWB by 0.10% and tweaked one age band (70-74) by increasing it 0.50% from 4.5% to 5.0%. Ohio National also issued a new lifetime withdrawal benefit, GLWB Preferred IS, that offers a generous 5.5% lifetime guarantee (5.0% joint life version), which, if the account balance drops to zero, could switch to 3% – 9% based on the U.S. Treasury rate. The benefit carries two step ups; a HAV and a 7% fixed bump up for 15 years. The fee is 0.95% (1.25% joint).

Pacific Life released the Pacific Choice (B-, C-, L-shares). The fee is 1.20% (B-share) and includes two types of lifetime withdrawal benefits and an accumulation benefit. The CoreIncome Advantage 4 Select offers a 4% lifetime withdrawal for a 0.35% fee. Every three months the fee is re-evaluated and could increase up to 0.50% based on the company’s discretion. There is a highest anniversary value step up. The CoreIncome Advantage Select offers a 5% guaranteed withdrawal with a highest-anniversary step up for a 0.70% fee. (Benefit attached to the Pacific Destinations contract offers a 4.5% lifetime withdrawal for a 0.55% fee.)

Protective filed notice in that it will limit 1035 exchanges and rollovers from qualified accounts. The limitation went into effect May 20th. This will limit further exposure for the carrier into its Protective VA B, C and L Series contracts.
RiverSource re-issued the RAVA5 series (Access, Select, Advantage), raising the fees 0.05%. The Advantage B-share costs 1.10% (L-share 1,35% and C-share 1.50%). The contracts carry the existing lifetime withdrawal benefit and accumulation benefits, and include a variety of alternative asset class subaccounts.

SunAmerica bumped up the withdrawal percentage by 0.25% on the SA Income Builder-Dynamic Option. The single life version of this lifetime withdrawal benefit now offers 5.25% and the joint version is at 5.0%. SunAmerica released the SunAmerica Income Builder, a new lifetime withdrawal benefit. For a fee of 1.10%, the benefit features a 5% lifetime withdrawal for a 65-year-old and two step ups: HAV and a 6% fixed annual step up.

Transamerica broke the bank with a massive update/re-issue of 39 new contracts (including New York versions). The VA lineups for Axiom, Members, Advisors Access, Income Access, Partners, Principium, Retirement Income Plus, TA Variable Annuity all received revisions. The main changes were a new series of death benefits, updated investment options, and elimination of the initial payment guarantee and the fixed life annuitization option. The living benefits remain the same.

Transamerica issued a new contract, the Retirement Income Plus, with a new living benefit that offers a 5.5% lifetime withdrawal for a 65 year old (single; 5.0% joint); a HAV step up as well as a 5% fixed step up. There are six investment options that fall on the con- servative side. The contract fee is 1.30% and the single life version of the GLWB is 1.25%.

Pipeline
Allianz released a new GMAB in July called Investment Protector. For 1.30% the benefit guarantees principal after a 10-year period. The benefit has a step up that is the greater of the account value or 80% of the HAV.
Allianz also plans to increase the fee on its Income Protector series of lifetime GMWBs, a 0.35% bump.

AXA filed a buyback offer in July for owners of certain living benefits on their Accumulator series of contracts issued from 2004 and 2009. The buyback will be executed in September. The offer seeks to have the client terminate either their lifetime GMWB rider, enhanced earnings rider, or other death benefit in exchange for a credit
to their account value. The calculation will factor in multiple values and credit an amount to the contract owner’s account.

Principal plans to roll out a variable annuity called Principal Lifetime Income Solutions on Aug. 1. The fee is 1.40% and the contract carries an existing lifetime GMWB with a 5% withdrawal rate for a 65-year-old (4.5% joint life). There is an HAV step up and a 5% fixed annual step up. The rider fee is 0.95% and the contract offers four low-cost, diversified subaccounts.

Security Benefit is updating its Elite Designs. The new C-share contract will have 280 subaccounts including alternative asset classes and a return of premium death benefit. The cost is 1.45%.

TDF ‘Heretic’: Ron Surz

Posted on September 8, 2013 by Jenna Gottlieb -

What I do: I work in the target-date fund space, and I’ve gotten to be the heretic of the whole industry. I think the idea of a target date fund is very good, but I’m afraid the idea is used to package products that favor fund managers instead of investors. Fund companies are paid more to manage risky assets and I think they are running much too much risk at the target date. I think it’s wrong. I have a patented Safe-Landing Glide Path®. The basis for the patent was not necessarily new ideas, but liability-driven investing. My objective is to not lose participant money, to put enough aside in fairly safe investments. People believe that they’re protected in a target date fund. When they allow their employer to default them they think they’re being taken care of, but they’re not. I’m not against target date funds. I just wish they were better.

Who my clients are: I have one client. My glide path design is being used in a collective trust in Houston called the SMART Funds. It’s $50 million in all, used by 10 small plans. I’ve been trying hard to get the word out but I’m the world’s worst marketer. I’m working to get more investors in the SMART Funds. The funds are divided into three phases: accumulation, 15 years from retirement, and retirement date. In the last phase, retirement, in order to minimize the potential for loss, 95% of the allocations at the target date are held in the reserve asset (TIPS, Treasury bills and cash).

Why people hire me: Some advisors say that their clients can’t retire on all cash. I think that’s generally true; I don’t expect them to keep their savings in cash. I expect participants to withdraw their accounts at retirement because that’s what most do. I try to keep it safe and fully expect them to do something that makes sense, like buy an annuity, to make it last. I don’t want them to lose it all like in 2008. I think there’s going to be another 2008 and there will be lawsuits because there’s way too much risk at the target date. Prior to the Pension Protection Act of 2006, the default option was cash or stable value funds. I can’t fathom why people are taking on more risk now. Target date funds have caught on, but there’s more to investing than just your age. One thing you can do that’s beneficial is to provide more diversification and better risk controls. Err on the side of safety.

How I get paid: I have many roles that keep me busy and entertained. My patented Safe Landing Glide Path is the basis for the Brightscope On-Target indexes and the asset allocation for SMART Funds on Hand Benefit & Trust in Houston. In addition, I manage model portfolios on several UMA platforms, based on Surz Style Pure Indexes. I also provide due diligence software for sophisticated investors and their consultants, including hedge funds. eVestment in Marietta purchased my holdings-based style and attribution system, and rolled out their version last month. For investors, I provide style-sector-country heat maps that identify momentum opportunities.

Where I came from: Having earned a masters in Applied Mathematics at the University of Illinois, my first job was with Northrop’s Electronic Countermeasures Division, designing equipment to protect our military aircraft from heat-seeking missiles. Then I changed careers in 1970 to work for A.G. Becker, who sponsored my MBA in Finance from the University of Chicago. At Becker I developed some of the very first software for investment manager due diligence. Then in 2006, I entered into the target date fund space and have been spending a lot of time on that.

How I mix business with pleasure: After my mother passed away in 1990 I came in touch with my own mortality and decided to have some fun. Life is good. So in 1992 I left the firm I started in Chicago, Becker Burke, and set off to scratch a variety-pack of itches: my bucket list. I enjoy tinkering with software to create usable investment tools, and working with bright people to develop and promote their innovations. I’ve been fortunate to earn some money and do what I love. I recently teamed up with my sister, Kathy Tarochione, to create some really fun videos that share the fun with viewers. You can visit our on-line video channel at https://vimeo.com/channels/ronsurz, where you’ll find four videos on a range of topics. I am having a great time, and wake up each morning pumped for the day ahead.

My retirement philosophy: Save and protect. The key to success is to save enough and not lose it. It’s not profound, but no one is saying it. Risk will not compensate for lack of savings. I’m 68 and I’ve lived it. When you stop working, you look to see if you can maintain your standard of living. Some will make plans to live more modestly and some make plans to buy yachts. Disruption to those plans due to investment losses is painful in many ways, and is quite emotional.

Quote of the Week

Posted on September 5, 2013 by Editor Test -

Spain wants to link pension benefits to longevity, not inflation

Posted on September 5, 2013 by Editor Test -

The Spanish government has proposed reforms to the country’s national pension system that would “decouple” pension payments from inflation and would instead link them to life expectancy and economic conditions. It has sent the proposal to trade unions for comment.

In a speech earlier this week, however, Spain’s employment minister, Fatima Bañez, stressed that there would be no hike in the legal retirement age in Spain – which currently stands at 67 and is among the highest in Europe.

But with the country’s budget deficit now at 10.6% of GDP and growing, she said that the new measure would have to be introduced as early as the beginning of 2014. Her announcement echoed recommendations made by a pension steering committee last July.

The proposed measures include a limit on inflation indexation from 2014 onward. Instead, the government would introduce a minimal increase of 0.25% per annum on pensions, as well as a cap to prevent pension valuation from exceeding this percentage.

The government also plans to strengthen the “pension sustainability factor” in 2019, which would aim to replace the traditional inflation-linked revaluation of pensions.

Instead, the revaluation would be based on the life-expectancy ratio, as well as the balance of revenues and expenses of the social security system in the years prior to a given year.

In its report, the pension steering committee said new criteria should be taken into account in the calculation method used to determine the “sustainability factor,” which was introduced during a previous reform in 2006.

The group also recommended taking into account probable life expectancy at the time of retirement, so that people retiring sooner will receive a lower pension for a longer period.

In parallel to the state pension reform, the government is also looking at ways to strengthen its “second-pillar” personal accounts system.

In July, Angel Martinez-Aldama, director of INVERCO, Spain’s investment and pension fund association, said the government was expected to present a report to Parliament that would describe new measures intended to boost participation in and strengthen the second pillar.

New York Life releases selected mid-year sales figures

Posted on September 5, 2013 by Editor Test -

America’s largest mutual life insurer, New York Life, announced strong sales of life insurance, income annuities and mutual funds through the second quarter of 2013.

Sales of individual recurring premium life insurance policies (whole life, universal life and variable universal life) through agents were up 18% over the first half of 2012. In addition, the number of life insurance policies sold through agents continued to rise, up 4% through the second quarter of 2013.

The company also reported growth in various ethnic markets, with 46% of the company’s new life insurance policies produced by agents serving the African-American, Chinese, Hispanic, Korean, South Asian, and Vietnamese markets in the United States.

New York Life remains the leading seller of fixed immediate annuities, with 32% of the market for first quarter 2013, and is the leader in sales of deferred income annuities, with 46% of the market for first quarter 2013, according to industry sources.

The company’s combined sales of these guaranteed income annuity products, including single premium immediate annuities and the company’s deferred income annuity, Guaranteed Future Income Annuity, increased 13% in the first half over the same time period in 2012.

Sales through New York Life Direct increased by 8% over the same period last year. New York Life Direct includes the AARP Operation, which has provided life insurance and lifetime income annuities to AARP members since 2006. AARP has agreed to retain New York Life as the exclusive provider of life insurance products to AARP’s 37 million members through 2022.

Sales of New York Life’s MainStay family of mutual funds increased by 41% to $13.69 billion through the second quarter compared to the first half a year ago. New York Life’s operations in Mexico, Seguros Monterrey New York Life, had a strong first half with 13% sales growth compared to the same period last year.

Sales of all fixed annuity products rise in 2Q 2013: Beacon

Posted on September 5, 2013 by Editor Test -

Rising bond yields helped breathed life into the fixed annuity market in the second quarter of 2013.

For the first time in two years, all fixed annuity product types posted sales gains in second quarter 2013 over the first quarter of the year, while sales of deferred income annuities and indexed annuities posted new records, according to the latest Beacon Research Fixed Annuity Premium Study.

“In addition to the quarter’s rising interest rates, the steepest yield curve in nearly two years enabled carriers to increase the rates they offered on fixed rate and indexed annuities,” said Jeremy Alexander, CEO of Beacon Research, in a release.

“Credited rates on 5-year CD-type fixed annuities rose by an average of 35 basis points. DIA sales were up almost 40% from first quarter due to continued demand for retirement income, larger payouts and new product introductions.”

Total fixed annuity results were $17.1 billion in second quarter, up 14.6% sequentially and 0.2% from a year ago. Sales of indexed annuities increased 17.1% from first quarter to $9.1 billion.

Income annuity results, which include DIAs, grew 16.9% sequentially to $2.6 billion. Sales of market-value-adjusted (MVA) annuities rose 34.9% from the prior quarter to $1.3 billion, largely due to big gains by two products.

Source: Beacon Research.

New York Life was the top-selling fixed annuity company in second quarter 2013, followed by Security Benefit Life, Allianz, American Equity and Great American Life. New York Life switched positions with Allianz. Security Benefit Life and American Equity remained in second place and fourth place, respectively. Great American entered the top five in fifth place.

Second quarter results for the top five study participants were as follows:

Total Fixed Annuity Sales (in $ thousands)

New York Life 1,470,446

Security Benefit 1,434,104

Allianz Life 1,264,400

American Equity 1,135,553

Great American 837,615

Security Benefit was the new top seller of fixed-rate non-MVA annuities, jumping from sixth place in the previous quarter. Symetra moved from third place to become the new leader in bank channel sales. Pacific Life took the lead among independent broker/dealers, up from second place. The other top companies in sales by product type and distribution channel were unchanged from the prior quarter.

Top products

New York Life and Security Benefit Life each had two of the five top-selling fixed annuity products in second quarter. New York Life’s Lifetime Income Annuity regained the top position from Security Benefit Life’s Total Value Annuity, which moved to second place.

Security Benefit Life’s Secure Income Annuity and American Equity’s Bonus Gold remained in third and fourth places, respectively. New York Life’s Secure Term MVA Fixed Annuity joined the top five in fifth place, up from 12^th place last quarter, and was the first MVA annuity in the top five since third quarter 2009.

Rank Company Name Product Name Product Type

1 New York Life NYL Lifetime Income Annuity Income

2 Security Benefit Life Total Value Annuity Indexed

3 Security Benefit Life Secure Income Annuity Indexed

4 American Equity Bonus Gold Indexed

5 New York Life NYL Secure Term MVA Fixed-Rate MVA

“We expect a modest increase in total fixed annuity sales in the coming months should interest rates continue to rise,” Alexander concluded. “DIAs probably will continue the strong growth pattern we’ve seen in the past 18 months.”

The quarterly Study is the first and only source to track and analyze product-level fixed annuity sales on an ongoing basis, and the first to put a decade’s worth of historical industry, company and product sales information in an easily-searchable online database at www.annuitymarketstudy.com.

At Lincoln Financial, the dawn of a brand new DIA

Posted on September 5, 2013 by Editor Test -

With the addition this week of Lincoln Deferred Income Solutions to its broad product palette, Lincoln Financial Group became the latest big insurer to offer a deferred income annuity, or DIA. DIAs, which allow Americans to pay today for income that starts sometime in the future, are the newest and fastest-growing segment of the annuity business.

In the first half of 2013, DIA sales increased 151% from the same period in 2012, with estimated sales of $940 million, up from $370 million in 2012. The leader of the category is New York Life, which recently reported that it had a 46% market share in the first quarter of 2013.

So far, mutual insurers with captive agent forces have dominated the DIA space, so it may be significant that Lincoln, a publicly-held company with a big third-party distribution network has jumped on the DIA bandwagon. Lincoln was second only to Jackson National in total annuity sales in the first half of 2013, with combined fixed and variable sales of $8.3 billion.

DIA sales are currently rare in the independent channel. Less than one percent of DIA sales have come through independent sales channels, according to Jeremy Alexander, CEO of Beacon Research, and only 2.5% of all independent channel sales of income annuities are represented by DIAs. “There’s huge potential,” he said.

DIA sales may be helped by rising yields, Alexander added, but he doesn’t think yield is driving the DIA market. Rather, it’s demand coming from retiring baby boomers who want to buy a personal pension.

“Our other fixed deferred annuities are interest rate sensitive, especially in the bank channel. But this isn’t about price sensitivity. It’s really about need. We just keep seeing more sales. With such a new market, it’s hard to tell.”

The Lincoln product can be purchased with a single premium of either qualified or non-qualified money. Income from qualified contracts must be taken by age 70 ½. Aside from those restrictions, the contract is designed for flexibility, according to Brian Wilson, assistant vice president, fixed annuity solutions, at Lincoln, which is headquartered in Radnor, Pa.

During the deferral period, policyholders have a one-time option to move their income start date forward or backward by as much as five years. During the income period, they can take out as much as six months’ income in a lump sum on up to three separate occasions. An inflation-adjustment of up to 4% per year can be added. Payouts can be single or joint, life and/or period certain, with cash refund or installment refund.

The DIA is intended to round out Lincoln’s offering, which includes fixed, indexed, immediate and variable annuities, without cannibalizing other sales. “This is one element in our overall product portfolio,” Wilson told RIJ. “It’s not positioned against other products.”

No two DIA customers are alike, he said. “We heard feedback from one consumer who said, I don’t need a legacy, I’m not looking for return of premium, I just want as much income as possible. Others have said, ‘I’ve got to access to my money.’”

As for Lincoln’s decision to get into the DIA space, that wasn’t hard—at least, not after DIA sales started to take off in 2012. “The market speaks for itself,” Wilson said. “Quarterly sales were $160 million, then $395 million, then $535 million. A lot of it has to do with recent economic events. Americans lack confidence about retirement.”

Lincoln DIA prices will be listed on the Cannex website for advisors who want quotes, he said. Advisors can also access illustrations directly from Lincoln through the company’s advisor web portal. Lincoln provided RIJ with the following sample rates, based on a $100,000 premium:

Source: Lincoln Financial Group, September 5, 2013.

Introducing: The Journal of Retirement

Posted on September 4, 2013 by Kerry Pechter -

A New DC Concept from Denmark

Posted on September 4, 2013 by Editor Test -

In the area of innovative defined contribution (DC) pension products, I believe that Americans can learn a lot from recent developments in Denmark.

Decades ago, Denmark took the DC route in providing for occupational pensions. Last year, the first year in which Denmark’s pension system was rated by the Australian Centre for Financial Studies and Mercer, it ousted the Netherlands from the top position in the rankings. It also became the first system ever to be classified with an ‘A’ grade—an award that was widely publicized.

Less well known is the fact that a new product class, called “(formula-based) smoothed income annuities,” has been invented and launched in Denmark. It is a hybridized approach that overcomes the limitations of variable income annuities (i.e., fluctuations in payments) and of so-called “with-profits” or “participating” policies (i.e., lack of transparency in calculating the bonuses).

Nobody knew this could be done. The unique design of this new product class gives participants greater potential for upside, while also providing participants with partial downside protection over their lifetimes (with the option to add more). [See today’s RIJ cover story, “Have Your Danish and Eat It Too”]

Specifically, the design makes it possible for the fund manager to maintain a higher proportion of equities and other real assets throughout the payout period, thus generating higher expected returns and higher expected pension benefits. It allows greater stability in income payments by using an individual buffer fund for each policy (one that may be negative as well as positive) to absorb market volatility.

These products also offer an innovative enhanced income payment profile with “more money when you need it” based on realistic assumptions of future mortality and longevity avoiding conservative margins. The retirement income level may be gradually adjusted up or down in accordance with continuously updated assumptions of the future mortality rates. The smoothing of the retirement income payments is made possible by the mechanism for smoothing of investment returns and risk sharing.

This design relieves participants of the need to lock in unfavorable interest rates when they convert savings to income. Their income level is set at retirement, and it won’t fluctuate with market conditions. This holistic approach to pension plan design make possible a seamless financial transition from working life to retirement, providing an effective bridge between the accumulation and decumulation phases.

Smoothed income annuities represent an entirely new retirement and wealth accumulation strategy for the private and occupational pension markets in the U.S. It has the potential to set a new standard for retirement income solutions and to become the backbone of one’s retirement income portfolio. It also provides for attractive default investment alternatives and solutions. It is possible to design default investment alternatives and solutions that are tailored to different market segments –also giving providers an opportunity to differentiate themselves from competitors.

The next generation of DC and collective defined contribution (CDC) retirement income products in the United States could be designed as smoothed income annuities. My work and the work of others have demonstrated that these products have particularly attractive return/risk properties in relation to life-cycle products, such as target date funds.

I believe that this new product class can yield exciting—even game changing—opportunities for early adopters who want to seize a competitive advantage and capture a larger share of the growing DC market. It could lead to a revival of the pension fund industry, and help to ease the transition from defined benefit to defined contribution pension products. More importantly, it also represents an opportunity to improve the lives of millions of people throughout the world.

Per Linnemann, a Danish actuary, was one of the designers of smoothed income annuities, which are currently marketed by SEB Pension under the short name Tidspension (TimePension). His bio is available at LinkedIn or on request. He can be reached at [email protected].

Have Your Danish, and Eat It Too

Posted on September 4, 2013 by Kerry Pechter -

Denmark is Earth’s happiest country, at least according to a 60 Minutes broadcast from a few years ago. And the Danish pension system was not merely ranked first in the world in 2012, it was also the first and only system ever to achieve an A rating on the Melbourne Mercer Global Pension Index.

So when an actuary from that harmonious peninsula in the North Sea—a former chief actuary of that country, no less—claims to know a better way to optimize risk and reward during both accumulation and decumulation, well, attention must be paid.

For the past several weeks, Per Linnemann (right), who has also been an academic and long-time product developer at SEB Pension in Copenhagen, has been helping me understand how that company’s retirement savings mousetrap—called TimePension—resolves the conflicting needs for safety and upside in retirement. This mousetrap, by the way, won Insurance Risk magazine’s Innovation of the Year Award in 2009.

TimePension’s beauty part, he explained, is that it cures the target-fund glidepath dilemma by allowing investors—either individuals or plan participants—to maintain a 60% equity allocation both before and after they retire. It manages downside risk with a “formula-based smoothing account,” ultimately backed by an insurance company. It delivers retirement income via a period certain smoothed income annuity coupled (optionally) with longevity insurance.

Whether TimePension could work in the U.S. is debatable; in Denmark, even defined contribution money is centrally managed by professionals. Lump-sum cash-outs are the exception rather than the rule. But TimePension is not so fundamentally different from what AllianceBernstein, BlackRock, Prudential or Financial Engines are doing in the U.S. DC market. Asset managers who want to retain retirement plan assets during the transition from employment to retirement might find it especially appealing.

Linnemann, who has spent a lifetime working on pensions in industry, academia and government, is now, at age 60, a consultant. The number one item on his personal pre-retirement “bucket list” is to find an insurance company, asset manager or university in the U.S. that will provide a platform for adapting and developing smoothed income and lump sum products to the U.S. retirement market. [See Linnemann’s guest column in today’s RIJ]

“In 1952, TIAA-CREF created the variable income annuity. This innovation is intended to complete that product by offering greater stability in the pension payments,” he said. “That’s how I think of it.”

How TimePension works

For an explanation of how TimePension works at SEB Pension, Linnemann referred me to Frank Pedersen, a fellow actuary and childhood friend (a not unusual coincidence in Denmark) who is the company’s resident expert on the topic. He provided an example, based on a hypothetical plan participant making a 15%-of-pay contribution to a TimePension account. Here’s how it operates during the accumulation period.

Every month, 15% of each participant’s compensation goes into the pension account, which for convenience Pederson called Account #1, and all of the earnings from that account go into the smoothing or buffer account, which he called Account #2. Every month a small percentage of Account #2 accrues to Account #1. Most of the earnings stay in the buffer account as a reserve against potential losses.

“For example, if you put 100 kroner into Account #1 and the rate of return is 10%, so you have 10 kroner in Account#2, for a total of 110 kroner. This year, you would move one percent of Account#1, or one krone, from Account #2 to Account #1. That leaves 9 kroner in Account#2. Then you would take 20% of Account #2, or 1.8 kroner, and put it in Account #1. You still have 110 kroner in total, but you have 102.8 in your pension account and 7.2 in your smoothing account,” Pederson told RIJ.

“You would do the same thing if the rate of return had been minus 10%. You would move one krone to Account #1 from Account #2, which would now be minus 11. Then you would take 20% of that, or 2.2 kroner, and move that from Account #1 to Account #2. You would have 98.8 kroner in Account #1 and minus 8.8 kroner in Account #2. This is how the interest is divided.

“It becomes very stable over time. Every month, an amount equal to one-twelfth of one percent of Account #1 and one-twelfth of 20% of Account #2 moving to Account #1 from Account #2. This year the guaranteed accrual rate is only one percent, but in a normal year it’s about 3%,” he said.

TimePension has been running at SEB Pension for 10 years, and all but a few of the participants have seen positive returns in their primary accounts every year, including 2008, Pedersen said. In 2008, the overall fund lost 24.9%, but because Account #2 had an existing positive balance, and because Account #1 earned a guaranteed rate of 4.0% that year, and because the loss incurred by the overall fund was so diluted by the smoothing formula, there was no overall loss to the participants’ Account #1, even in the worst year of the financial crisis. “The following year we had a positive return of 17.5%, so all of the problem in Account #2 was gone,” he said.

The decumulation phase

When a TimePension participant retires, he or she decides whether to receive the balance as a smoothed income annuity over a period certain of between 10 and 25 years. The amount of the initial payment, like the initial payment of a variable income annuity in the U.S., is based on the principal accumulated in Account #1, the length of the term and an “assumed interest rate,” currently 3.5%. The monthly payments are smoothed up or down, depending on whether actual returns are higher or lower than 3.5%. The money remains invested in about 60% equities and 40% bonds, and the two accounts and the smoothing formula remain operative.

Here’s where SEB Pension’s insurance unit comes into play. During decumulation, the insurer provides some downside protection and participates in risk sharing in return. According to Pedersen, if he receives an amount equal to x% of his pension account (Account #1) in a given year, then SEB Pension will receive an amount equal to x% of his buffer account (Account #2) in that year, so long as the buffer account is positive. If Account #2 drops into negative territory, however, the insurance company must make a contribution of x% of Account #2. “We share the risk when it goes up and when it goes down,” he said.

There’s also a ratchet function available in TimePension that protects the participant and that may require a hedging program by the insurer. But the hedging is “plain vanilla,” Linnemann told Insurance Risk magazine in 2009, because the smoothing account itself absorbs most of the volatility.

What’s the point of all this backing and filling? According to one of Linnemann’s academic papers on the subject, the TimePension system produces higher returns on average than either of the other two retirement plan designs in Denmark, “unit-link” (like our 401(k) plans) and “traditional with-profits” (similar to TIAA-CREF’s retirement annuity fund). TimePension entails less volatility and less sequence of returns risk at retirement than unit-link plans, and its accrual method is more transparent than that of with-profits plans, while offering higher returns.

SEB Pension tried to patent TimePension back in 2002, but “because it was ‘formula-based’ we were told it wasn’t patentable,” Pedersen said. Given the novelty of TimePension, prospective enrollees and clients sometimes have difficulty grasping it. “Our biggest problem is to explain how it functions,” he conceded. “But if we have the opportunity to tell people how it functions, they’re receptive. Everyone knows that unit-linked is too risky. And they don’t like the traditional plan. Only a few people know about this new alternative.”

Business is growing, however. In the first six months of 2013, TimePension account for about 25% of SEB Pension’s sales. (SEB Pension has about 10% of Denmark’s pension market.) It is available as an individual as well as a group product. TimePension has caught the eye of the Britain’s Department for Work and Pensions, which has become interested in finding a DC/DB hybrid that involves greater risk-sharing between plan sponsors and plan providers. In Britain, this hypothetical hybrid has been dubbed “Defined Ambition.”

Taking it on the road

Could TimePension work in the U.S., as a retail product or as an institutional product? Given the differences between the U.S. and Danish tax systems and labor laws, the answer would appear to be no. For better or worse, Americans demand a lot more liquidity and flexibility with their retirement savings than Danes do. Danes can cash out of their TimePension plans, but they apparently have to absorb a prohibitive market value-adjustment and tax payment if they do.

None of the U.S. pension experts I spoke to were familiar with TimePension. The reactions of some retirement experts, after they were sent copies of one of Linnemann’s research papers, ranged from recognition to skepticism about the illiquidity of TimePension, to dismissal of any program that purports to cheat the laws of risk and reward.

Jeff Dellinger, a consultant who helped create Lincoln Financial’s i4Life variable income annuity and the author of The Handbook of Variable Income Annuities (Wiley, 2006), saw something familiar in TimePension. “It made me think of an arrangement I talked about in my VIA book for coping with volatility,” he said in an email.

“[The book explains that] there will be some natural ups and downs in monthly income from market movement. A region is defined where if the naturally calculated VIA payment would fall in that region, then nothing else happens. If the naturally calculated VIA payment would fall below or above that region, then only the floor or ceiling payment is made and the shortfall or excess adjusts the underlying reserve. This allows for volatility control in a less expensive way than simply having the insurance company trade the appropriate derivatives and pass their cost along to annuitants in the way of lower income.”

Mark Warshawsky, author of Retirement Income: Risks and Strategies (MIT, 2011) told RIJ, “It would appear that the [product] is not entirely liquid, and while in the Europe that may not be a big deal, in the US it probably is, in a negative way. For example, TIAA-CREF offers a smoothed interest rate and dividends on its TIAA accumulation and annuity products, with perhaps a higher expected return, but the lack of liquidity is always subject to complaint.”

The program director at the Center for Retirement Research at Boston College, Steve Sass, said, “The objective is important: to reduce the risk in 401(k)-type plans without resorting to expensive guarantees. And it does so by sharing risk, not by guaranteeing returns or pensions. While risk capacity is clearly different at different stages of life, and is lowest in retirement, and this could be a complicating factor, I’m willing to accept the simplification until it could be analyzed more carefully.”

Moshe Milevsky, the annuity expert at York University, was skeptical. “Repeat after me: No arbitrage, no free lunches, and risk can’t go away by ‘smoothing,’” he commented in an email.

But Linnemann points out that the centrally managed funds in a TimePension plan aren’t very different from the life-cycle or target-date funds that have become nearly ubiquitous in the U.S. defined contribution landscape.

Target-date funds have also been paired with guaranteed income solutions in DC plans by AllianceBernstein (Lifetime Income Strategy), which was adopted in 2012 by United Technologies, by Prudential Retirement (IncomeFlex), which adds a living benefit rider to TDFs and by Financial Engines, whose Income+ program manages both the accumulation and payout stages for participants, and offers an option for longevity insurance.

If these programs become more widely adopted—they’ve been stalled by fiduciary and liability concerns on the part of DC plan sponsors—it’s not impossible to see TimePension, with its unusual buffer account, added to the mix.

“In the U.S., defined contribution has moved into lifecycle products. But that is not enough. You need a product design like TimePension to get the best of both worlds. It’s not a money machine. You could still end up in a Japanese scenario with no returns for decades. But it would make the transition easier and you would gradually end up with a new level of return.”

Linnemann hopes to cap a 35-year actuarial career by spreading awareness of the TimePension concept, if not the exact product, around the world. “It’s been used by corporations and households in Denmark since 2002, and it’s not known internationally. Why should we wait a decade or more for it to spread by itself? Before I retire I would like to finish off my working period by developing this product class further.”

Linnemann would like to consult for an adventurous plan sponsor, like a Microsoft or Apple, who could eventually adopt a program like TimePension, or find an insurance company, asset manager or university who could provide a platform for further work.

“You could design different versions of this design for different companies, and a large company could have a say in what type of investment products are used. I’m hoping that many millions of people could have the benefit of more stable retirement income. As far as I have been able to see, there’s nothing that is as good as this.”

The Bucket

Posted on August 29, 2013 by Editorial Staff -

Chad Parks joins Beacon Research as sales director

Beacon Research, an independent source of annuity information, announced today that Chad Parks has joined the company as Director of Sales. He will report to President and CEO Jeremy Alexander.

Parks previously served as regional vice president at Allianz USA, AXA Equitable and Sun Life. He also headed Davis & Parks Technologies, a software technology company serving the investment community.

He holds a bachelor’s degree from the University of North Carolina at Chapel Hill.

Athene Annuity’s SPIA to use enhanced Infosys McCamish platform

Athene Annuity’s MaxRetire SPIA (single premium immediate annuity) will be the first product to use the Repetitive Payment Management (RPM) functionality on the Infosys McCamish Systems VPAS platform, the companies announced.

The VPAS platform provides end-to-end servicing and administration for life insurance and annuity contracts, according to a release. The VPAS “RPM web-enabled payout component” enhances the VPAS platform for servicing payout annuities and settlements for life insurance claims. The carrier and policy owner can view accumulations and payouts on one platform.

Athene’s distribution began selling the MaxRetire SPIA product on May 30, 2013. McCamish Systems has provided end-to-end platform-based BPO services to Athene’s fixed and fixed indexed annuities since 2006.

According to the release:

The new service allows products to be configured and deployed without the need for development, leading to improved speed to market for carriers. It allows them to provide innovative new payout products and riders quickly to the growing annuity market based on the ease of the product configuration.
Tax regulations and product features for the qualified and non-qualified annuity markets are built into the platform. The VPAS RPM solution supports qualified and non-qualified contracts with single and joint life options, with guarantee periods, if desired, as well as period certain options.
RPM offers robust fee deductions, optional payee elections, automated exclusion ratio calculations and easily supports multiple calculation methods.
The component lowers the risks and costs to carriers by providing one platform for accumulation and repetitive payout/ disbursement processing, since a single platform eliminates the need to issue a new policy on a separate platform when the contract annuitizes.
It enables seamless and automated processing using online product calculation engine for payout processing.

ADP TotalSource Retirement Savings Program hires ING U.S.

ING U.S. announced today that its Retirement Solutions business became the service provider for the ADP TotalSource Retirement Savings Program, effective August 7, 2013. The program, serviced by ING U.S.’s large corporate markets recordkeeping division, comprises approximately 2,800 plan sponsors as part of multiple-employer arrangement that represents over 57,000 participants and nearly $2 billion in assets.

ING U.S. will provide participants access to financial planning tools, as well as custom communication and financial education programs. Participants will also have access to ING U.S.’s investment lineup, investment advice and retirement planning advice.

ING U.S. serves as a plan provider for 48,000 institutions and more than five million participants, according to Pensions & Investments ranking of Top DC Recordkeepers, April 2013.

FIA policyholder behavior study published by Ruark Consulting

Ruark Consulting LLC, a Connecticut-based actuarial consulting firm, has released the results of its 2012 Fixed Indexed Annuity Partial Withdrawal Study, which details the impact of various product features on policy persistency.

Eleven companies, including most of the major FIA writers, submitted data for the partial withdrawal study. The study the period January 2006 through September 2012 and included over 8 million contract years of exposure covering partial withdrawal experience under all FIA contracts, regardless of the presence of a living benefit.

Ruark examined various factors—age, duration and contract size—to determine those that have a material impact on partial withdrawal behavior for fixed indexed annuity contracts.

On contracts with a living benefit rider, Ruark looked at the effect of the “money-ness” of the guarantee and went into more depth on lifetime withdrawal behavior by examining results for the commencement of withdrawals under the benefit and, once withdrawals start, whether they continue.

Key findings of the study included:

The presence of a free withdrawal amount has a significant effect of withdrawal behavior on all contracts – even those with a lifetime withdrawal feature.
Withdrawals by younger owners are more of a lower frequency, high severity event, with a material portion of their annual withdrawal amounts in excess of the free amount.
Tax status is an important factor due to the telling effect of required minimum distributions on qualified contracts at older ages.
Contracts with a GLWB rider take withdrawals less frequently than those without the rider and less by amount prior to starting lifetime income. However, withdrawals are still at levels that are detrimental to the guarantee. Ruark Consulting and our FIA clients were surprised at the limits of the rider’s effect on overall withdrawal behavior.
GLWB contract owners have been very reluctant to turn on the rider’s lifetime income feature, having done so at single digits rates so far. These rates are even lower than Ruark Consulting has observed in its variable annuity studies on similar withdrawal benefits.
Those that start lifetime income also do not “perfectly” exercise their option, as annual amounts withdrawn include significant portions both less than and greater than the contractual maximum amounts.
The few GLWB contracts that commence lifetime income do, though, tend to leave it on: continuation rates are in excess of 90%.

Despite the above findings, company risk managers should not take false comfort in results thus far, as the GLWB rider is early in its history. Ruark Consulting plans to continue to track this and other key assumptions in the FIA market in order to provide its clients with important and necessary information for pricing, risk management, and, ultimately, valuation.

Vanguard suggests SWiP option for DoL income illustration

Posted on August 29, 2013 by Editor Test -

Vanguard, one of the country’s largest 401(k) providers, has taken a maverick position in its official comments to the Department of Labor about the DoL’s proposal to require plan sponsors to present illustrations on participant account statements showing how their account balances might translate into lifetime income streams in retirement.

Signed by Steve Utkus, principal and head of Vanguard Center for Retirement Research, Vanguard’s letter said that defined contribution (DC) plan participants are best served by allowing a choice of “income modeling tools and approaches that reflect each plan’s specific population and provisions.” Vanguard’s choice would be to use the systematic withdrawal method as an illustration, rather than annuities.

Vanguard, whose philosophy has traditionally been that diversification is adequate protection against market risk for long-term investors, doesn’t support the assumption that participants will annuitize their accounts at retirement, even for the purposes of illustration, because participants so rarely annuitize.

Vanguard, a specialist in the direct marketing of low-cost index funds, sells no-load deferred and variable annuities, but its contracts are manufactured for it by outside life insurance companies.

According to a Vanguard release, the company “notes concern about the proposed requirement to project retirement income based on an assumption that participants will annuitize their entire account balances at retirement.” Its letter to the DoL said that this ‘does not comport with plan provisions or participant behavior,’ and cited the facts that relatively few DC plans offer annuities and most participants prefer lump-sum distributions even in plans that offer annuitized payments.

“If the DOL requires lifetime income illustrations to be provided on participant statements, sponsors and service providers should have the flexibility to project retirement income using a systematic withdrawal approach,” Vanguard’s letter said.

IRI publishes brief guide to deferred income annuities

Posted on August 29, 2013 by Editor Test -

Any advisor or layperson who has general questions about deferred income annuities (DIAs) can find most of the answers in a new Insured Retirement Institute whitepaper entitled “Deferred Income Annuities: Insuring Against Longevity Risk.”

The whitepaper describes in sufficient but not excessive detail how DIAs work and how they compare with other types of annuities, such as single premium immediate annuities, variable annuities with income riders and fixed indexed annuities with income riders.

The IRI also explains why people would purchase a DIA (to protect against running out of money, to provide income for medical expenses later in life) and how they can use DIAs (by creating sequential or overlapping layers of DIA income in retirement) to maintain inflation-protected income throughout retirement.

An insurance agent or financial advisor might hand out this brochure to prospective clients. It doesn’t refer to specific products by name. Some of the information about DIAs came as a surprise, such as the assertion that DIAs (unlike SPIAs) typically can’t be liquidated for a commuted value after purchase.

Aside from providing information about DIAs, the brochure also includes information that professionals may find familiar, about longevity risk, the risk of disability in old age, market risk, and other risks that a source of guaranteed lifetime income can mitigate.

Cetera acquires two MetLife broker-dealers

Nationwide Financial introduces simplified small plan 401(k)

New York Life’s stable value fund passes $2 billion milestone

Chad Parks joins Beacon Research as sales director

Athene Annuity’s SPIA to use enhanced Infosys McCamish platform

ADP TotalSource Retirement Savings Program hires ING U.S.

FIA policyholder behavior study published by Ruark Consulting

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