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MetLife, Inc. chairman, president and CEO Steven A. Kandarian issued the following statement this week after the company was notified by the Financial Stability Oversight Council (FSOC) that it had reached “Stage 3” in the process to determine whether MetLife would be named a non-bank Systemically Important Financial Institution or SIFI:

“We look forward to working with FSOC on the best way to fulfill its obligation to mitigate systemic risk.

“I do not believe that MetLife is a systemically important financial institution. The Dodd-Frank Act defines a SIFI as a company whose failure ‘could pose a threat to the financial stability of the United States.’ Not only does exposure to MetLife not threaten the financial system, but I cannot think of a single firm that would be threatened by its exposure to MetLife.

“The life insurance industry is a source of financial stability. Even during periods of financial stress, the long-term nature of our liabilities insulates us against bank-like ‘runs’ and the need to sell off assets.

“To be clear, I support prudent regulation of the life insurance industry. After all, we are financially liable for insolvencies through the state-based guaranty funds. What I do not support is a regulatory system that creates an unlevel playing field.

“If only a handful of large life insurers are named SIFIs and subjected to capital rules designed for banks, our ability to issue guarantees would be constrained. We would have to raise the price of the products we offer, reduce the amount of risk we take on, or stop offering certain products altogether.

“We look forward to working with FSOC on the best way to fulfill its obligation to mitigate systemic risk.”

MetLife, Inc. provides insurance, annuities and employee benefit programs to about 90 million customers in the United States, Japan, Latin America, Asia, Europe and the Middle East.   

© 2013 RIJ Publishing LLC. All rights reserved.

Britain’s National Employment Savings Trust (NEST) has lowered its exposure to UK investments markedly in the last year, with domestic holdings now only 30% of assets, down from nearly 50% last March. Publishing its annual report for the financial year 2012-13, the “public option” defined contribution plan said its default investment options, retirement date funds, performed as expected.

The fund also said NEST Corporation, the entity responsible for the day-to-day running of the fund, had been the victim of a $2.1 million fraud. Chairman Lawrence Churchill said the plans defenses had been strengthened since the £1.4m (€1.6m) payment had been uncovered. He added that, despite the money not coming straight from members’ pots, if the scheme were unable to recover the money, it might increase running costs.

“They have delivered above-inflation returns within our given risk budgets while protecting members from excessive volatility in uncertain conditions,” the report said. The 2021, 2040 and 2055 retirement date funds all saw double-digit returns. A member retiring in eight years saw investments grow by 12.2% over the year and by 10% since the fund was launched in August 2010. A member retiring in 27 years saw returns of 13.6% over the year.

Members with a greater risk appetite invested in the NEST Higher Risk Fund saw returns of 15.6%, only 1.1 percentage points above the Sharia-compliant fund. Those who opted for the lower-risk fund only saw returns of 0.4%, in line with the option’s benchmark return both last year and since the fund’s inception.

NEST has also significantly rebalanced its asset allocation away from the UK; instead, it increased investment in North America to 35.9%, its single largest regional exposure. A greater emphasis was also placed on Continental Europe, up nearly 3 percentage points to account for 18.4% of investments. Latin and South America remained the smallest identified region, with investments in the area nonetheless rising over the 12 months from 0.4% to 1.9% of total assets.

In other matters, NEST justified its decision to allocate 20% of its assets in growth-oriented funds to real estate as “reasonable” and essential to its mandate to offer above-inflation returns.  NEST appointed Legal & General Investment Management to a “property mandate,” thus helping NEST invest in UK property and a global real estate investment trust (REIT) index.

NEST CIO Mark Fawcett described the allocation as hedge against investment risk. “There is this strategic question as to how much we should have in real assets, and then there is this risk management question [on] relative attractiveness of other assets in the shorter term,” he told IPE.com. “About one-fifth in real assets – almost whichever way we run the models and crunch the numbers – that seems to be a reasonable position.” He explained that, in NEST’s view, real assets are a “good way of hedging some of that inflation risk” – with the fund seeking to outperform the UK consumer prices index (CPI).

© 2013 RIJ Publishing LLC. All rights reserved.

Aria Retirement Solutions has announced an enhanced version of its contingent deferred annuity (CDA) product, RetireOne Transamerica II solution. A registration statement for the product was filed with the Securities and Exchange Commission May 15.

The product is designed for use by registered investment advisors (RIAs) and their clients who want to add longevity protection to a portfolio of mutual funds or exchange-traded funds without purchasing a variable annuity contract. A CDA—once known as a stand-alone living benefit, or SALB—lets RIAs add lifetime income rider insurance to clients’ portfolios without changing the tax treatment of the underlying investments. There’s no surrender fee for letting the coverage lapse.

Aria Retirement Solutions provides the technology platform for the product, Transamerica Advisors Life provides the lifetime income guarantee and a variety of low-cost fund managers provide the investments.

Like a lifetime income benefit in a variable annuity, a CDA guarantees an income for life by putting a floor under the amount of assets on which the client can base an annual income for life. The income amount is also determined by the client’s age (age 60 or later) when he or she initiates the guaranteed income stream.

 In Aria’s CDA, the income amount also depends on the 10-year Treasury rate. For instance, at today’s rates, a 65-year-old single client could take 4% of the guaranteed benefit base per year for life. At a rate of 7% or more, the client could take 5.5% per year for life.

Like variable annuities with living benefits, retail CDAs aren’t necessarily cheap. Counting the RIA management fee (1% to 1.5%), the management fees on the underlying funds and ETFs, and the insurance fees, the total drag on the insured investments can exceed 3% a year, depending on the risk of the investments being wrapped.

Aria CEO David Stone told RIJ that the CDA fees aren’t comparable to VA fees, because the client would be paying the RIA management fee anyway and the funds and the ETFs in the CDA are ultra-low cost. A typical retail variable annuity will charge about 2%-2.5% for the base annuity and the living benefit rider.  Throw in the fund fees and the all-in cost is frequently 3%-3.5%,” Stone said in an email.

“With our CDA, we just offer the insurance component, which can be as low as 65 bps after all breakpoints,” he continued. “If we combine the insurance with a portfolio of low cost ETFs, the all-in investment related costs can be 90-95 bps. So, essentially for the cost of an actively managed mutual fund, a consumer can get guaranteed income for life.  

“Of course, the fees can go up for portfolios with greater risk or higher fees or if the advisor wants to use the account to deduct their fees. But we believe the majority of advisors will look to keep the all-in cost (before the RIA fees) to between 90-150 bps.  Also note, we work with advisors who just assess a flat fee or charge much less than 1-1.5%.”

So far, Aria may be the only firm that markets CDAs to retail investors and their advisors. So far, market penetration of the still-novel product category has been slow. The product is not available in all states. 

RIAs can’t wrap Aria’s longevity protection around just any investment portfolio they like. They must choose from among products in the 16 asset categories available under the Aria contract. There’s a different cap on portfolio allocations for each asset class. The caps are as low as 5% for emerging market small equities or alternative assets and as high as 100% for balanced funds and investment grade bond funds.

Eligible investments are listed on Aria’s website, www.retireone.com. They include funds and ETFs from Dimensional Fund Advisors (DFA), iShares, Schwab, Vanguard, and others. The program offers nine investment “Profiles” or “Strategies.” Their risk levels vary and the fees correspond to the risks.  

According to the SEC filing, each eligible investment has a “Fund Factor,” which Aria defines as “the factor derived from the use of a proprietary algorithm that attempts to assess the relative risk associated with each Eligible Fund. The algorithm factors criteria such as market data, historical volatility and other measures of exposure.”

There are several fee options for advisors to choose from, depending on whether they want the insurance fee and the advisor’s fee to be taken from the guaranteed benefit base or from a separate cash account, and whether the RIA charges a management fee of 1% or 1.5% per year.

© 2013 RIJ Publishing.

Putting to rest some uncertainty within the British retirement plan industry, the U.K. government announced that NEST, the publicly-backed, nationwide voluntary defined contribution plan designed for low- and mid-income workers, will shed its restrictions in 2017.

Until then, the restrictions will remain. Contributions to NEST will be capped and consolidation of other retirement accounts into NEST accounts will not be permitted. The news was issued by the Department for Work & Pensions—the English counterpart to our Labor Department—and reported by IPE.com this week.

NEST is a “public option” workplace retirement plan. It is Britain’s solution to a problem that the U.S. also faces: insufficient access to employer-sponsored retirement savings plans, especially among people who work at small companies, have modest incomes and belong to ethnic minority groups.

As in the U.S., where only about half of full-time private sector workers have access to a workplace retirement plans, Britain’s private plan providers have difficulty offering plan services at prices that small employers can afford. (Lack of adequate economies of scale is often the reason given.) NEST was created so that small employers could give their workers a viable, low-cost retirement savings option.

When NEST was launched, restrictions on contributions and transfers were placed on it for two reasons: to ensure that it remained focused on its target market, and to allay concerns among private-sector plan providers that NEST might be robust enough to attract business away from them. The government had intended to review the restrictions in 2017 and possibly remove them then. The administrators and supporters of NEST had hoped that the restrictions might be lifted by as early as 2014.

The restrictions make NEST a kind of second-class plan, at least temporarily. There was some concern among retirement policymakers here that the restrictions on NEST might inhibit small employers from choosing it for their employees, and that private providers might not be able to give small employers a low-cost option. Both factors could make Britain’s goal of getting the maximum number of workers auto-enrolled in some kind of plan by next year harder to achieve.

NEST officials claim not to be disappointed about waiting until 2017 for the removal of the restrictions. “The perception that our restrictions were a barrier in the early years of automatic enrolment haven’t actually been borne out by reality,” a NEST spokesperson said privately. “From our point of view we are very happy with the Government’s decision and we welcome the certainty this announcement brings to employers and members.

“Our UK reforms are built on developing and maintaining a strong consensus across the full range of stakeholder groups, representing different interests and communities and this decision has been warmly welcomed by all of them. This consensus has got us to where we are today and we all work hard to maintain it.

“There had been concerns expressed from some other providers that once the restrictions on NEST are lifted it could monopolize the market. But over time we have developed very good relationships with other providers who generally do now accept that NEST is performing an important, specific role within the UK market.”

According to a recent U.K. government report:

Less than one in three private sector workers are saving into a pension, and around 11 million people are not saving enough to achieve the retirement income they would like. Without action, this would increase pensioner poverty, place unsustainable pressure on the state, or both.

The UK is tackling this through:

• Reforms to the State Pension – equalization of and increases in State Pension age and simplification of the State Pension system to provide a solid foundation for individual saving; and
• A duty on all employers to automatically enroll eligible workers into a workplace pension with the incentive to save reinforced by a mandatory employer contribution.

Automatic enrolment commenced in July 2012 with the very largest employers and ends – with the very smallest employers – in April 2017.  Around 11 million people will be eligible, with six to nine million people newly saving or saving more.

Reform on this scale will transform the UK’s long-term savings culture, delivering social change on an unprecedented scale. Even under pessimistic assumptions about the number of people who might opt out of pension saving, automatic enrolment should lead to much higher participation in all workplace pensions than without the reforms. This will result in an extra £8 to 12 billion invested in pension saving each year once implementation is complete.

© 2013 RIJ Publishing LLC. All rights reserved.

A new proposal that if enacted could lead to vast changes in the current retirement plan system in the U.S., was described by Sen. Orrin Hatch (R-UT), the ranking member of the Senate Finance Committee, in a speech on the Senate floor Tuesday.

The “Secure Annuities for Employee (SAFE) Retirement Act of 2013,” as Hatch described it, would have deep implications for the public and private retirement systems. So far, Hatch hasn’t introduced a bill, even at the committee level. An informal document released by Sen. Hatch’s office said the bill would:

• Allow state and local governments to privatize their pensions by buying annuities from insurance companie.
• Allow small employers without retirement plans to sponsor “Starter 401(k)s” with simplified operating requirements.
• Stop the Department of Labor from creating a fiduciary standard for plan advisors by consolidating all fiduciary rulemaking for 401(k) plans and IRAs at the Treasury Department.

A July 9 report by the Wall Street Journal’s Washington Wire said, “MetLife Inc. and other insurers, which could gain significant business, and major business groups including the U.S. Chamber of Commerce have written letters endorsing Mr. Hatch’s concept. It’s less clear if the bill will catch on with unions or their allies in a Democratic-controlled Senate. Mr. Hatch plans to introduce the bill and then work to gather congressional supporters.”

No Senate co-sponsors have been named. A spokesperson at the Employee Benefit Research Institute said he had not heard anything about the bill until he read a press report on Tuesday. In a press release, the American Society of Pension Professionals and Actuaries said that the bill reflects many of ASPPA’s positions, as described in this document.

Support for the bill, according to a release by Sen. Hatch’s office, has come from the U.S. Chamber of Commerce, Americans for Tax Reform (ATR), MetLife, the Small Business Council of America (SBCA), American Council of Life Insurers (ACLI), National Association for Fixed Annuities (NAFA), National Association of Insurance Commissioners (NAIC), and the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA), among others.

The National Association of Insurance Commissioners, which Sen. Hatch’s office lists as a provider of support for the proposal, said that it has no position on it. A Treasury Department official said his group was about to begin studying it.

Impact on state and local governments and private insurers

Title I of the bill proposes to attack the public pension underfunding problem by allowing state and local governments to adopt “SAFE Retirement Plans.” The governments would buy life annuities from insurance companies. Using the plans would be optional.

The National Council on Public Employees Retirement Systems reacted negatively to Hatch’s bill. “Contracting out a non-profit enterprise to a for-profit insurance company makes absolutely no sense. Public pension plans are already in the business of providing their retirees with annuities. We self-annuitize – at a cost of 50 to 76 basis points, certainly a lower cost than a for-profit insurance company could offer,” said Hank Kim, executive director of NCPERS.   

Impact on small employers

Title II of the bill would expand access to workplace retirement savings plans by allowing small employers to create Starter 401(k)s that, according to Sen. Hatch’s website, allows employees to “save up to $8,000 per year, more than in an IRA, but does not involve the administrative burden or expense of a traditional 401(k) plan.” The release did not mention the Treasury Department’s proposed “Auto-IRA” for small employers, which also addresses lack of retirement plan access in the U.S.

Implications for the DoL’s fiduciary rule

Title III of the proposed bill would shift all authority over prohibited transaction rules to the Treasury Department and away from the Labor Department, where the Assistant Secretary of Labor and director of the Employee Benefit Security Administration, Phyllis Borzi, is preparing to re-issue a proposal for a fiduciary standard for plan advisors. Borzi’s first proposal, opposed by industry, could limit the ability of plan advisors to market retail services to participants in the plans they advise.

In an unsigned comment to the Washington Wire report cited above, a reader wrote that state and local government pensions would become much more expensive—or the benefits would shrink dramatically—if governments purchased annuities from private companies.

“The annuity writers will ‘price’ their products very conservatively to minimize the risk that they will be assuming,” the commenter wrote. “In other words, the cost to taxpayers to fund the same level of pensions currently promised will skyrocket. Essentially the 7%-8% assumptions for earnings growth currently used by all public-sector pension plans will drop to the 2.5%-4% level used by the annuity writers.”  

© 2013 RIJ Publishing LLC. All rights reserved.     

The belief that efforts to reduce poverty in the United States have flopped over the last half century isn’t justified, according to a new research paper by Bruce Meyer of the University of Chicago and James Sullivan of Notre Dame.

According to their article, “Winning the War: Poverty from the Great Society to the Great Recession (NBER Working Paper No. 18718),” the poverty rate declined by 26.4 percentage points between 1960 and 2010, with 8.5 percentage points of that decline occurring since 1980. They arrived at that conclusion by moving from “traditional income-based measures of poverty to a consumption-based measure and adjusting for bias in price indexes.”  

Figuring out who has benefitted from economic growth or redistributive policies and who would benefit from additional targeted policies depends critically on whether one examines consumption or income, the authors said. The consumption-based poverty results suggest much greater improvement for single parent families and the aged than do the income-based poverty measures. However, overall changes in consumption- and income-based measures are more similar for married two-parent families.

Despite repeated claims of a failed war on poverty,” Meyer and Sullivan write, “our results show that the combination of targeted economic policies and policies that support growth has had a significant impact on poverty…There have been noticeable improvements in the last decade, though they are not as big as the improvements in some prior decades… We may not have won the war on poverty, but we are certainly winning.”

The researchers considered vehicle ownership, housing, and other expenditures, using data from the Annual Social and Economic Supplement to the Current Population Survey and the Consumer Expenditure Survey. They also factor in inflation, changes in tax and transfer policies and demographics.

They conclude that tax changes, particularly expansions of the earned income tax credit, have noticeably reduced poverty. Increases in Social Security have played a large role since 1960. Other transfers have not been as important, at least in the past three decades. Rising educational attainment also helps explain some of the decline in poverty.

© 2013 RIJ Publishing LLC. All rights reserved.