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“Despite ongoing worldwide economic uncertainty, the global fund management industry grew at a 3.9% organic growth rate in 2012. Excluding money market funds, USD 565 billion flowed into mutual funds during the year,” said Morningstar’s latest Global Fund Flows Report, which measures mutual fund assets in Australia, Canada, Europe, Japan and the U.S.

“These massive inflows, though, fell short of 2009 and 2010, which saw inflows of USD 746 billion and USD 672 billion, respectively,” the report said. “Moreover, the average management fee that the industry gathers from investors has fallen dramatically since 2007 due to the cyclical shift to fixed-income products and a secular inclination toward less expensive funds.”

“The prevailing global trend in 2012 was investors’ hunger for yield and quest for the perceived safety of fixed-income funds. Worldwide, fixed-income funds gathered USD 535 billion in 2012, or nearly 95% of long-term net inflows,” said Syl Flood, product manager, investment research for Morningstar.

The report also showed:

• U.S. fixed income is by far the largest long-term global category, with nearly USD 2 trillion in assets under management (AUM). U.S. investors contributed USD 199 billion of the category’s USD 227 billion total inflow in 2012. The PIMCO Total Return fund is the world’s largest actively managed strategy, with USD 442 billion in assets (including assets managed for institutional clients). 
• In 2012, interest from cross-border investors propelled funds in the U.S. fixed-income category to a 47% organic growth rate. Many of the most popular offerings are tended by U.S.-based managers, including AllianceBernstein, Muzinich, Neuberger Berman and PIMCO.
• While 78% of worldwide mutual fund and exchange-traded fund (ETF) AUM still resides in actively managed funds, passive products captured 41% of estimated net flows—USD 355 billion—in 2012. With the exception of Australia and New Zealand, index funds grew faster than actively managed funds in every geographic region during the year.
• Newer funds—those without a three-year track record—captured 87% of worldwide inflows in 2012.
• Vanguard and PIMCO took in 16% and 18%, respectively, of worldwide long-term mutual fund inflows in 2012.

The report examines each key market in detail, analyzing flows by attributes such as broad asset class, Morningstar category, and fund group, as well as new fund launches and the active versus passive dynamic in each market. The commentary encompasses the 71 domiciles in which Morningstar tracks fund flows, accounting for USD 20.7 trillion in assets, and touches on the USD 1.9 trillion ETF universe tracked by Morningstar, when applicable.

W&S Financial Group Distributors, Inc., the wholesale distributor of annuities and life insurance for Western & Southern Financial Group’s member insurance companies, has introduced a new single premium deferred annuity, SmartStep.  

The product is aimed at the many Americans who are “sitting on the sidelines” with their money invested in short-term paper, waiting for rates to rise, W&S said in a release.

SmartStep offers four years of guaranteed rates: an initial rate set by the company at the time of issue, followed by three years of stepped-up rates. At the end of the guaranteed period, the contract will be credited with an annual renewal rate set by the company.

Contracts without a return of premium guarantee receive the initial rate in year one, the initial rate plus 40 basis points in year two, the initial rate plus 80 basis points in year three, and the initial rate plus 120 basis points in year four.

Contracts with a return of premium guarantee receive the initial rate in year one, the initial rate plus 15 basis points in year two, the initial rate plus 30 basis points in year three, and the initial rate plus 45 basis points in year four. A floor interest rate of 0.50% (1% in New York) is guaranteed for the life of the contract

The SmartStep SPFA also features:

• An optional return-of-premium guarantee on surrender. (The cost of the guarantee is lower interest rate step-ups in contract years two through four.)
• Optional annuitization for single or joint annuitants. 
• A guaranteed death benefit.
• Provisions for limited access to free withdrawals.    
• A 7% surrender penalty for years one through three, 6% for year four, 5% for year five, 4% for year six and zero percent after. 
• A minimum premium of $20,000.
• Contract availability for issue ages 18 through 89.

Western-Southern Life Assurance Company, Cincinnati, and National Integrity Life Insurance Company, Goshen, New York, both offer SmartStep. Both are units of Western & Southern, which is rated AA+ (Very Strong) by Standard & Poor’s.   

© 2013 RIJ Publishing LLC. All rights reserved.

Poland is struggling to maintain two shaky retirement “pillars” for its citizens: a first pillar similar to our Social Security system and a newer, voluntary pillar whose assets are invested in professionally-managed funds.

To help reduce a general budget deficit, the government has already had to divert contributions away from the second pillar, a defined contribution plan whose Polish acronym is OFE, to the Pay-As-You-Go first pillar, whose Polish acronym is ZUS.

The nation’s Labour and Social Policy Ministry is currently consulting the finance, economy and treasury ministries, the Social Security Institution (ZUS), the National Bank of Poland, the Polish Financial Supervision Authority  (KNF) and the Warsaw Stock Exchange (WSE). Executives at Aviva and ING are also weighing in.

Since the financial crisis, the establishment of a viable second pillar has been hindered by fact that the ZUS fell into deficit. In 2011, the mandatory contribution to the OFE was cut to 2.3% from 7.3%, with the remaining 5% was sent to the ZUS. The OFE contribution rate has since risen to 2.8% in 2013 and is set to increase to 3.5% by 2017. Their accumulations in OFE funds are expected to provide 20-25% of a final pension for Poles.

The transfer helped reduce the government’s overall budget deficit, which the European Union has ordered it to reduce. But the diversion of money away from the OFE has negative implications for bank deposits, equity prices and ultimately Poland’s economy.

Pawel Pytel, chief executive of Aviva Pension Fund Management Company, said the OFE money should remain invested on the capital markets, and not get swallowed by the ZUS, whose deficit is projected to nearly double by 2020. 

“Future taxes and employee contributions will have to rise to secure the first pillar’s liabilities,” Pytel told IPE.com. “We can generate better returns than the current ZUS indexation, and, from a client’s view, it’s safer if there are two sources of financing future pensions.”

A further shift of funds to the ZUS from the OFE would require the OFE’s fund management companies to sell off assets, potentially lowering securities prices. In any case, there will be less money flowing into the OFE, since participants approaching retirement are expected to make progressively smaller contributions.

“There will be huge implications for the capital markets and Poland’s GDP,” said Grzegorz Chłopek, president of the board and chief executive at ING PTE, if money is drained from the OFE investment funds.

He predicted reduced bank liquidity, less co-financing of infrastructure projects, a smaller market for IPOs and SPOs on the Warsaw Stock Exchange, and problems for the bond market. “After several years, we will see a deep recession due to lack of stable long-term capital enabled for borrowers,” he said.

© 2013 RIJ Publishing LLC. All rights reserved.

Half of defined contribution (DC) participants still do not know how much they pay in plan annual fees and expenses, a proportion that appears unchanged by the implementation of fee disclosure regulations in 2012, according to LIMRA, the Life Insurance Marketing Research Association.

LIMRA surveyed DC plan participants before and after plan participants received information about their plans’ fees and expenses to determine how effective the disclosure statements were and how participants would react.

Prior to receiving disclosure notices, 50% of participants said they did not know how much they paid in fees and expenses; the same portion did not know subsequent to receiving the notices.

“The disclosure notices — or the discussion of them — did seem to improve the knowledge of those who believed they didn’t pay any fees or expenses,” said Alison Salka, corporate vice president and director of LIMRA Retirement Research.

“There are nearly 75 million workers who participate in defined contribution plans in the United States. Our study found that 22% of participants believed they didn’t pay fees and expenses after receiving disclosure notices, compared with the 38% in our first survey, prior to disclosures going out.”

The study found that many participants overestimated the amount of fees and expenses they pay in their DC plans.   Forty-two percent of participants believe they pay 10% or more — with over a quarter of participants believing they paid 25% or more in fees and expenses.

On average, DC plan fees and expenses range between 1-2 percent, depending on the size of the plan and the participants’ allocation choices. LIMRA’s study found that less than one in three participants who thought they knew how much they paid estimated their fees and expenses to be under two percent.

The survey found that 7 in 10 participants who said they knew they paid fees and expenses believed those fees and expenses to be reasonable, similar to what LIMRA found in its survey prior to the disclosure notices being sent

“There was much speculation on how consumers would respond to the disclosure notices, yet our consumer surveys and discussions with plan service providers indicate that there has been limited reaction to learning about their fees and expenses,” noted Salka.  

A putative Class Action Complaint was filed in the United States District Court for the District of Massachusetts last week, accusing Fidelity Management and Trust Company and others of fiduciary breaches over its handling of float income, according to press reports.

The suit was filed by participants in 401(k) plans from Bank of America, EMC Corp. and Safety Insurance Co., and it contains similar allegations to another suit, filed in the Boston federal court February 5, by current or former participants of plans from Hewlett-Packard Co., Delta Air Lines Inc. and Avanade Inc., a subsidiary of Accenture.

The February 5 suit was filed for Timothy Kelley (an ex-participant in the Avanade and Hewlett-Packard 401(k) plans) and Jamie Fine (a participant in the Delta 401(k) plan), but class action status is being sought on behalf of all Fidelity 401(k) participants, not just participants in the Avanade, Delta and HP plans.

According to the February 5 complaint:

Fidelity caused certain of the Plans’ assets to be deposited on an interim basis in interest-bearing accounts before it invested or disbursed monies as directed by the Plans’ participants. Income earned on or derived from the Plans’ assets while invested in such accounts is “float income.” The float income was an asset of the Plans under ERISA. Fidelity exercised discretion and control over the investment of the Plans’ assets in such accounts and over the collection and allocation of float income. Accordingly, Fidelity was a fiduciary for the Plans with respect to the float income. As a fiduciary, Fidelity was prohibited from dealing with the float income for itself or for the benefit of another and was required to deal with that float income with prudence and unflagging loyalty. Fidelity did not. Instead, it engaged in prohibited transactions and breached its fiduciary duty in two distinct ways.

First, Fidelity used float income to pay itself trust and record-keeping fees above and beyond the fees authorized in the trust agreements between the Plans and Fidelity. Thus, Fidelity engaged in repeated self-dealing transactions and breaches of duty in violation of § 406 and § 404 of ERISA whenever it paid itself float income.

Second, Fidelity remitted float income into the mutual fund options selected by the Plans’ participants without crediting the amount of that float income to the contributions made by Plans or the Plans’ participants. This had the effect of disseminating the value of the float income generated by the Plans’ assets to all of the investors in the mutual fund, and substantially diluting the value of the float income received by the Plans and the Plans’ participants. Thus, Fidelity engaged in repeated transactions for the benefit of others and breaches of duty in violation of § 406 and § 404 of ERISA whenever it invested float income into its mutual funds.

Both float-income suits refer to a March 2012 opinion of a judge in U.S. District Court in Kansas City, Mo., in a lawsuit by plan participants against ABB Inc., Cary, N.C., and Fidelity. The judge ruled that Fidelity had “breached its fiduciary duties” in the use of float income, and ordered Fidelity to pay the plan $1.7 million. Fidelity is appealing the decision.

“Our practices are in compliance with ERISA and DOL guidelines,” Jennifer Engle, a Fidelity spokeswoman, told Pensions & Investments magazine. “We believe that the practices described in the lawsuit are consistent with the law and fair to all parties and that we provide valuable services to 401(k) clients for whom Fidelity serves as a record keeper and trustee.”

© 2013 RIJ Publishing LLC. All rights reserved.

The UK’s pension minister, who has proposed a “defined ambition” approach to retirement funding that would spread longevity and investment risk among plan providers and plan participants, says the private sector might need public help in underwriting the guarantees that such plans would entail.

Speaking at a joint OECD/Pension Institute conference on defined contribution, Steve Webb said that a government-backed DC protection fund could be the best way to allow for cheap guarantees due to the “challenges” posed by the solvency requirements for private sector approaches.

“If we are going to have financial guarantees, they have got to be backed,” Webb told a joint OECD/Pensions Institute conference on DC, guarantees and risk sharing yesterday. “Backing through solvency is very, very expensive.”

He said individual banks had discussed with his department how best to achieve guarantees and that the Department for Work & Pensions (DWP) had been examining both the possibility of private and quasi-government solutions – the latter of which, he said, were potentially more able to provide security “cheaply.”

Speaking at the same event, the chairman of the National Employment Savings Trust (NEST) Lawrence Churchill praised the proposed DC Pension Protection Fund (PPF), which Webb has described as a “smoothing fund” for participant outcomes.

He appeared to view greater risk sharing as a possible route, telling attendees: “We do need a better solution than merely transferring all of that risk onto those who don’t understand it.”

But Tim Jones, chief executive of NEST, noted that NEST had considered introducing a level of guarantee, but decided against it. He appeared to favor higher contributions by members rather than guarantees. He said it was important for “people to put more money in and to put that extra money to harder work.”

© 2013 RIJ Publishing LLC. All rights reserved.

Global defined contribution (DC) assets should reach US$13.7 trillion by 2016, according to the latest report from Cerulli Associates. By then, Australia will be the third-largest market after the United States and the United Kingdom.

In other Cerulli findings:

The United Kingdom is the only market with assets in excess of US$1 trillion that is expected to have double-digit growth. Asia ex-Japan shows immense potential with Korea and Taiwan registering the strongest growth rates across the region. China, Hong Kong, and Thailand are expected to grow more than 10%. 

Europe has the greatest immediate potential for growth. The region is forecast to have more than US$6.8 billion in assets under management in 2013. The United Kingdom and the Netherlands have the greatest potential, but Poland also offers huge opportunities. Managers can tap growth in disparate markets, but local knowledge, language skills, and after-sales service are needed to access the addressable assets. While it is possible to identify common themes, much also depends on a country’s regulatory environment and investment heritage. 

“Performance is considered an important attribute by most European trustees and consultants, but low fees act as a trump card in competitive tenders in Italy,” says Barbara Wall, director at Cerulli Associates. “In Germany it is steadiness of returns and a coherent investment strategy that win. In the Netherlands and the Nordic region expertise in proven alpha niches is a competitive advantage, whereas in France it is an association with an insurance company that holds sway.” 

In other findings: 

• In the United States, United Kingdom, and Latin America, consultants are the most important gatekeepers. In contrast, their role is less significant in Asia and continental Europe, where banks and insurance companies are the primary gatekeepers. Auto-enrollment in the United Kingdom opens the door to platforms, which will be particularly appealing to employers keen to outsource complex and time-consuming processes.  
• In the United States, as income from defined benefit schemes dwindles, consultants’ interests in DC plans clashes with retirement specialist advisors. Advisors are moving up-market from small plans and have developed fee-for-service models. Cerulli research indicates that there are more than 3,000 specialist advisors in the United States, of which about 600 teams demonstrate consultant-like characteristics. Opportunities for consultants in Brazil, meanwhile, are likely to mushroom as rules on international investing are liberalized.   
• Pressure on fees is one trend that is close to being universal. Most of the investors polled in the Nordic region, the United Kingdom, and the Netherlands told Cerulli the crisis has prompted them to negotiate fees more vigorously. These same interviewees also said they were prepared to share extra returns with managers who could deliver stable performance. Continuity in returns was the common requirement and a key to new business. 

© 2013 RIJ Publishing LLC. All rights reserved.

The United States ranks 19th worldwide in the retirement security of its citizens, according to a new annual index compiled by Natixis Global Asset Management (NGAM), the world’s 13^th largest investment management firm.

The Natixis Global Retirement Index gauges how well retired citizens live in 150 nations, based on measures of health, material wellbeing, finances and other factors. The study was released today by the NGAM Durable Portfolio Research Center, which conducts research on risk management, asset allocation and other investment issues.

Though the U.S. is the world’s biggest pension market, it lags behind less-affluent nations on measures of income and health, according to the index. While the U.S. leads the world in per-capita health spending, individuals are still responsible for a portion of this expense.

Western European nations with universal health care and retiree social programs dominate the top of the rankings, taking the first 10 spots. Norway is first overall, followed by Switzerland, Luxembourg, Sweden and Austria. Australia is the highest-ranked non-European country, followed by Israel and Canada. The U.S. finished ahead of the United Kingdom, but trailed the Czech Republic and Slovakia.

Demographic challenges
Like many other nations, the U.S. is grappling with significant demographic change, including a rapidly aging population, rising life expectancy rates and declining birth rates. Globally, the number of people aged 65 or older is on track to triple by 2050, when the ratio of the working-age population to those over 65 in the U.S. is expected to drop from 5-to-1 to 2.8-to-1.

According to a recent Senate report, the U.S. faces a retirement savings deficit of $6.6 trillion, or nearly $57,000 per household. As a result, 53% of American workers 30 and older may be unprepared for retirement, up significantly from 38% in 2011.

Only half of all workers have access to employer-sponsored plans, and those who do participate often make the common mistakes of saving too little or investing too much in lower-returning products.

The Natixis Global Retirement Index is a composite index that combines 20 indicators grouped into four major categories: health; material well-being; quality of life in retirement; and finances.

CoreData Research, a London-based financial research firm, captured data from a variety of sources, calculated a mean score in each category and combined the category scores for a final overall ranking of 150 nations.

The categories, and the subjects they comprise, are:

• Health: Per-capita health spending, life expectancy, the availability of physicians and hospital beds per 1,000 citizens, and the level of noninsured health spending. (Sources: World Bank’s Development Indicators, 2012; World Health Organization)
• Material well-being: Per-capita income, income inequality and unemployment. (Source: World Bank)
• Finances: Old-age dependency (the ratio of retirees to workers), inflation, interest rates, taxation level and bank nonperforming loans. (Sources: World Bank, United Nations)
• Quality of life: The level of happiness and satisfaction of citizens, as well as the quality of the climate and environment. (Sources: Gallup World Poll 2012; Environmental Performance Index 2012)

© 2013 RIJ Publishing LLC. All rights reserved.

ING U.S. has launched the ING Lifetime Income single premium deferred fixed annuity, issued by ING USA Annuity and Life Insurance Company (ING USA).

ING U.S. currently offers an in-plan guaranteed income investment option for 401(k) participants as well as a series of retirement income planning and education resources for ING Financial Partners’ financial advisors. 

 “ING USA’s new deferred fixed product rewards those who have the ability to postpone their income withdrawals, by stepping up their future available income withdrawal amount. If their needs shift, the individual can access a portion of the funds along the way although this will result in reduced future income withdrawal amounts,” said Chad Tope, president of ING U.S. Annuity and Asset Sales.

The ING Lifetime Income annuity offers two deferral bonus opportunities. If income payments are deferred for five years, the available income withdrawal amount is boosted by 150%. With a ten-year deferral, the available income withdrawal amount gets a guaranteed boost of 225%.

Another potential growth feature is linked to changes in the S&P 500® Index.  If the S&P 500 Index is higher at the end of a contract year than at the beginning, the available income amount increases by this percentage subject to an annual cap on the amount of this increase. The index cap is currently 6% and is fixed for the life of the contract. ING may declare a different index cap in the future for new contracts.

While there is upside potential, the income amount will not be decreased as a result of a decline in the S&P 500 over the course of the year.  The step up benefit and index-linked growth increase the benefit value, which is used to determine the income withdrawal amount only and do not increase the contract’s account value.

The income amount has the potential to grow until lifetime income withdrawals start, at which point the amount is locked in and the income withdrawals will continue for an individual’s lifetime, or the lives of two spouses if there are joint owners.  An optional death benefit grows in a similar way, providing protection for beneficiaries and helping with legacy planning.

© 2013 RIJ Publishing LLC. All rights reserved.

The life insurance unit of Houston-based Forethought Financial has launched the ForeRetirement variable annuity with “daily benefit options.” The contract, which marks the company’s first entry into the VA market since acquiring The Hartford’s annuity business, is available in B, C and L shares.

ForeRetirement will be distributed in partnership with national, regional and independent broker/dealers, as well as banks. It has been approved in 49 states and the District of Columbia, covering all jurisdictions where Forethought Life Insurance Company issues variable annuity business.

The contract’s “Daily Lock Income Benefit” guarantees lifetime withdrawals for retirees as a percentage of the benefit base, which can grow through favorable investment performance. The benefit captures new contract value highs on a daily basis, known as “step-ups,” to age 90, with a minimum deferral bonus of 6% simple interest credited until the 10^th contract anniversary or the first withdrawal if sooner.   

Contract owners who elect the income benefit can also elect the “Legacy Lock” death benefit option. It allows contract owners to provide beneficiaries with death benefit proceeds at least equal to the amount of premium invested. The death benefit will not reduce for withdrawals, unlike traditional annuity death benefits, as long as the benefit’s requirements and guidelines are met.

© 2013 RIJ Publishing LLC. All rights reserved.