Archives: Articles

IssueM Articles

A Primer on Safety-First Retirement Planning

One book I picked up on a whim for my new Kindle is Erin Botsford’s The Big Retirement Risk: Running Out of Money Before You Run Out of Time. I didn’t know what to expect. And I almost stopped reading in the first chapter when she laid claim to creating something she calls Lifestyle Driven Investing.

This is the basic goals-based approach to investing, which is already called Liability Driven Investing when used by pension funds. Changing the word liability to lifestyle is a good idea, because while pension funds think of their future payment promises as corporate liabilities, individuals also have liabilities that are less natural for them to identify as such. These liabilities are their future spending needs to support their lifestyle.

Investing, especially in retirement, shouldn’t be driven by maximizing risk-adjusted returns over a single time period, but by what can best help you to secure your future spending needs.
That being said, I’m glad I finished the book. She did cite other resources, and she does seem to be well-intentioned and not just another snake oil salesperson claiming credit for others’ work.

What she describes in the book is a good example of the safety-first approach to retirement planning. As she is a practicing financial planner, it is nice to be able to add another name to the list of planners using the safety-first approach. 
Usually, the safety-first approach is criticized as being too academic and too unrealistic for the real world. The book doesn’t really contain anything new, but it is a nice overview and introduction to safety-first ideas.

Erin does a good job explaining the safety-first approach to readers who may be unfamiliar with the concept, and whose knowledge about retirement planning may be based mostly on concepts like the 4% rule from the diametrically opposed school of thought of retirement income: the probability-based approach.

First she explains four Wall Street myths: The stock market always goes up in the long-term; the modern portfolio theory concepts of diversification and asset allocation are the keys to retirement success; financial service firms provide a broader range of investment options than are otherwise available to household investors; it is net worth which determines one’s lifestyle in retirement.

The book then takes an excursion about the relationship between investment returns and demographic trends and also the relationship between demography in the social welfare system. It’s a nice overview, but perhaps not all that relevant to the overall purpose of the book.

Next, she returns to safety-first principles by describing how one’s lifestyle spending can be separated into different categories. She identifies four categories in her house of security: Needs, wants, likes, and wishes. Here she is talking directly about the spending, rather than the assets that will cover each of those spending categories, but the overall concept is the same. This is because different assets are used to meet the different spending categories.

For spending needs, she recommends using what she calls lifestyle investments. These are investments that produce income, and that must be considered either safe or predictable or guaranteed. She also suggests that these assets be in a legal entity that will provide protection in the event of a lawsuit.

This is the basic concept of goals-based investing in which you first build a floor to meet basic needs. Investment categories can include bonds and annuities. She describes a variety of different types of annuities, and I think she did a good job in explaining advantages and disadvantages of different approaches.

For wants and likes, she suggests hybrid investments. These are investments that would generally provide an income that is not safe or guaranteed. Examples include preferred stock, publicly traded REITs, covered calls, master limited partnerships, dividend stocks, etc. Once needs, likes, and wants are met, more volatile, [growth-oriented] investments can be used to achieve one’s wishes.

Again, these are all basic tenets of the safety-first school of thought, which provides a stark contrast to probability-based notions like failure rates and “safe” withdrawal rates. Anyone seeking a basic introduction to this school of thought could be well served by reading this book.

This book review was adapted from a post at wpfau.blogspot.com.

Quote of the Week

“When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this—just wait for the depression which will come sooner or later. When this depression—or panic—becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back all the stocks. No doubt the stocks will go still lower. Again, pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.”

Where are the Customers’ Yachts? or A Good Hard Look at Wall Street, by Fred Schwed Jr.

As an Investment, Will Gold Pan Out?

Gold, the value of gold, and the wisdom of owning large amounts of gold today is the topic of a new research paper written by Campbell R. Harvey of Duke University and Claude Erb and published by the National Bureau of Economic Research.

In their conclusion, the authors write, “Investors are faced with a golden dilemma. Will history repeat itself and the real price of gold revert to its long-term mean – consistent with a ‘golden constant’?

“Alternatively, have we entered a new era, where it is dangerous to extrapolate from history? Those are the uncertain outcomes that gold investors have to grapple with and the passage of time will do little to clarify which path investors should follow.”

The paper lists six traditional arguments for owning gold: As an inflation hedge; a currency hedge; an alternative to assets with low real returns; as a safe haven; because the world will return to a gold standard; and because it is “under-owned.” 

Then the authors assess each of these rationales. Goldbugs may not agree with their findings. They write:

We find little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short term or the long term. The gold-as-a-currency-hedge argument does not seem to be supported by the data.

The fluctuations in the real price of gold are much greater than FX changes. We suggest that the argument that gold is attractive when real returns on other assets are low is problematic.

Low real yields, say on TIPS, do not mechanically cause the real price of gold to be high. While there is possibly some rational or behavioral economic force, perhaps a fear of inflation, influencing variation in both TIPS yields and the real price of gold, the impact may be more statistically apparent than real. We also parse the safe haven argument and come up empty-handed.

History buffs may enjoy the article, which offers such nuggets of knowledge as this:

In the era of Emperor Augustus (reigned from 27 B.C. to 14 A.D.), a Roman legionary was paid about 2.31 oz. of gold a year (225 denarii) and a centurion was paid about 38.58 oz. of gold a year (3,750 denarii). Converted to U.S. dollars, the pay of a Roman legionary was about 20% that of a modern day private in the U.S. Army and the pay of a centurion was about 30% greater than the pay of a captain in the U.S. Army.  

And those who relish science or even science fiction may enjoy the following:

The near‐Earth asteroid 433 Eros might contain up to 125,000 metric tons of gold… There are currently 15 near‐Earth asteroids with expected profit greater than $1 trillion. Closer to home, perhaps someday in the future someone will figure out how to implement Nobel prize winner Fritz Haber’s plan to electrochemically recover some of the estimated 8 million tons of gold in the world’s oceans.

My personal fascination with gold and the gold standard stems from a long-ago experience in Europe. In mid-August 1971, while pedaling my pannier-laden Peugeot UO-8 from Fontainebleau to Paris, I stopped at a local bank branch in Melun to change a traveler’s check into francs.

The teller was flustered because she didn’t know how many francs to trade me for my green $20 American Express check. President Nixon had just for practical purposes ended the Bretton Woods Agreement and taken the dollar “off gold.” That eventually left the exchange rate to float… or, as Nixon’s aides might have put it, “to twist slowly in the wind.” For some reason, the teller chose to give me the (higher) previous day’s rate. I continued on my way, and the rest is history.

Correction: Nixon didn’t take the dollar “off gold” in 1971 as suggested above. According to Erb and Harvey, the U.S. did not officially embrace a monetary system of pure fiat money until October 1976. According to “A Brief History of the Gold Standard in the United States, by the Congressional Research Service (June 23, 2011):
“The United States began to halt its redemptions of dollars into gold for international transactions in 1967 and 1968. The actions of 1971 and 1973 were not the adoption of floating exchange rates and fiat money, but the loss of the ability to redeem dollars at a fixed price. Floating occurred by default.”

© 2013 RIJ Publishing LLC. All rights reserved.

DoubleLine repeats as fastest-growing active fund manager

Emerging market bond and stock funds, non-traditional investment strategies, innovative income approaches, and bond fund leadership typified the investment themes of the mutual fund managers (of those managing at least $2 billion) with the highest rate of net inflows in 2012, according to Strategic Insight.  

The list of the fastest growing managers in 2012 includes many small and mid-size mutual fund managers. Each of the listed managers enjoying over $10 billion of net inflows during 2012 has increased their flows from 2011, some more than doubling. (See table of fastest-growing active managers below.)

DoubleLine Capital, a $37 billion Los Angeles firm, was the fastest-growing actively-managed mutual fund firm in the study for the second consecutive year. Of its assets, almost all is in DoubleLine funds and about $35 billion is invested in mortgage-backed securities. (See chart at bottom.)

“During 2012 fund managers across a wide range of strategies and size benefitted from rapid expansion of their assets and clients’ relationships,” said Avi Nachmany, Strategic Insight’s Director of Research, in a release. “In 2013 we expect the range of participating managers to expand further as demand for equity funds increases.”

Managers of index mutual funds and index-based Exchange Traded Products have benefited from dramatic expansion during 2012, as assets managed by such funds eclipsed $2.5 trillion and net inflows exceeded $250 billion.

About half of these annual flows were captured by Vanguard’s managed funds or ETFs, with significant gains also by BlackRock’s iShare unit and by State Street Global Advisors (SSgA).

“Economy of scale allows the largest providers of index strategies to pass costs savings to investors. But a number of smaller managers of index funds and ETFs also grew meaningfully last year,” added Nachmany.

A number of managers of target date strategies beyond the traditional major players experienced substantial growth over the year. “Fastest growing target date managers in 2012 included JPMorgan, MFS and John Hancock,” said Bridget Bearden, head of Strategic Insight’s Defined Contribution and Target Date funds practice.

(Source: Strategic Insight.)


(Source: DoubleLine.com)

© 2013 RIJ Publishing LLC. All rights reserved.

Immediate annuities unattractive today: Journal of Financial Planning

Given today’s low payout rates from immediate fixed annuities (IFA), many retirees would likely be better off waiting until interest rates improve or delaying the IFA purchase decision to an older age.

So concludes an article published in the current issue of the Journal of Financial Planning by David M. Blanchett, CFP, of Morningstar, who also asserted that IFAs appear more attractive for individuals than couples.

“IFAs remain an attractive longevity hedge for retirees age 80 or older, as well as for retirees who have a strong preference for guaranteed income and want to simplify the income-generation process, versus attempting to self-fund from a traditional retirement portfolio,” Blanchett writes.

The article is filled with charts and tables demonstrating the value of an immediate annuity at different ages, different withdrawal rates, and different prevailing interest rates.

© 2013 RIJ Publishing LLC. All rights reserved.

New Cerulli report focuses on the top 1% of U.S. households

High-net-worth investors maintain an average of 3.7 investment provider relationships, up from 3.3 in 2008, according to the latest research from Boston-based global analytics firm, Cerulli Associates.

“High-net-worth investors have more provider relationships and are more likely to change providers than other investors,” said Cerulli director Bing Waldert in a release.

Cerulli’s report, High-Net-Worth and Ultra-High-Net-Worth Markets 2012: Understanding Bank Trust Departments, Family Offices, Private Client Groups, and Other HNW Providers, analyzes the U.S. high-net-worth (investable assets > $5 million) and ultra-high-net-worth (investable assets > $20 million) marketplaces. It covers vehicle usage, fees, and services provided at bank trust departments, family offices, and private client groups.

Despite the high-net-worth market’s competitiveness, it remains appealing to providers and asset managers, said the Cerulli report, now in its fifth iteration. Providers are drawn to the large balances of high-net-worth investors and to their complex situations.   

High-net-worth investors will begin to consolidate their providers and urges providers to consider how to position themselves as the advisor of choice when the time comes, the release said.

Cerulli gathered data from proprietary surveys of bank trust asset managers, bank trust groups, HNW providers, and HNW asset managers. Investor data is drawn from Cerulli’s relationship with Phoenix Marketing International, while advisor data is provided by Cerulli’s annual advisor survey.

According to the Spectrem Group, 1,078,000 U.S. households are worth $5 million or more and about 107,000 people are worth $25 million or more. The $5 million-plus crowd is dominated by senior corporate executives (17%) and entrepreneurs/owners (12%).

© 2013 RIJ Publishing LLC. All rights reserved.

Interested in a D.C. pied-a-terre?

The opulent, historic and highly-secure Washington, D.C., residence of Barack and Michelle Obama has been valued by Zillow, publisher of the Zillow Home Value Index, at $294.9 million, or about 7% more than its appraised value when the Obamas moved in four years ago. Average home values in  the city of Washington rose 13.6% during the past four years.

If the White House were for sale, the official residence of the U.S. president would be the third most highly-appraised home in the world, ahead of the penthouse of One Hyde Park in London and behind the Villa Leopolda on the French Riviera. The most expensive home in the world is the 27-floor “Antilia” in South Mumbai, valued at at least $1 billion.

Zillow calculates the value of the White House as if it were a home that could be bought and sold, using the proprietary Zestimate algorithm, which determines a home’s estimated worth based in part on public data and recent sales.

To determine the White House Zestimate, Zillow looked at the home’s physical characteristics, including 55,000 square feet of indoor space, 132 rooms, 35 bathrooms, 16 bedrooms, three kitchens and 18 acres of premium, downtown Washington, D.C., land.

They then considered the most expensive home sales in Washington, D.C., as well as other historic homes in the D.C. area recently for sale, and calculated the amount historic homes typically fetch over similar homes with no historical significance.

Zillow’s statisticians deemed the White House the most historic home in America and applied a maximum historical premium to their models to determine its Zestimate value.

A standard 30-year fixed rate mortgage on the White House today (assuming 20% down and a 3.276% interest rate) would require a monthly payment (including taxes, insurance, principal and interest) of $1,130,832, according to Zillow. As a rental, the White House would bring more than $1.75 million per month, according to Zillow’s Rent Zestimate.

© 2013 RIJ Publishing LLC. All rights reserved.

Five Questions to Ask about DIAs

In their quest for low-risk yield, investors and advisors have looked into every financial nook and cranny that they can dream of.  That search has helped to turn a former step-child of the annuity world into a Cinderella.

We’re talking now about deferred income annuities (DIA), aka Advanced Life Deferred Annuities (ALDAs), aka longevity insurance. If your client has a good chance of living to age 90 or 95, he or she might consider buying this.

Until mid-2011, few people other than annuity wonks like Moshe Milevsky of York University or Jason Scott of Financial Engines championed DIAs, which allow a person to fund an income that starts up to 40 years after purchase. Advisors and the public largely ignored it. 

Things began to change in 2011, after New York Life introduced a DIA called the Guaranteed Future Income Annuity. Sales rapidly crossed the $1 billion mark, which is lemonade-stand money on Wall Street but a large sum in the income annuity world. Soon MetLife, Symetra, MassMutual, American General (AIG) and Guardian were dusting off existing DIAs or christening new ones. Just last week, Fidelity announced that it had added MassMutual’s RetireEase Choice DIA to its Fidelity Insurance Network platform, along with the New York Life Guaranteed Future Income Annuity II.

Why the surge? Part of the explanation has to be that, in a low-yield era, people can get an attractive discount on future income by buying it a decade or more in advance. A life insurer who issues the contract can offer a discount for two reasons: because the premium generates interest during the deferral period and because (in the case of a life-contingent DIA) the annuitant may not live to collect.

If you’re determined to think of DIAs and other income annuities purely as investments, and you hear an internal voice asking what their IRRs are, they’re probably not for you. But if you think of them as insurance that relieves your client of the need to hoard cash against the possibility that he or she might live to age 90 or 95, then DIAs can make a lot of sense… at least in principle.

Consider the Guardian Life SecureFuture DIA. Today, if a man plops down $100,000 at age 45 for a Guardian DIA, he can get $22,386 a year for life at age 75, with income guaranteed for at least 10 years. The contract pays a cash refund if he dies during the deferral period. Time is money, of course: If your client has just turned 60 and wants to buy that DIA, he will get only about $13,100 a year at age 75, thanks to the shorter deferral period.

To get the maximum value out of a DIA, you should do what few people choose to do in practice: take a life-only DIA contract that doesn’t pay out until after age 85, when a 65-year-old’s chance of still being alive is about 50/50. For instance, for $100,000 at age 60, MetLife will provide a man with a single life-only contract that pays $42,400 (for a woman, it’s $41,000) starting at age 85. 

You can buy a DIA with either after-tax or qualified money, but the required minimum distribution requirements add a wrinkle (though not necessarily a serious obstacle) to the use of qualified money. If you’re looking for a deep-dive analysis of the DIA, and a comparison between DIAs and GLWBs, I recommend papers that Joe Tomlinson, CFP, wrote for Advisor Perspectives in March and April of 2012.

One nice feature of most of the current products is that they allow flexible premiums. A person can open a DIA for as little as $5,000 or $10,000 at age 40, say, and add to it over time. Contract owners don’t have to commit all of the money during today’s low-rate environment.

Given the long-dated nature of the guarantee, you naturally need to buy from a life insurer with stellar financial strength ratings. Independent advisors who make their living from a percentage of AUM may still be able to earn a fee, albeit a smaller one, from the money that goes into the DIA. But that’s a topic for another day.

Questions you might ask your or your client when considering a DIA:

1. Does your client have $500,000 to $1 million in investable assets? If so, he probably has enough liquidity to apply 10% to 20% toward eliminating his risk of living a very long time, and not so much wealth that he can easily self-insure against longevity risk.   

2. Is your client, or your client’s spouse, a healthy, non-smoking woman? If so, there’s a good chance she will be alive for five to 10 years after age 85, and able to collect the benefit. Like diamonds, a DIA can be a girl’s best friend.

3. If you decide to buy, how should you design the contract? DIAs come with most of the same options that you’ll find in single-premium immediate annuities, including cash refunds, joint-and-survivor payouts, periods certain, and inflation adjustments. The product costs the least (and, conversely, has the highest risk of forfeiture) when there’s no cash value and income starts after age 85. Most clients will choose to give up some income in favor of some protection against forfeiture.

4. Does your client have a strong bequest wish? This is a trick question. Under the typical scenario, someone who wants to maximize his bequest to heirs is a terrible candidate for a life-contingent annuity. On the other hand, someone who knows he has an income starting at age 85 may, as mentioned above, feel less pressure to hoard wealth right up until the time he dies. He can be more generous during his lifetime. 

5. Do you think a longevity annuity would allow you to invest the client’s remaining money with more freedom? The biggest benefit of a DIA, or any income annuity, may be the added risk it allows a client to take with the rest of his money. A 60-year-old client with $1 million and no DIA has to be careful with his money. A 60-year-old with $900,000 and an annuity that pays $40,000 a year in 25 years can arguably take on more investment risk and worry less about the future during the interim. The potential gains from greater risk-taking could offset the price of the annuity. On the other hand, if your client intends to be cautious with his $1 million anyway, and has a strong “bequest motive,” there may be little opportunity lost by foregoing the annuity.   

© 2013 RIJ Publishing LLC. All rights reserved.   

Guardian Life launches deferred income annuity

Following through on plans announced late last year, The Guardian Insurance & Annuity Co., Inc., part of Guardian Life, has introduced a deferred income annuity (DIA) that can be created with as little as $5,000 and provide income that starts up to 40 years after the purchase date.    

The DIA product is called Guardian SecureFuture Income Annuity. Along with SPIAs (single premium immediate annuities) and the Guardian Investor II variable annuity with several guaranteed lifetime withdrawal benefit options, the New York-based mutual company now offers clients multiple ways to avoid outliving their savings.

“There are various ways to structure income in retirement, and different people view the need for income in different ways,” said Douglas Dubitsky, vice president of Product Management & Development for Retirement Solutions at The Guardian Life Insurance Company of America. (See chart at right, taken from a SecureFuture brochure, for hypothetical payout amounts.)

guardian payout chart“So we’re creating multiple products. Income products used to be one-size-fits-all. It either fit your needs or it didn’t. It wasn’t a solution; it was a product. Now we have multiple solutions, and an advisor can see what works best for each client,” he added.

Guardian distributes through a captive sales force and Dubitsky envisions agents working with clients to create solutions that provide income at different times during retirement, and where different products offer different strengths—such as mortality credits from income annuities and upside exposure from deferred variable annuities.

“You can ladder a SPIA with a DIA or variable annuity and a DIA. People might say, I want a pay raise at a certain age. There’s such a great need for income-producing products, that there’s no threat of cannibalizing sales” between the Guardian VA and DIA, Dubitsky said.

“You can move the start date forward or back one time during the course of the contract. The low minimum additional premium gives clients the opportunity to make multiple payments. We see scenarios where people add assets to the DIA from different accounts at different times. This is a market we firmly believe in.”

According to the SecureFuture fact sheet, the product can be purchased with non-qualified money at any time up to age 80, and with qualified money between ages 18 and 68. Income must start by age 85 for non-qualified money and by age 70½ for qualified money. The minimum additional purchase premium is only $100.

Guardian has AA+ ratings from Fitch and Standard & Poor’s, A++ from A.M. Best, and Aa2 from Moody’s.

Contract owners can accelerate payments, receiving up to six months at a time once during the life of the contract. Both single and joint contracts are available, and clients can choose life with period certain or cash refund of the unpaid premium. There’s a return-of-premium death benefit if a single annuitant dies during the deferral period. Payments can be increased each year by 1% to 5%. 

© 2012 RIJ Publishing LLC. All rights reserved.

The Bucket

Nationwide enhances spousal payouts of lifetime income rider

Recognizing a growing need among Boomers for joint-and-survivor annuity contracts, Nationwide Financial has increased the joint payout rates for the lifetime income rider (Nationwide L.inc) on its Destination Series 2.0 variable annuities, which offers a 7% simple roll-up during the accumulation period.

Lifetime payout rates for Nationwide L.inc with joint option will increase by 0.25% for most age bands, the company said in a release. For example, payouts for someone starting income at age 65 will be 4.75% instead of 4.5%. On a contract with a $500,000 benefit base, that would translate into $1,250 a year or about $104 a month, before taxes.

In addition to Nationwide L.inc with the joint option, Nationwide’s spousal protection feature delivers a guaranteed death benefit covering either spouse, regardless of who passes away first, even on IRAs where there’s a single owner.

Neuberger Berman introduces ‘Dynamic Real Return Fund’

Neuberger Berman Group LLC has launched the Neuberger Berman Dynamic Real Return Fund (tickers: NDRAX, NDRCX, NDRIX), a mutual fund that invests in multiple asset classes in an attempt to “deliver attractive risk-adjusted returns in various inflationary environments,” according to a release.

The actively managed fund will invest in inflation-sensitive asset classes such as commodities, global TIPS, high-yield bonds, leveraged loans, U.S. and emerging markets equities, master limited partnerships (MLPs), and real estate. The fund managers also employ a dynamic overlay designed to capitalize on short-term changes in inflation expectations.

The Fund’s lead portfolio managers are Andy Johnson, chief investment officer for investment grade fixed income, and Thanos Bardas, global head of sovereigns and interest rates.

Symetra proposes SPIA instead of early Social Security claiming

Symetra Life Insurance Company now offers financial advisors a web-based retirement planning toolkit as part of an education campaign that tackles the question: “Does it pay to delay Social Security?”

The education campaign features collateral pieces and a public-facing website, www.symetra.com/itpaystodelay, which will be refreshed monthly through March. It provides links to a variety of resources, presentations and strategy-supporting material from respected industry experts and organizations.

January’s theme is “Does It Pay to Delay Social Security?” The site features a marketing flyer and presentation illustrating specific examples of how delaying Social Security benefits can create more income in the long term. February’s theme — “Have Your Retirement … and Income, Too” — will outline a strategy that gives clients the ability to replicate their Social Security income from ages 62–70 through a period-certain single premium immediate annuity (SPIA).

Phoenix Marketing offers study of social networking by advisors 

Almost 60% of financial advisors use social networking platforms to interact with clients, colleagues and firms, according to a new study by Phoenix Marketing International, which has added a “social networking module” to its syndicated study programs for the financial services industry.

Phoenix also found that more than 80% of those who have adopted social networking  consider their proficiency to be “above average,” and 30% of non-users plan to start in the next six months. Advisors tend to be less concerned about inability to use social networking than about regulatory issues. 

Conducted among financial advisors in the US this month, the new Phoenix social media study also answers:

  • To what extent have financial advisors (FAs) adopted social networking?
  • Does adoption vary by FAs’ role, $AUM, annual production, tenure, age, or gender?
  • Which devices and social networking platforms do FAs use?
  • What are FAs’ concerns about integrating social networking as a business practice?
  • Are they governed by a social networking policy or guidelines?
  • Why do FAs use social networking?
  • What are specific firms doing in terms of social networking “best-practices”?

A full report on how advisors utilize social networking is available for purchase from Phoenix, which provides competitive information on the attitudes and behaviors of individual investors and financial advisors and how they assess specific brokerage firms and their ROI from multi-media brand advertising.

Firms queried in this study include American Funds, Ameriprise, BlackRock, Charles Schwab, Columbia Management, Franklin Templeton, iShares, Jackson National, John Hancock, Lincoln Financial, MetLife, Nationwide, Oppenheimer, PIMCO, PowerShares, Prudential, Scottrade, State Street, Transamerica and Vanguard.

© 2013 RIJ Publishing LLC. All rights reserved.

Simplifying the British national pension is complicated

As Britain prepares to shift from a two-tier national pension system (basic and earnings-related) to a one-tier system in 2017, the government is trying to make the transition as smooth and transparent as possible—and without undermining the remaining private defined benefit plans, according to a report in IPE.com.

The switch to a one-tier system would end “contracting out,” by which Britons were encouraged to stop all or part of their contributions to the earnings-related second-tier national pension and directed them into an employer-sponsored plan (DB or DC) or personal retirement plan instead.

In a new Department for Work & Pensions (DWP) white paper on national pension reform, the government acknowledged the financial and administrative impacts of ending “contracting out” and pledged not to undermine DB plans.

Pensions minister Steve Webb told the House of Commons that the current multi-tier system was “extraordinarily complex” and did not allow workers to predict their income in retirement, adding that  “the overall cost of the new system will be the same as that of the one it replaces.”  

After 2017, the earnings-related tier will be gone and the basic national pension will be higher. “This is not a pensions giveaway for the next generation,” said Webb. “A higher flat pension is affordable only because, in the long term, people will not become entitled to very large earnings-related pensions through the state system.”

His department’s accompanying White Paper, ‘The single-tier pension: a simple foundation for saving’, further outlined how the state second pension would be abolished after 2017 and confirmed a review of the state pension age every five years, starting the same year contracting out would end.

The British Chambers of Commerce said the reforms would simply matters for savers. It would also create a “much-needed incentive” for workers to save privately, said Adam Marshall, the Chamber’s director of policy and external affairs.

Marshall said a proposal to allow defined benefit plan sponsors to amend fund accrual in a “limited” fashion to compensate for the loss of the rebates—the money the plans currently get from employees who have contracted out of the second-tier public pension—was “sensible and necessary.” 

But Zoe Lynch, a partner at the law firm Sackers, disagreed, saying that, “With the abolition of DB contracting out, the intention is to retain the contracted-out rights within the plan,” she said. “Plans will therefore be required to retain records and remember the restrictions attached to DB contracted-out benefits.”

The industry raised concerns about the end of contracting out ahead of the publication of the White Paper yesterday. Union Unite expressed concern about the override praised by Marshall, noting the “danger” of employers watering down pension provision to “claw back” the increased national insurance cost.

The DWP white paper also described proposals to review the state pension age every five years, with a 10-year notice period before any increase in the eligibility age.

“More frequent reviews would allow the government to respond quickly to changes in life expectancy projections, but would mean clarity for individuals would be reduced,” the policy paper said. “In contrast, less frequent reviews could result in the need for large adjustments to State Pension age.”

The reform will also introduce a minimum 10-year contribution period to draw the partial state pension and raise the threshold to receive the full state pension, under the reforms a flat-rate sum of £144 ($230) per week in current terms, to 35 years of contributions from the previous 30 years.

© 2012 RIJ Publishing LLC. All rights reserved.

DTCC protests swaps data reporting rules

DTCC, the Depository Trust & Clearing Corporation, has complained to the U.S. Commodity Futures Trading Commission (CFTC) about a perceived “lack of clarity, arbitrariness, and inconsistent rulemaking” by the agency on the regulatory reporting structure for over-the-counter (OTC) derivatives transactions.

In a comment letter filed with the CFTC this week, the DTCC urged the Commission to “address inconsistencies regarding the conclusion of its recent swaps data reporting public comment period, as well as to publicly address how it plans to consider third party comments and questions raised about the impact of The Chicago Mercantile Exchange Inc. (CME) proposed Rule 1001.”

According to DTCC, proposed Rule 1001 would allow inappropriate commercial bundling of swap data repository (SDR) and clearing services by CME (and other derivates clearing organizations), and eliminate the ability of market participants to choose their preferred SDR.

The proposed CME rule would require, as a condition for using CME clearing services, that all CME customers have their cleared trades directed to CME’s own captive SDR. This would undermine the intent of Dodd-Frank’s provisions on fair and open access, market protection, trading transparency, risk mitigation and anti-competitive practices.

DTCC asked the Commission to extend the review period by 45 days to appropriately analyze the “novel and complex issues” associated with Rule 1001. DTCC also submitted a report by the economic consulting firm, NERA, which outlines the potential anti-competitive and cost-benefit ramifications of CME proposed Rule 1001.

Several trade associations and market participants have all expressed concern with the proposed change, DTCC said in a release. This group includes the Association of Institutional INVESTORS (AII), GFMA FX Division, International Swaps and Derivatives Association (ISDA), Securities Industry and Financial Markets Association (SIFMA), Wholesale Markets Brokers’ Association, Americas (WMBA), Moore Capital Management, LP., Citigroup Inc., Deutsche Bank and JPMorgan Chase & Co.

DTCC has raised a series of objections to CFTC action regarding the swaps data rulemaking process and the impact of proposed Rule 1001, including a January 8, 2013 comment letter in which DTCC showed how Rule 1001 could undermine the intent of Dodd-Frank, decrease transparency for investors and regulators, and increase risk to global financial markets.

© 2012 RIJ Publishing LLC. All rights reserved.

Pew report on public pensions draws ire of public pension trade groups

A newly-released report on state pension plans by the Pew Charitable Trusts has provoked protests from The National Conference on Public Employee Retirement Systems (NCPERS) and from the National Public Pension Coalition, two trade groups.

The groups, which advocate for public pensions, charged that Pew had shown the status of public pensions in the least flattering light by using data from 2009, a nadir of prosperity for the plans, and that Pew had prescribed remedies that would weaken rather than strengthen the finances of public pensions.  

Executive director and counsel of NCPERS Hank Kim said, “The analysis presented in the Pew Charitable Trust’s new report, A Widening Gap in Cities, presents a distorted and outdated picture of the health of municipal pension plans – primarily because the data Pew worked with is four years old.”

The data from 2009, a period that included the financial crisis and its immediate aftermath, “cannot yield a realistic representation of the status of municipal pension plans today,” Kim said.

NPPC executive director Jordan Marks said in a separate release: “Rather than focus on retirement security and the important role that public pensions play in local economies, Pew suggest various reforms that would slash benefits and put retirement benefits at risk.”

NCPERS represents more than 550 public sector pension funds in the U.S. and Canada. NCCP represents millions of public sector employees, including teachers, nurses, police, firefighters and other public sector employees.

© 2012 RIJ Publishing LLC. All rights reserved.

28% of plan sponsors offer in-plan retirement income solutions: Aon Hewitt

American workers will need 11 times their final pay to meet their financial needs in retirement, but the average U.S. worker falls short of that by about 2.2 times pay, according to a new survey from Aon Hewitt, the global human resources business of Aon plc. The firm surveyed over 425 U.S. employers with 11 million employees.

The survey shows that:

  • 80% of employers are making financial wellness a top priority in 2013.
  • 61% are looking beyond current participation and savings rates and are helping workers evaluate their retirement readiness, up from 50% a year ago.   
  • 86% of companies plan to focus communications initiatives on helping workers evaluate and understand how much they need to save for retirement.
  • 76% currently offer target-date funds as a way to provide workers with a simple and straightforward approach to investing.
  • Of employers who do not offer target-date funds, 35% will likely add this option in 2013.
  • Managed accounts and online third-party investment advisory services continue to gain popularity (64%), up from 40% a year ago.
  • 28% of companies offer in-plan retirement income solutions—including professionally managed accounts with a drawdown feature, managed payout funds, or insurance or annuity products that are part of the fund line-up, up from 16% a year ago.
  • Of those employers that do not currently have these options, 30% said they are likely to add them in 2013.
  • 52% of companies will use podcasts and 42% will use text messages to communicate and educate their workers on their retirement benefits in 2013.
  • The percentage of plan sponsors that plan to use social media channels to communicate with workers has tripled from 6% last year to 18% in 2013.
  • 37% of employers have recently reviewed the total DC plan costs (fund, recordkeeping, and trustee fees). Among those who have not, 95% are likely to do so in 2013.
  • 35% of employers completed a review of DC fund operations, including fund expenses and revenue sharing; 87% plan to do so this year.
  • 31% of employers recently changed their DC plan fund lineup to reduce costs. More than half (52%) of the remaining companies may do so in 2013.

© 2012 RIJ Publishing LLC. All rights reserved.

From Prudential, Prudent Forecasts for 2013

Dangerous though it is to make predictions, football pundits, Farmer’s Almanac publishers and financial professionals continue to make them, especially at this time of year. They can’t seem to help it. It goes with the territory.

So, at the Millennium Hotel in chilly midtown Manhattan last week, a panel of five Prudential executives delivered their economic forecasts for 2013 to the assembled media representatives—though not in terms that could be construed as promissory or exceeding the legal safe harbor for forward-looking statements.

Sometimes it’s good to be overweight  

Prudential has a “bullish tilt” for 2013, said Edward F. Keon, managing director and portfolio manager, Quantitative Management Associates (seated at far right, with Quincy Crosby and John Praveen), a research unit of Prudential Financial. “We’re overweight stocks across the world. We’re also overweight high-yield bonds even though the rally there has been going on a long time.”

Crosby Praveen Keon PrudentialKeon called 2012 “relatively calm” in terms of volatility and pointed to the S&P 500’s 16% return as evidence. “It’s been a pretty good year despite all the uncertainty,” he said. “A lot of the bad stuff that we feared didn’t happen.”

In contrast to the 20% drop in equities that followed the battle over the debt ceiling in 2011, the market took the tumultuous Presidential contest and the fiscal cliff in stride, he said. The market had apparently decided to “ignore the rhetoric” and assume that politicians can generally be relied on to “do what they think is right” for the country.

Keon expects U.S. GDP to grow by (2% GDP growth?) and corporate earnings to grow by 10% in 2013. The drag from a higher payroll tax and higher taxes on the wealthy could be “offset by a drop in gasoline prices.”

Asked why equities prices rose in 2012 despite huge outflows from equity funds, Keon said that some of the money has simply moved into equity ETFs but that the biggest factor has been corporate buybacks of their own shares. “There’s no evidence of that slowing down,” he said.

A ‘dichotomy’ explained

Reflecting on 2012, John Praveen, managing director and chief investment strategist, Prudential International Investment Advisors, observed a “dichotomy” between weak economies and strong financial markets around the world. Expansive monetary policies rescued the financial sector and eased pressures that might have split the Eurozone.   

“Central bank liquidity explains this dichotomy,” Praveen said, attributing actions by Ben Bernanke at the Fed and to Mario Draghi at the European Central Bank with calming the markets and keeping Greece from abandoning the euro.  

The ECB, the Bank of England and the Bank of India have all cut interest rates, he said, and the Bank of Japan announced that it would do more in terms of providing liquidity. Praveen noted that a second quarter correction hurt the markets but a fourth quarter uptick in China’s growth rate gave it a second wind.

Moving at ‘muddle speed’

Quincy Crosby, chief market strategist, Prudential Annuities, extended the discussion of the macro-economy. “The markets have been driven by policy announcements,” she said. “Draghi is responsible for the European rally. Credit has eased, there’s less volatility and risky assets have been moving higher.”

Crosby continued, “There have been 326 separate easing actions by central banks around the world, and the stimulus has underpinned markets. The lower rates are helping companies with their debt loads and giving households more disposable income, enabling the economy to move at ‘muddle speed.’

 “The truth is, markets don’t need much growth to do well,” she added, predicting industrial stocks and the industrial metals business will pick up in the U.S. in 2013. “Money will be moving to U.S. companies that have strong overseas markets.”

 In terms of bonds, she said, “the barbell strategy of 2012 should still be in play”—meaning that investors will put money in short- and long-term bonds but not in intermediate bonds.

“There will a scavenger hunt for yield by consumers,” she added. “Pensions will be taking more risk. The worry is that you could see a buildup of tremors around the world. Inflationary pressures may be rising in emerging markets and the question is, will emerging market central banks ‘tighten’ in response. That’s how the cycle works.”

When emerging markets tighten, she explained, overseas sales of U.S. companies fall.

Crosby expanded on her comment about “tremors.” “I’m a devotee of Hyman Minsky,” she said. “Complacency leads to trouble. Ben Bernanke is forcing people into riskier assets. Risk begets risk until, when fear hits, it gets out of control.” She interprets the flow of money into high-yield bonds and rising levels of margin debt as signs of complacency about risk.

The Fed, she said, may be setting up the markets for a fall. “Bernanke made it clear that he’ll work out an exit strategy when we get to 6.5% unemployment. So now everybody is focused on the labor reports. But there will be dislocations associated with that. What if they all try to sell at the same time?” She would like to see a bit of inflation. “We hope we’re on the cusp of seeing some inflation and rise in yields. That would confirm that growth is picking up in the U.S.” 

‘We like high-yield’

“Rates will stay low in 2013,” said Michael K. Lillard, managing director and chief investment officer, Prudential Fixed Income—a prediction that echoes the Fed’s own statements. In Washington, D.C., “budget battles will continue,” he added. Congressional action will be characterized by “small deals, little fixes and lots of brinkmanship.”

Otherwise, he thinks most of the economic indicators are reading positive for the year ahead. Lillard expects 2% growth in the U.S. this year, 5% growth in emerging markets and 3% average growth worldwide.

“The Fed is in a data dependent mode. Depending on the unemployment rate, the Fed will keep buying securities. There’s value in fixed income overall, but not in U.S. Treasury issues or U.S. agency debt. Government debt might be downgraded again. Two thousand twelve was a good environment for credit products,” Lillard said.

“We like high-yield. Companies are holding steady, with cash on hand,” he added. “The high-yield sector doesn’t show any precursors of defaults. We see a 2% default rate.” He likes “double B” bonds paying a 5% coupon and “single B” bonds paying 6% a year. “We like U.S. money center banks. Banks are more liquid and they’ve got fewer bad assets on their books” than had been the case, Lillard said. “Tighter regulations will keep the banks from taking too much risk.”

Lillard also likes AAA-rated floating rate CLOs (collateralized loan obligations) with subordination levels of 35%, which he said currently offer 140 basis points over LIBOR. “We’re also positive about emerging market foreign exchange, which is biased to outperform the dollar,” he said.

Social Security ‘not going away’

George Castineiras, senior vice president, Prudential’s Total Retirement Solutions, said, “The outlook is very positive for retirement income,” pointing to the fundamentals represented by $18.5 trillion in retirement-oriented savings, the inevitable retirement of the Baby Boom generation over the next 20 years and their need for retirement income.

Regarding Social Security, he said, “The average person thinks that it will go away. It won’t go away. Americans depend on Social Security for between 30% and 70% of their income in retirement. You can’t vaporize that.” He called the status of Social Security “grossly misunderstood” and feared that this misunderstanding might motivate too many retirees to start their benefit at age 62 and lock in a minimum payout for life.

Prudential Retirement is of course a big player in the defined contribution plan business, serving some 3.6 million participants and annuitants in more than 4,200 plans with accounts worth about $240 billion.

The big trend in DC plan is automation, he said, referring to automatic enrollment, automatic investment selection, automatic escalation of contributions and automatic income planning (default into a lifetime withdrawal benefit wrapper around target-date fund assets).

To succeed in the DC business, he said, a service provider has to be good at administration, risk management and employee engagement. “Right now, engagement models are bad,” Castineiras said—a reference to the still-evolving regulations intended to govern communication between 401(k) service providers and participants and ensure that participants get unbiased advice about their savings.

© 2013 RIJ Publishing LLC. All rights reserved.

How TOPS Avoids Bottoms

A funny thing happened in the U.S. equity markets late last May. Jitters about a possible Greek exit from the Eurozone spooked investors. Stocks plunged. S&P volatility spiked. And on the dashboards of certain “managed volatility” funds, red lights flashed.

Among those risk-managed funds were the three TOPS Protected ETF Portfolios that Ohio National, Nationwide and Minnesota Life use to buffer the market risk inherent in the relatively generous lifetime income guarantees of their variable annuities. Without the risk-controls in those funds, in fact, those benefits probably wouldn’t be sustainable in today’s stingy rate environment.    

Managed by Valmark Advisors and sub-advised by Milliman, the TOPS Protected ETF Portfolios employ a dynamic short-futures strategy designed to deliver 60% to 70% of the market’s upside during peaceful bull markets while making “drawdowns” shallower.

But the strategy is vulnerable to the kind of head-fake that the equity market put on it last spring, one that can be seen in the red and black chart below (courtesy of Doug Short of Advisor Perspectives). The chart overlays the history of the S&P500 and the VIX volatility index during the past two years, and illustrates the conditions that the portfolios had to weather.

The third-quarter 2011 market correction can be see at left, where the red VIX lines rise above the black S&P500 lines. Farther to the right, in May and June 2012, there were similar hints of an impending correction, but it was a false alarm. Volatility lapsed and the S&P500 recovered. Stiill, the signs temporarily fooled the TOPS Protected strategy, slowing the portfolios’ performance last year.

VIX and S&P500 Performance 2011-2012

“Volatility did spike in the early summer of last year,” Doug Short told RIJ. “So I’m not surprised that some funds got whipsawed in 2012 in their read of the VIX and similar volatility indicators. They were expecting a selloff similar to the year before.” 

By the end of 2012, all three TOPS Protected ETF Portfoliios (Balanced, Moderate Growth and Growth) had topped their benchmarks (the S&P Daily Risk Controlled 8%, 10% and 12% Indices, respectively) with returns of 8.39%, 8.66% and 8.24%, but not before the industry began to buzz with gossip that these relatively new-to-annuities TOPS portfolios had been a disappointment in a year when the S&P 500 returned 16%. 

“We heard the buzz last year, and we fought it as much as we could,” said Michael McClary of Valmark, an Akron, Ohio-based securities firm that is better known in the ETF world than the mutual fund world. “But it took on a life of its own.”

Gauging the performance and appeal of managed volatility funds is both important and difficult. It’s important because VA issuers can ill afford to offer GLWB riders with generous roll-ups to retiring Boomers unless the contract owners bear some of the market risk—by agreeing to put all or part of their premia in low-volatility investment options.

Yet it’s difficult to compare the various competing managed volatility funds, because they come in so many different flavors. They hold different types of assets, use different risk-management methods, have different objectives and cost structures, and track different benchmarks. And they are so new to the variable annuity space that it may be too soon to evaluate them meaningfully. Morningstar, for instance, doesn’t have a managed volatility fund category yet.

Short futures strategy

The TOPS Protected ETF Portfolios themselves are only about 18 months old. They benefit from a strategy created by Milliman over a decade ago for institutional portfolios. The strategy involves using part of the fund’s own assets to enter short equity-ETF futures contracts. The futures appreciate in value when equity prices fall, and their value offsets the paper losses of the fund’s equity holdings.

“We can still be at an 85/15 allocation, but the short futures could give us an effective allocation of 65/35,” McClary told RIJ. The manager doesn’t have to sell equities and, because losses haven’t been locked in, the technique makes the fund less likely to miss out on the next market rebound. 

“The mandate of these portfolios is to manage to a risk level directly by dynamically shifting the hedge position for changes in volatility and increased downside exposure,” said Adam Schenck of Milliman. “We expect the portfolios to capture a significant portion of the upside of protracted bull markets, which play out over many years. What we saw over 2012 was an unusual bull market scenario.”

“We will trail during high volatility bull markets. May 2012 was a down month, but we were still well ahead of the benchmarks heading into June 2012,” McClary said. As volatility spiked, “we de-allocated during that period. Then the market shot right up. It was a short-term high volatility bull market. There’s nothing we can do in that situation.

“That type of situation doesn’t carry on for a long time, and [the slightly lower returns] is not something that will change your standard of living. But that’s not the risk we’re protecting against. We protect against high-volatility bear markets and long-term bear markets. We finished with an 8.2% gain and a beta of 0.24 on our balanced model.”

At the end of 2012, TOPS Protected Moderate Growth held about 30% fixed income, 60% equities and 10% cash. The Growth portfolio had a 76.5% equity allocation at the end of 2012. The Balanced portfolio had a 40% equity allocation. The portfolios also enter into short futures contracts tied to the “Mini” versions of the MSCI EAFE Index, the S&P500 Index, the Russell 2000 Index, the S&P Midcap 400 Index and the MSCI Emerging Markets Index.

In the bond portion, TOPS’ biggest exposures were to TIPS, high quality corporate bonds and high-yield bonds through iShares ETFs. In the equity portion, the holdings were a smorgasbord of largely Vanguard, iShares and SPDR ETFs in a wide range of regions, sectors, and styles.

Apples and oranges

Certain other “managed volatility” funds outperformed the TOPS Protected Portfolios last year, but they had different holdings. For instance, the BlackRock Managed Volatility Fund, classified by Morningstar as a Moderate Allocation Fund, held about 50% equities, 38% bonds and 12% cash as of October 31, 2012. It returned 12.27% in 2012, according to vanguard.com, or about 2% behind the Morningstar Moderate Allocation.

It had a turnover rate of 324% over the past three years and a beta of .80 (vs the Morningstar Moderately Aggressive Target Risk), compared to the TOPS Protected Moderate Growth’s beta of 0.28 and turnover of 7%, according to Morningstar. SEI’s Managed Volatility Fund, classified as a Mid-Cap Blend fund, also returned just over 12%. But that’s an equity fund. PIMCO’s Global Multi-Asset Managed Volatility Portfolio, launched last September, is too new to evaluate.

Two charts from Morningstar.com show the behavior of the TOPS Protected Funds over the past 18 months. In the chart directly below, which shows the change in the value of a hypothetical $10,000 in the TOPS Protected Growth portfolio from June 9, 2011 to December 25, 2012, it’s evident that the TOPS portfolio fell much less than the Morningstar Aggressive Allocation benchmark in the 3Q 2011 downturn. It’s also evident that the TOPS portfolio performance nearly matched that benchmark in mid-2012, but lagged that benchmark in the following rebound. 

TOPS Performan 6/2011 to 12/2012

A second chart (below), compares the progress of a hypothetical $10,000 in TOPS Protected Moderate Growth with that of the BlackRock Managed Volatility Fund (Institutional). Their performance diverges in mid-2012, with the TOPS portfolio falling behind during the second half of the year before closing the gap at the end of 2012.

TOPS Protected vs BlackRock MV

One satisfied insurer

Annuity executives at Ohio National, the Cincinnati-based mutual company that was the first to offer TOPS Protected portfolios as a variable annuity investment option, said they are satisfied with the results that the funds produced in 2012. The company’s VA sales in 2012 totaled $2.8 billion. Overall, the insurer manages $30.6 billion.

Not knowing if customers and advisors would embrace the trade-offs of the relatively untested managed-volatility investment requirement, Ohio National originally offered two GLWB options last January; the richer option one required putting at least half of the premium in managed volatility investments.

“We got acceptance faster than we expected. The wholesalers got some feedback at first. People were a little nervous. They were asking, ‘Is it working as advertised?’ But now the story is accepted,” said Jeff Mackey, FSA, assistant vice president, Annuity Product Management at Ohio National. The story has been accepted well enough that Ohio National was able to eliminate the less-rich living benefit rider entirely.

Steve Murphy, FSA, Ohio National’s senior vice president, Capital Management, told RIJ, “We thought we would need the other rider for 2012 and 2013, but we’ve closed that one, which indicates that the marketplace likes the story. People buy the product for protection.

“And even though they know their benefit base is protected [by the GLWB], they still feel bad if their account value goes down. This strategy [which buffers falls in account value] provides both belt and suspenders. This story has definitely sold well in the marketplace. We had trouble keeping a lid on sales. We de-risked five times last year and still had no problem with sales,” he added.

Mackey told RIJ, “We think these are a good fit for account holders, for advisors who want a stable trail income, and for us on our balance sheet. They give us more stable earnings. It really has performed as expected and we’re pleased.

“You have to be careful about looking at narrow performance windows,” he added. “These are long-term investments. The time horizons are 30-plus years out, so to look at their performance over a week or a month is a bit shortsighted.

“Also, you have to remember that these portfolios are designed to mitigate severe downturns. There’s no free lunch here. There will be periods where it could underperform. But if you want the extra protection, you might have to give up something on the upside.”

High stakes

The stakes here are measured in billions of dollars, as fund companies compete to offer managed volatility investments to life insurers, as life insurers compete to offer appealing retirement income products to Boomers (despite market, interest rate, and longevity risk constraints), and as retiring Boomers struggle to squeeze more income—and peace-of-mind—out of their savings.

One indication of the level of competition among asset managers: Last November, a person who did not fully identify himself e-mailed RIJ a highly critical two-page review, dated October 1, 2012, of Milliman’s TOPS Protection method apparently written by a firm called “Retirement Products Research.” RIJ was unable to trace the origin of the document, and the original sender did not respond to requests for attribution.    

© 2012 RIJ Publishing LLC. All rights reserved.

Strategic Insights looks into “managed volatility”

Managed volatility investment strategies are emerging as a solution for investors who want protection from future stock market losses, according to “Managed Volatility: The Anatomy of an Investing Trend,” a new research report from Strategic Insight.

Managed volatility assets have accelerated in less than a decade to $129 billion as of September 2012. The report identifies a total of 175 funds from 32 different advisors.

A major component of the growth comes from funds converting to managed volatility mandates, the report found. At the end of September, $61 billion, or 47% of the total assets in managed volatility funds, came from converted portfolios. Most of this activity has been in the variable annuity space, which also commands the bulk of assets.

The report focuses on several key issues, such as whether managed volatility is a kind of fad, whether managed volatility funds will find a significant market outside variable annuity separate accounts, and whether these funds sacrifice upside potential for downside protection or not.

“The implementation of these strategies may represent a trade-off in terms of cost and/or the sacrifice of some market gains. This perspective is not shared by all investment professionals, with many arguing that certain strategies can improve overall returns by reducing the impact of performance- draining downturns,” the report’s executive summary said.

“The managed volatility trend has really taken off since the financial crisis in 2008,” said Tamiko Toland, managing director of Retirement Income Solutions at Strategic Insight. “These funds include a dynamic element that readjusts the investments for periods of high volatility or market declines. This kind of strategy is directly useful to clients but is also valuable for insurance companies providing guarantees against assets held in variable annuities.”

Because managed volatility funds can help insurers better manage the risk of living and death benefits, these funds have proliferated within variable annuity funds. However, this trend is also gaining steam among retail mutual funds. Managed volatility mutual fund assets have grown substantially from $967 million in the first quarter of 2006 to $21 billion at the end of the third quarter of 2012.

While 84% of today’s managed volatility assets are held within variable annuities, this investment category is gaining a foothold among retail mutual funds and is likely to grow in other areas, including college savings and retirement plans.

With so many players, there are a wide variety of approaches, all classified and identified within the report. “The report is the first of its kind to quantify the managed volatility opportunity and analyze the biggest players,” Toland commented. “We’ve also seen a lot of interest from mutual fund boards for analysis on this trend.”

The Bucket

ING U.S. hires David Bedard to lead fixed annuities business

ING U.S. has hired David Bedard as president of its annuities business segment, reporting to Maliz Beam, CEO of ING U.S. Retirement Solutions and based in Windsor, Conn. Bedard’s unit focuses on fixed annuity sales.

Bedard will be responsible for product, financial management and the operating performance of the fixed annuity business.  He will also serve as a member of the Retirement Solutions executive team. 

Most recently, Bedard was executive vice president of Global Annuities for The Hartford Financial Services Group after serving as the chief financial officer of the wealth management business. 

Previously, he was senior vice president and chief financial officer for the U.S. Life and Agency division of New York Life Insurance Company, where he also served as senior managing director and chief financial officer for New York Life Investments. 

Bedard also held leadership positions earlier in his career at MassMutual and Coopers & Lybrand. He is a certified public accountant, earned a B.S. in business administration from Nichols College in Massachusetts.  

Secretary Solis to leave Labor Department

Secretary of Labor Hilda L. Solis announced on Wednesday that she was stepping down, becoming the latest woman to leave President Obama’s cabinet at a time when his personnel choices are drawing scrutiny for their lack of female candidates, the New York Times reported.

Ms. Solis, a former congresswoman from California, told colleagues in an e-mail that she had submitted her resignation letter to Mr. Obama Wednesday afternoon.

She said she had decided to step down after consulting family members and friends. Associates of Ms. Solis, who is 55 and was born in Los Angeles, said she was likely to run for a seat on the Los Angeles County Board of Supervisors.

In a statement, Mr. Obama said, “Secretary Solis has been a critical member of my economic team as we have worked to recover from the worst economic downturn since the Great Depression and strengthen the economy for the middle class.”

Veralytic becomes favored vendor to FPA members

Veralytic has agreed to license its life insurance pricing and performance research at discounted prices for members of the Financial Planning Association through the FPA’s Practitioners Resource Guide.

In a release, Veralytic described itself as “the only patented, objective and transparent evaluation of suitability of life insurance.”

Veralytic compares illustrations of hypothetical policy values that might be considered “misleading” and “inappropriate” by financial and insurance industry authorities. The Veralytic Research provides a star rating system that measures against five categories of policy performance, in terms of suitability.

Mesirow Financial investments now on Mid Atlantic Trust’s platform

Mesirow Financial’s Investment Strategies group has launched a series of model portfolios on the Modelxchange platform of the Mid Atlantic Trust Company, which serves plan sponsors and advisors in the open architecture and third-party administrator marketplace.

The ModelxChange platform will better enable Mesirow to provide 3(38) investment manager fiduciary services to sponsors of defined contribution retirement plans.

Mesirow Financial’s model portfolios are designed for both fee-based and commission-based advisors and offer three levels of 12b-1 payouts. They include exposure to exchange-traded funds (ETF) and mutual funds, allowing advisors and plan sponsors to offer strategies based on mutual funds, passive ETFs or both active and passive ETFs. The portfolio sets also include target-date and risk-based options.

The Investment Strategies team at Mesirow Financial is an independent, third-party consultant that provides asset allocation strategies and manager selection to defined contribution providers, broker/dealers, registered investment advisors, insurance companies and mutual fund companies. Mid Atlantic Trust serves about 40,000 corporate retirement plans and is part of the Mid Atlantic Capital Group.   

Northwestern Mutual to recruit more than 5,500 financial professionals in 2013

Northwestern Mutual is aiming to add 5,500 financial representatives and interns in 2013 in response to what it called “an increasing demand for financial security planning.” It will be the second year in a row of record recruiting goals for the insurer. 

According to Steve Mannebach, vice president for field growth at development at Northwestern Mutual, the company is seeing both a need and a demand nationwide for a tailored planning approach to asset protection, growth and savings solutions.

RIIA establishes online library of webinars on retirement income

The Retirement Income Industry Association (RIIA) is expanding its webinar series into a formal Retirement Income Virtual Learning Center (VLC), the RIIA said in a release this week.

The objective is to create a library of live as well as archived lectures and presentations on retirement-income research, products, and strategies for personnel at home offices and institutions and financial advisors, according to Kim McSheridan, RIIA consultant for the VLC project.

In addition to supporting RIIA programs such as the Retirement Management Analyst advanced education, the Retirement Market Insight research and consulting platform and the Retirement Management Journal, the VLC will “offer retirement income content and research to help users acquire, retain and expand client relationships; increase revenue; anticipate and manage growth opportunities; and, differentiate themselves in the marketplace for increased success,” the release said.

The content will be delivered by the leading retirement income experts, said Robert Powell, RIIA’s business unit director of publications and the VLC.   

The RIIA VLC is also seeking sponsors for each of its webinar tracks. Sponsors receive a one-minute advertisement at the beginning and end of each live and archived webinar and a chance to have a subject matter expert of their choice deliver one webinar during the sponsorship year.   

© 2013 RIJ Publishing LLC. All rights reserved.

“Softer” version of Basel III sparks comment in Europe

European pension experts say the recent launch of a “softer” version of the Basel III framework’s capital requirement rules for banks represents a recognition that stricter capital requirements could have unintended consequences for the global economy, according to a report in IPE.com.

The revision of the previous Basell III proposals includes an extension of eligible assets held by banks to count in their liquidity buffers. A less severe calibration for certain cash flows and a phasing-in arrangement from January 2015 to 2019 are also planned.

According to Michel Barnier, commissioner for internal market and services at the European Commission, the treatment of liquidity is fundamental, both for the stability of banks as well as for their role in supporting wider economic recovery.

“I welcome the unanimous agreement reached by the Basel Committee on the revised liquidity coverage ratio and the gradual approach for its phasing-in by clearly defined dates,” said Michel Barnier, commissioner for internal market and services at the European Commission.

Dave Roberts, senior consultant at Towers Watson, said, “The regulatory system must not be allowed to disrupt an economic recovery.” But he doubted that last weekend’s agreement to soften the liquidity coverage ratio under Basel III would comfort those with similar concerns around IORP II.

In the U.S., however, Simon Johnson of MIT’s Sloan School of Management blasted any attempt to soften regulations on banks, charging that soft regulations were the cause of the financial crisis. On his New York Times blog, he wrote, “Again the Europeans want to double down by letting the banks do want they want…

“This week the Basel Committee on Banking Supervision, as it is known, let us down – once again. Faced with renewed pressure from the international banking lobby, these officials caved in, as they did so many times in the period leading to the crisis of 2007-8. As a result, our financial system took a major step toward becoming more dangerous.”

Pension representatives stressed that the only link between Solvency II, the revised IORP Directive, and the regulatory framework for banks was based on Basel II regulation, which remains in use until Basel III is implemented.

Like Basel II, Solvency II organizes capital requirements under the “first pillar,” governance and supervision under the “second pillar “and disclosure and transparency under the “third pillar.”

It was pointed out that the change in regulation from Basel II to Basel III dealt with issues more relevant to banks than to insurance companies.

“Banks typically rely much more on shorter-term funding… funding liquidity and short-term access to capital markets is more important for banks,” said Paul Sweeting, European head of strategy at JP Morgan Asset Management. “Insurance companies are much more likely to use long-term financing and are not so much subject to the risk of reduced access to capital markets as banks would be.”

Even though Basel III may indirectly influence IORP II via the Solvency II regime, it is the longer-term capital adequacy requirements rather than liquidity that worry pension funds.

“Pension schemes and insurers have a very different liability profile to other financial institutions, and, hence, there is less focus within Solvency II on liquidity and more on the type of underlying assets held by institutions,” said Pete Drewienkiewicz, head of manager research at Redington.

© 2013 IPE.com.