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The Day the Gold Standard Died: 50 Years On

Posted on August 11, 2021 by Kerry Pechter -

The “gold standard” died 50 years ago this week. I witnessed the execution, in a sense, and I’ve spent a fair amount of time since then trying to understand what happened, why, and how well it explains today’s economy.

The date was August 16, 1971. The scene was a provincial bank in France. I had pedaled north from Fontainebleau that morning, following the Seine to Paris. At the outskirts of Melun, I leaned my bike with its saddlebags against a stone wall outside the bank and walked inside.

The teller seemed flustered, even panicky. Richard Nixon had taken dollar “off gold” the day before; she wasn’t sure how many francs to exchange for my $20 travelers check. Eventually, calmer, she gave me about four francs per dollar—the usual rate. I countersigned my check, pocketed the money and left.

“Bretton Woods,” and the eponymous financial treaty that the US had just broken, didn’t mean anything to me at the time. I had just spent ten picaresque weeks in southern Europe on a budget of about $10 a day, vaguely aware of why everything was so cheap. The future—the oil crisis and the “stagflationary” 70s—was still over the horizon.

A whistle-stop in New Hampshire

Mount Washington Hotel

Bretton Woods is a section of Carroll, New Hampshire, and the home of the still elegant Mount Washington Hotel. That’s where, in July 1944, to escape the swelter of Washington, DC, for the cool White Mountains, the world’s finance ministers met to replace an international monetary system whose perverse incentives helped cause two world wars in 30 years.

Or, rather, the ministers came to rubber-stamp the new dollar-based regime, designed mainly by the Roosevelt administration. Given America’s economic strength and the fragility of Britain’s empire near the end of World War II, America was in a position to replace England as the world’s economic leader and the dollar to replace the pound as the world’s “reserve” currency.

The dollar became a proxy for gold and a benchmark for all other currencies. Under the Bretton Woods agreement, the US (with 55% of the world’s yellow bullion) was the only country that would exchange its money for gold on demand from foreign central banks. Dollars, backed by about $25 billion in gold, would and did help finance the economic recovery of a war-whacked world.

The boom—including the Baby Boom—lasted through the mid-1960s. By then, deep-pocketed Uncle Sam eventually spread so many dollars around the world (via wars and imports) that it couldn’t afford to keep releasing ounces of gold for only $35—at least, not without cutting spending on Vietnam, raising interest rates, cutting imports, clamping controls on domestic wages and prices, and throwing the US economy into recession. With his eye on re-election in 1972, Nixon threw the gold standard under the bus instead of the US economy.

In his 1981 book, The Money Lenders, Anthony Sampson summarized the financial sea-change:

“The supremacy of American bankers was already questioned by the end of the sixties, as the balance of financial power was shifting. The world’s confidence in the dollar, which lay at the basis of the Bretton Woods agreement, was undermined by the Vietnam War. The long boom of the West was faltering, with too much capacity and too little employment. The pound was devalued in 1968 followed by other currencies, which in turn undermined the strength of the dollar. American manufacturers were losing out against Europe and Japan; Japanese cars were beginning to roll into America. The United States showed a [trade] deficit for the first time since 1893.” US gold reserves stabilized after slipping to about $10 billion in 1968, but the antagonism between the gold standard and the expansion of US spending was set.

“The Nixon administration tried to hold up the dollar but by 1971… they ‘had either lost or abandoned any semblance of control of the situation’; and they finally decided to force devaluation on the others. The western finance ministers at the Smithsonian Institution in Washington legitimized what the market had already decided, and devalued the dollar against gold… By March 1973 Nixon gave up the attempt to fix the dollar to gold. All western currencies floated up and down freely. The Bretton Woods system had virtually collapsed (p. 118-119).”

That collapse has been well-described and explained in several non-technical books: Closing the Gold Window, by Joanne Gowa; The Way the World Works, by Jude Wanniski, The Fate of the Dollar, by my late uncle Martin Mayer, among others. The most recent may be Kenneth D. Garbade’s 2021 book, After the Accord, an academic history of the Federal Reserve from 1951 to 1979. For events leading up to the Bretton Woods agreement, see Ben Steil’s The Battle of Bretton Woods (2013.)

Garbade, an economist and former senior vice president at the New York Fed, writes that Arthur Burns, who in 1970 succeeded Fed chairman William McChesney Martin (the chair since 1951 and the man who compared the Fed to a “chaperone who has ordered the punch bowl removed just when the party was really warming up”), satisfied Nixon’s demand for lower interest rates to stimulate the economy.

“The decline of rates reversed the flow of gold [to the US Treasury] and exacerbated a cascading series of problems that culminated in Nixon’s decision to close the Treasury’s gold window on August 15, 1971, putting an end to United States gold sales to foreign central banks at $35 an ounce. Within two years, the Bretton Woods system of fixed exchange rates was gone as well, replaced with floating rates.”

Red lights, very cheap

At the time, Europe was still a bargain, especially if you were a young bicyclist or backpacker in southern Europe with no need for things that required money, like fancy dining, lodging or transportation. (Prices in the US in 1971 were roughly 10% of today’s level—the minimum hourly wage was $1.60—but most of Europe was an order of magnitude cheaper.)

From left: Federal Reserve chairman Arthur Burns, Treasury Secretary John Connally and President Richard Nixon.

My biggest single expense that summer was airfare from New York ($250, round-trip). A Peugeot UO-8 10-speed bicycle cost $115. At the very lowest end of the tourist economy, you got very little but you paid nothing for it. The price of a cot, among three or four other cots, in a spare bedroom in an Italian family’s apartment near the Rome train station: 800 lira or $1.

And so forth. A night at the only lodging house (with a staff of one, offering linen but no other amenities) in Arvi, on the southern coast of Crete: 20 drachma or about 60¢. In Holland, a cold green bottle of Heineken with ham-and-cheese on a dinner roll cost less than $1. In Amsterdam’s stoner cafés and even its famous red-light district, 20 guilders or $6 could go a long way.

How do today’s prices compare? Finding out would require a breadth and depth of research that I’m no longer prepared to do. For my purposes here, the more pressing question is, How did the end of Bretton Woods and the gold standard impact the world’s economy?

A 40-year bull market begins

In How the World Works, Wanniski describes how it led to a decade of stagflation—inflation plus low growth. By unmooring the dollar from gold while lowering interest rates and stimulating the economy for political reasons, Nixon added to the inflation that had already been underway. Then a series of hefty political and economic dominos began to fall.

Wanniski, a “supply-side” journalist who championed economist Arthur Laffer’s famous “curve,” noted that inflation drove American’s salaries into higher tax brackets and reduced their spending power, leading to the famous “stagflation” of the 1970s. But more fatal geo-political other-shoes soon dropped.

Precipitously, the oil producers of the Middle East, to offset the falling value of dollars, raised the price of oil, which was fixed in dollars. That event was followed by the oil shortages of 1973, the “Yom Kippur War” between the Arabs and Israelis, Nixon’s resignation from the presidency, and then the recession of 1974-1975, when the Dow dropped to 619 (3264, adjusted for inflation).

On an inflation-adjusted basis, the Dow fell from the present equivalent of about 8000 in 1966 to 2252 in 1982—bottoming out after two or three years during which Fed chair Paul Volcker stopped accommodating the banks’ needs for reserves and allowed the fed funds rate—which today stands at only 0.25%—to climb to 20%.

Gold’s atomic structure

That’s when the post-Bretton Woods fever seemed to break. From that point—the climax of perhaps the greatest stock- or bond-buying opportunity in financial history—the prices of securities began climbing and, with a couple of significant but transitory interruptions, ascended to today’s alpine heights. Many people remember the 1970s as a gloomy time; Warren Buffett probably doesn’t. He scooped up blue-chip bargains.

But it was also the start of the era of widening economic inequality in the US (between those who own a lot of securities and those who don’t), the exponential accumulation of US deficits and debt (the value of outstanding Treasury debt rose to $28 trillion in 2021 from $1.2 trillion at the end of 1982), and the appearance of large trade deficits. Once a major exporter, the US has been the world’s biggest importer for more than 40 years. Once the world’s largest creditor, the US is now the world’s largest debtor.

That makes for a lot of historical dots, and there’s no limit to the number of ways you could connect them. One residual question: How has the dollar managed to remain the reserve currency even after so many trillions of them have been put in circulation worldwide?

We shouldn’t mourn the end of the gold standard. As Keynes noted, digging gold out of the earth, exchanging it for paper at a central bank, and re-burying it in Fort Knox or in a vault under the Federal Reserve Bank of New York never made sense. In any case, there isn’t nearly enough gold in the world to finance today’s global economy. And that’s not the worst aspect of it.

Countless Aztecs, Incas and Africans were enslaved or slaughtered for gold. In the 1940s, Europeans were killed for the crowns and fillings in their teeth. Toxins still bleed from old gold adits in Colorado. Cyanide-laced pools stagnate beside new gold mines all over the world. All because of gold’s intrinsic value: its perfect atomic structure, which makes it ideal for conducting electricity and for making jewelry that never loses its lustre.

Average Years Spent in Retirement, By Country

Posted on August 11, 2021 by No Author -

Athene Takes Another Bite at Pensions Apple

Posted on August 5, 2021 by Kerry Pechter -

Americans’ retirement savings, either in the form of individual annuity contracts or group annuities funded by defined benefit pension funds, continue to supply a flood of manageable money to the asset management partners of private equity-owned life insurers.

In a “pension risk transfer” (PRT) deal announced this week, for example, Lockheed Martin, the aerospace giant, transferred $4.9 billion in pension obligations—and, presumably, the savings that back them—to Bermuda-based Athene Holding Ltd.

Athene’s subsidiaries, Athene Annuity Life Company and Athene Annuity & Life Assurance Co. of New York, will provide a group annuity to about 18,000 Lockheed Martin retirees currently receiving pension benefits.

The transaction announced this week is the second pension risk transfer transaction Lockheed Martin has signed with Athene. In 2018, Athene insured approximately $800 million in pension obligations for more than 9,000 of Lockheed Martin’s retirees and their beneficiaries.

In its second-quarter 2021 earnings report, issued today, Athene Holding reported assets of $215.5 billion. Yesterday, Apollo Global Management reported assets under management of about $471.8 billion. Last March, the two companies, already closely tied, announced that they would merge. “Athene accounts for about 40% of Apollo’s AUM and generates 30% of its fee-related earnings revenue,” according to a March 25, 2021, report from SP Global Market Intelligence.

In total, Athene said it has partnered with plan sponsors and intermediaries on more than $19 billion of transactions to support more than 300,000 annuitants since it entered the PRT market. In a release, Bill Wheeler, Athene’s president, said the “transaction with Lockheed Martin represents Athene’s largest PRT transaction to date.”

“The Athene group annuity contracts were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contribution was required as part of this transaction,” a Lockheed Martin release said.

But Athene’s release said it had used its strategic capital vehicle, Athene Co-invest Reinsurance Affiliate (ACRA), “to support the completion of this transaction.” Athene could not be reached for comment before deadline on why Athene would need third-party capital to complete a PRT deal.

A report from Artemis, a publication that covers the insurance industry in Bermuda, said Athene created ACRA in the spring of 2019 and soon funded it with $3.2 billion from third-party investors. According to Artemis:

Athene has built ACRA to give investors the certainty in their time horizon, which in the life space has hindered companies’ ability to get third-party capital onboard. Investors need some certainty in how they can get out of a vehicle, not wanting to be on the hook endlessly for these long-tail transactions. “Investors want to know when is their exit and what does it look like,” [Chip] Gillis [an Athene Holding co-founder, now retired] said, adding, “So that’s been built into it.”

ACRA provides investors with a mid-term allocation horizon with a way to access life and retirement risks in a structure providing the returns they seek, in a way they can see this exit point clearly. Other companies are likely to take notice and see the opportunity to bring in complementary sources of capital, or to tap into new investor groups with different appetites, all while providing an insurance or reinsurance linked return which meets the alternative needs of many institutions mandates.

On Jan. 1, 2022, Athene will begin paying and administering the retirement benefits of certain retirees and beneficiaries in the Lockheed Martin Corporation Salaried Employee Retirement Program and the Lockheed Martin Aerospace Hourly Pension Plan. The transaction will result in no changes to the benefits received by retirees and beneficiaries. Affected retirees and beneficiaries will receive a letter with additional details about the transfer.

This was Lockheed Martin’s fourth PRT deal in about two years. In 2019, MetLife assumed approximately $1.9 billion in pension obligations for about 20,000 of the company’s retirees and their beneficiaries. In 2020, a MetLife subsidiary, Metropolitan Tower Life, assumed about $1.4 billion in obligations for about 13,500 Lockheed Martin retirees and beneficiaries.

In a press release, Lockheed Martin said it expects to recognize a non-cash, non-operating settlement charge of approximately $1.7 billion ($1.3 billion, or $4.75 per share, after tax) in the third quarter of 2021, primarily related to the accelerated recognition of actuarial losses for the affected plans. The actual settlement charge will depend on finalization of the actuarial assumptions, including discount rate and investment rate of return, as of the measurement date, the release said.

Athene’s strategy in acquiring annuity, insurance and pension assets—as well as its penetration of the fixed indexed annuity business, where it is the overall sales leader—has been compared to Warren Buffett’s strategy of buying insurance companies and using the premiums as a source of financing for other ventures.

These premiums are sometimes referred to as “permanent capital”—not because they never get paid back to policyholders but because they are a predictable and stable source of capital. If nothing else, the asset management affiliate of the insurance company earns management and possibly performance fees from managing the money.

“The way to think about Athene is part of the larger Apollo group. Of the assets that Athene gathers through large reinsurance deals, it keeps part in reserve and puts the rest into the investments that Apollo runs. That’s the float. Buffett has $120 or $130 billion in insurance float. He keeps some in case losses arise, and puts the rest to work in the conglomerate. Athene and Apollo have the ability to do that,” explained Steve Evans, the publisher of Artemis.

“The third-party capital piece is more recent,” Evans added. “ACRA is a co-investment facility, designed like an insurance-linked securities (ILS) fund. It takes in capital, and the investors get a share of the profits or losses. It enables Athene to do more with less of their own capital.”

But these deals—not unlike the efforts by broker-dealers to gain 401(k) savings via rollovers to brokerage IRAs—make some industry watchers nervous.

“Permanent capital in private markets will also accentuate the risk of misbehavior in a sector notorious for questionable practices. In the aftermath of the GFC, several PE groups saw their reputations marred by claims of collusion, corruption, and inadequate disclosure of fees charged to capital providers,” wrote Sebastien Canderle, author of “The Debt Trap” and other books, in a recent blogpost at the CFA Institute.

“Their use of float [of annuity and/or pension assets] is clever—but clever on a slippery slope,” said Tom Gober, a Richmond-based forensic accountant who analyzes life insurers, in an interview. “It worries me that the primary focus of the private equity and hedge funds is the accumulation of assets, a focus more on getting money in the door, not on the claims they’ll have to pay to annuitants or pensioners many years down the road.”

Athene has been fined for mis-practices in the past. New York financial regulators on Thursday fined Athene Life Insurance Co. of New York $15 million for not providing required information to about 15,000 life-insurance policyholders from 2015 to 2017, according to a Wall Street Journal story on June 28, 2018.

The violations occurred after First Allmerica Financial Life Insurance Co., a unit of Global Atlantic Financial Group, agreed to administer many of Athene’s life-insurance policies in 2013. FirstAllmerica also provided reinsurance for the policies. The types of policies impacted included universal life, whole life and term life.

As part of Thursday’s agreement, First Allmerica also agreed to make remedial efforts totaling about $40 million, including waiving some back premiums or extending payments for policyholders who didn’t receive notices, New York’s Department of Financial Services said.

In April 2020, SPGlobal reported that the New York State Department of Financial Services fined Athene Holding Ltd. and unit Athene Annuity & Life Co. $45 million related to a probe into the subsidiary’s unlicensed pension risk transfer business in the state.

The regulator noted that Athene Annuity & Life entered into 14 pension risk transfer transactions and engaged in thousands of unauthorized communications with New York-based plan sponsors.

Your Dream Cabin in the Rockies

Posted on August 5, 2021 by Kerry Pechter -

Retirement communities come in many flavors. Some communities are designed to help people ride into the metaphorical “sunset” of old age. These communities cater mainly to those in the slow-go or no-go stages of retirement.

Other communities, often in Rockies, or the Adirondacks or Berkshires or Northern Michigan, are designed more for those still in pre-retirement, or in the go-go stage of retirement, who want to ride an actual horse into an actual sunset. Or, as they get older, an ATV.

I’ve visited one example of that second kind of community a half-dozen times over the past decade. Until recently, friends of mine owned a share in one of fifteen cabins at a former dude ranch, converted to a homeowner’s association, in a remote valley in central Colorado.

This Shangri-La, whose exact location I won’t disclose, sits on a dry patch of table land in a cradle of forested hills and treeless peaks. A river runs through it. The neighbors, aside from other cabin owners, are hummingbirds, deer, beaver and occasionally a moose or bear.

Many people dream of retiring to such a place. But, delightful as it may sound, it’s not for everyone. You need time, wealth, and health in order to make the dream real. And even those who come don’t necessarily stay long.

Time is essential. You need to be either retired, or live in within a half-day’s drive (e.g., Denver, Taos, etc.) or be a teacher with idle summers in order to take advantage of owning a cabin in central Colorado. If you live in Tennessee, Texas, or Hawaii, as some residents do, you’ll need to spend a month or two at the cabin in order to justify the time you spend getting there (and the time spent earning money to buy the cabin). You must visit during the summer, when the cabins are not snowed-in and the road is passable; this isn’t a ski village.

Wealth makes ranch life easier. These cabins are second and sometimes third homes, after all. The structures themselves are not expensive, but they are neither large nor luxurious. There is no electricity unless you put up solar panels. The only other power source is propane—to run the well pump, heat water, and a gas-fueled refrigerator.

One of the original dude ranch cabins is currently on offer for $60,000, but it has only one bedroom, a sitting room/kitchen, and small bathroom. A newer cabin next door, to which a marine biologist from Hawaii recently added a second-floor loft, lists for $275,000. Do not expect to change your mind and flip your cabin. A couple of the older cabins, priced at $125,000, have sat on the market for years. If you’re tallying expenses, you might also include the potential costs of toys: horses, snowmobiles, and ATVs, as well as trailers for each of them. Under HOA rules, you may not rent your cabin, but you may have guests.

Just another trout stream in Colorado.

Your neighbors here will vary in wealth and status and the degree to which they upgrade their cabins. There’s a couple from the East who owned a lubricant packaging firm. There’s a second-marriage couple from New Mexico, both retired from government jobs with ample pensions. A charter-school teacher and his family recently bought a cabin. The original owner of the dude ranch, who built a sprawling log chalet on the property, is a retired Fortune 500 executive.

To be truly happy owning an isolated cabin in an HOA, it helps to be gregarious. Cocktails on a neighbor’s porch may be the only evening entertainment. A willingness to tolerate and obey annoying HOA rules is important too. An enduring passion for the wilderness is essential, as is a certain level of fitness.

Without health in your 60s, you’re at risk of reaching the slow-go stage as soon as you stop working. You don’t need to be a 65-year-old marathoner to enjoy summers in the Rockies. One long-time resident, morbidly overweight, passes his time rocking on his porch or shooting at the beaver whose dam floods the cattle grid on the road into the ranch.

Another resident needed to install solar panels to power his CPAP machine, but he still fly fishes in the three trout streams that flow from the Continental Divide. But you’ll get much more out of cabin ownership if you have enough lung capacity and muscle mass to hike into the thin air of the surrounding foothills and mountains.

As people get older, they naturally downshift from hiking to horses to driving an ATV. No family seems to keep a cabin indefinitely. Grown children may visit, but they aren’t likely to want to inherit a cabin and keep the tradition alive. It’s more common (as my friends did) to let the cabin go to be closer to grandchildren.

Colorado is almost but not quite Shangri-La, the fictional Himalayan village where no one grows old or dies unless they leave. The cabins are several hours away from the nearest large hospital. But we don’t need to discuss that now. After the rains in July, the wildflowers bloom and the meadows above the cabins become a kind of heaven.

Rob Sharps to succeed Bill Stromberg as head of T. Rowe Price

Posted on August 5, 2021 by Editorial Staff -

The CEO and chairman of T. Rowe Price Group, Bill Stromberg, will retirement from his roles at the company on December 31, 2021, and will be succeeded on the following day by Rob Sharps, T. Rowe Price’s current president, head of investments and group chief investment officer.

Of the “big three” providers of target date funds to corporate retirement plans, only T. Rowe Price is a publicly held company. Regarding the other two, Fidelity is privately owned and Vanguard is a cooperative. Traditionally, Baltimore-based T. Rowe Price has specialized in actively managed mutual funds, while Vanguard has focused on passively managed index funds. All three companies are leading full-service retirement plan providers.

At December 31, 2020, T. Rowe Price had $1,470.5 billion in assets under management, including $794.6 billion in US mutual funds, $400.1 billion in subadvised funds and separately managed accounts, and $275.8 billion in collective investment trusts, and other T. Rowe Price products, according to a recent SEC filing.

Assets under management increased $263.7 billion from the end of 2019. This increase was driven by market appreciation and income, net of distributions not reinvested, of $256.9 billion and net cash inflows of $5.6 billion for 2020. In addition, T. Rowe Price acquired client contracts from PNC Bank during 2020 that added $1.2 billion of stable value assets under management.

Rob Sharps

Stromberg, who was also chair of the firm’s Management Committee, served 35 years at T. Rowe Price and became CEO on January 1, 2016. He will continue to serve on the board as non-executive chair. Sharps will become president and CEO, take over as chair of the Management Committee, and join the board of directors.

Sharps joined T. Rowe Price as an equity analyst in 1997. Since then, he has served in corporate strategy, product development, key client relationships, and other enterprise initiatives. Before becoming head of Investments and group CIO, he was co-head of Global Equity, the longtime portfolio manager of the US Large-Cap Growth Equity Strategy, and portfolio manager of the former US Growth & Income Equity Strategy (now, US Large-Cap Core Equity Strategy).
Additionally, T. Rowe Price today announced the following leadership transitions:

Céline Dufétel, chief operating officer (COO), chief financial officer (CFO), and treasurer, will leave effective July 31, 2021, to assume a leadership position with a fintech company. She will serve in an advisory role with T. Rowe Price until August 31, 2021.
Jen Dardis, currently head of Finance, will become CFO and treasurer and join the Management Committee, effective August 1, 2021.
COO responsibilities will transition on an interim basis to Robert Higginbotham, a member of the firm’s Management Committee and head of Global Distribution who also has oversight responsibility for Global Product.
Eric Veiel, currently co-head of Global Equity, head of U.S. Equity, and chair of the U.S. Equity Steering Committee (ESC), will become head of Global Equity, effective January 1, 2022.
At that time, Josh Nelson, currently associate head of U.S. Equity, will become head of U.S. Equity and chair of the U.S. ESC and will join the Management Committee.

Brighthouse enhances its registered index-linked annuities

Posted on August 5, 2021 by Editorial Staff -

Brighthouse Financial, Inc. (Nasdaq: BHF) has added enhancement to its line of registered index-linked annuities (RILAs), known as Shield Level Annuities. They have no explicit fees; all fees are built into the crediting rates.
RILAs are structured products that pay out a bracketed rate of return based on the performance of options purchased on equity or hybrid indexes. Policyowners get all or part of the index gains and protection from the index losses up to a “buffer.”
The enhancements include a “Performance Lock.” Clients who select a crediting option with a cap on upside returns of a specific index can lock in the value of the index at the close of any business day once during their term. The Locked Index Value will be used for the remainder of the term to calculate the index performance for the Shield Option. Once it takes effect, the Performance Lock is irrevocable.
Brighthouse has also announced new 1-Year Shield Options, offering protection against the first 15% or 25% of market losses during the crediting term. In another enhancement, the maximum age for issuing the Return of Premium Death Benefit has been increased from 75 to 80.
Brighthouse Shield Level Select 6-Year Annuity and Brighthouse Shield Level Select Advisory Annuity, both part of the Shield annuity product suite, were recently named among Barron’s 2021 “Best Annuities,” in the registered indexed-linked annuities category, marking the fourth time Shield annuities have been included in the annual ranking since 2017.
© 2021 RIJ Publishing LLC. All rights reserved.

Ubiquity and Sallus partner on new Pooled Employer Plan

Posted on August 5, 2021 by Editorial Staff -

Ubiquity Retirement + Savings will be the recordkeeper, third-party administrator, and 3(16) plan fiduciary for a Pooled Employer Plan that Sallus Retirement LLC intends to launch effective January 1, 2022.

Ubiquity (originally called “The Online 401(k)”) started offering a low-cost, web-based robo-recordkeeping platforms for small plans as early as 1999—more than a decade before “robo” and “fintech” became part of the financial industry lexicon.

Founded by Chad Parks, Ubiguity describes itself as a fintech company “at the crossroads of HCM, SaaS (software-as-a-service)and robo-recordkeeping.” It recordkeeps over $2.8 billion in retirement savings for thousands of small businesses.

Sallus Retirement LLC was recently created by Magis Capital Partners, a venture capital firm in the fintech/robo-advice space, to a Pooled Plan Provider, which can serve as the sponsor of a single 401k plan for many different unrelated companies.

Sallus’ CEO is James Sopha, a Magis partner and former Jackson National Life president. Other Magis-supported ventures include FIDX, which runs Envestnet’s annuity platform, Advisor Credit Exchange (ACX), and Trucendent, an estate planning fintech platform.

“For business owners who previously could not afford to sponsor a plan or were concerned about fiduciary risk, as well as for the financial professionals serving them, Ubiquity’s performance of the recordkeeping and administrative fiduciary responsibilities will limit the burden and cost to small businesses joining Sallus Retirement’s PEP while optimizing the efficiency of the PEP’s operations,” the companies said in a release.

“The Sallus Retirement solution will enable small businesses to find retirement plans from non-traditional sources, such as wealth advisors, payroll companies and benefits brokers, filling an important void in the market,” the release said.

Average US Incomes (Before and After Transfers and Taxes) 2018

Posted on August 5, 2021 by No Author -

Research Roundup

Posted on July 29, 2021 by Kerry Pechter -

Here’s economist Larry Kotlikoff’s scary argument: Today’s low yields (and high prices) on government securities reflect investors’ flight to safety—but the flight is driven less by confidence in Uncle Sam’s financial strength than by the existential uncertainty that the government’s rising debt load creates.

Ergo, the government shouldn’t use its current low borrowing costs as an excuse or rationale to keep borrowing, Kotlikoff claims. More public debt will make investors more anxious, scare them into buying more Treasury debt, and extend a vicious cycle.

This is the paradox or irony concocted by the Boston University professor—who ran for president of the US in 2016 and likes to call Social Security a Ponzi scheme—in two June 2021 papers, “Deficit Follies” and “When Interest Rates Go Low, Should Public Debt Go High?”

“Uncertainty about the resolution of government debt policies can, itself, lower the government’s borrowing rate, making deficits look cheaper precisely when they are becoming economically more expensive,” he and his three co-authors write.

In this edition of RIJ’s Research Roundup, we summarize these and three other recent articles and working papers by US economic analysts. These include an evaluation of President’s Biden’s plan to repair America’s infrastructure; a study of American reactions to financial windfalls; and a research brief from Boston College on the extent to which Social Security penalizes motherhood.

“Deficit Follies,” by Johannes Brumm, Xiangyu Feng and Laurence J. Kotlikoff. (NBER Working Paper 28952), and “When Interest Rates Go Low, Should Public Debt Go High?” (NBER Working Paper 28951).

In these two papers, Kotlikoff and his co-authors dispute French economist Olivier J. Blanchard’s controversial suggestion that a government can borrow-and-spend without much harm if the interest rate on its debt is lower than its economy’s growth rate.

Here’s what Blanchard wrote in 2019: “If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes may well be feasible. Put bluntly, public debt may have no fiscal cost,” Blanchard wrote in “Public Debt and Low Interest Rates.” (NBER Working Paper 25621).

Kotlikoff et al. attack that idea from three directions. The first involves the supposed paradox of deficit spending, noted above: Deficit spending creates investor anxiety, but investors don’t shun government debt. Instead, they buy more, driving prices up and yields down. Perversely, that encourages more Treasury sales, more public debt, and more anxiety.

“Political and economic risks are causing people to be so scared that they’re bidding up safe assets,” Kotlikoff told RIJ recently. “It doesn’t follow that you should take from the young to give to the old. You should understand the risk and fix it. That would argue for progressive taxation from winners to losers. The safe rate then goes back to the rate of return on capital.”

His second point is that the government’s liability for future Social Security benefits effectively adds tens of trillions of dollars to the existing long-term federal debt.

“With Social Security, you’re taking from young people and, promising to give them benefits in future. With government bonds, you’re taking the money and promising interest in the future,” he said in our interview. “It’s just different labels for the same thing. The government is generating uncertainty over which generation is going to be on the hook to resolve these unsustainable policies.”

Kotlikoff’s third message is that deficit spending beggars future American workers. “I think we have a history of taking from the young and giving to the old, to the point where we’re endangering the economic welfare of the young. We should have been taking taxes from people, we should not have been using a deficit-expense response.

“My kids and all the other kids will have to pay. And if we don’t tax ourselves to pay for the victims, then we leave the debt to our kids and we [the older generation] will end up having to consume more. The [cost of Social Security] should have been kept within a generation [not transferred across generations].”

Instead, these researchers conclude, the US should abandon the “pay-as-you-go” financing (which the paper calls “take-go”) method that it currently uses and let each generation pay, via taxes, for its own future retirement benefits. “Relative to running the risk-sharing policy, either immediately or down the road, engaging in take-go is a government-organized Ponzi scheme—making early participants better off and inducing future cohorts to participate in what is a hard-to-discern bad deal to recoup their investment.”

“Can Biden Build Back Better? Yes, If He Abandons Fiscal ‘Pay Fors.’” Levy Institute Policy Brief No. 155, June 2021.

Fifty years ago, the economist Abba Lerner favored “functional finance” over “sound finance.” Sound finance meant aiming for a balanced budget at the federal level. Functional finance meant using deficit spending to boost the economy or correct a market failure where necessary.

Lerner’s spirit lives on in a recent Levy Institute Public Policy Brief, “Can Biden Build Back Better.” Yeva Nersisyan of Franklin and Marshall College and L. Randall Wray of Bard College claim that the policy of “budget-neutral” spending—which requires that budget cuts “pay for” or offset new federal spending—could hobble the Biden administration’s effort to spend trillions on new asphalt and digital highways.

“The ‘pay-for’ approach limits our spending on progressive policy to what we can raise through taxes, and we will only tax the amount we need to spend,” Wray and Nersisyan write, noting that such a policy “undermine[s] the goals internal to both the public investment and tax components of the administration’s plans.”

Echoing Lerner, Nersisyan and Wray recommend that the importance of a public policy goal, rather than its cost, should guide spending and taxation decisions. “If the purpose of taxing corporations and wealthy individuals is to reduce inequality, then the tax changes should be formulated to accomplish that—not to ‘raise funds’ to finance proposed spending,” they write.

“And while it is possible that general tax hikes might be needed to prevent public investment programs from fueling inflation… the kinds of taxes proposed by the administration would do little to relieve inflationary pressures should they arise,” they write. “Under current economic circumstances, however, the president’s proposed infrastructure spending should not require budgetary offsets or other measures to control inflation.”

“How Much Does Social Security Offset the Motherhood Penalty?” Center for Retirement Research at Boston College. Issue in Brief, July 2021, Number 21-11.

Social Security’s rules both favor and punish spouses—primarily women—for the time they spend out of the workforce and at home raising children. This report from the Center for Retirement Research (CRR) at Boston College tries to net out the pros and cons of that policy.

In their paper, Matthew S. Rutledge, Alice Zulkarnain, and Sara Ellen King (current and former CRR researchers) found that, on average, mothers miss a lot of Social Security benefits by staying at home when they might have been at work, contributing to the program and earning credits.

But the program helps after they retire. “Social Security is able to offset a significant amount of the penalty by the time mothers reach retirement through two separate channels: the progressive design of worker benefits and the availability of spousal benefits,” they write.

Non-working mothers tend to benefit from the tilt of Social Security benefits toward low-earners. They also benefit from the rule that provides them with at least half of their working spouses’ monthly benefit in retirement. In addition, surviving widows and widowers—whether they worked for pay or not—can receive the higher of their late spouses’ benefit or their own until they die.

The study finds that mothers earn, at the median, only 37% as much as childless women during their lifetimes. Median earnings for childless women are $3,850 per month, compared to $1,409 for women with children. But mothers receive, at the median, 60% as much in Social Security benefits as childless women.

The median Social Security benefit is $1,301 per month for childless women and $785 per month for mothers. Retired mothers with one child receive a median $974 per month from Social Security, while mothers with two children receive $847 per month.

Eighty years ago, at the birth of Social Security, men typically worked and women typically stayed home. But a lot has happened since then, like two waves of “feminism.” “In recent generations, women’s labor force participation and earnings have increased, so more women get Social Security benefits solely on their own earnings record,” the researchers wrote. But “as marriage rates have decreased and divorce rates have increased, fewer women meet the 10-year marriage threshold. [So] the share of women receiving a spousal benefit has plummeted from 35% in 1960 to 18% in 2019.”

“How Americans Respond to Idiosyncratic and Exogenous Changes in Household Wealth and Unearned Income” (NBER Working Paper No. 29000, July 2021)

If you won a Lotto jackpot or received some other financial windfall near your retirement age, would you work fewer hours? Would you retire? Would you move to a nicer house in a better neighborhood? Alternately, how would you respond to a hike in your marginal income tax rate?

Hoping to anticipate the domino effects of the introduction of a Universal Basic Income (UBI) in the US and a marginal tax hike on the wealthy to pay for it, four economists set out to learn if those policies would have the intended effect, or if they might backfire.

Combining “administrative data on US lottery winners with an event-study design that exploits variation in the timing of lottery wins,” University of Chicago researchers Mikhail Golosov, Michael Graber, Magne Mogstad and David Novgorodsky found that wealthier and poorer people respond differently to windfalls.

On average, “For an extra $100 in wealth, [US] households reduce their annual earnings by approximately $2.30,” the authors write. But averages hide the disparity between rich and poor. “Households in the bottom quartile of the pre-win income distribution reduce their annual household labor earnings by $1.30 per $100 dollars of additional wealth, whereas winners in the top quartile decrease their annual household labor earnings by $3.10 dollars per $100 of additional wealth,” the paper said.

In other words, poorer people tend to keep their day jobs and buy more stuff when they hit the jackpot. Richer people, who presumably already own lots of stuff, tend to “prioritize reducing labor over increasing consumption.”

The researchers also sought to learn if raising a poor family’s disposable income with a UBI would inspire it to move to a better neighborhood where the housing stock, the schools, and the chances for upward social mobility might be greater.

Again, poor and wealthy families appeared to respond differently. Not surprisingly, “Lower-income households are much more likely to move: the increase in the probability of moving for winners in the lowest quartile is around five times as large as that of the winners in the highest quartile for an extra 100,000 dollars in wealth.”

But the effect is diluted by other factors. “Pure unconditional cash transfers do not lead households to systematically move to locations of higher quality, consistent with the [well-documented] importance of non-financial barriers to moving to better neighborhoods.”

Is a Life/Annuity Crisis Brewing?

Posted on July 29, 2021 by Kerry Pechter -

The biggest life/annuity industry trend of the decade has been happening in plain sight for years. Only recently have I started reading and writing about it. I’ve discovered that others have been following it since at least the mid-2010s.

At RIJ, we call this phenomenon the Bermuda Triangle Strategy.

“Bermuda Triangle” refers to the trend among publicly traded life/annuity companies to reinsure capital-intensive blocks of life insurance and annuity liabilities. The reinsurers then engage large, global private equity or “buyout” firms to manage the investments that back the liabilities.

This strategy seems to help everybody. The life/annuity companies reduce liabilities and get cash out in the form of released capital. They use part of the money to buy back stock. The reinsurers, often in Bermuda, get new business. The buyout firms earn asset management fees.

These deals are sometimes plain-vanilla, arms-length transactions between well-capitalized entities. They help relieve the financial stresses on life/annuity companies, which under-priced products, low interest rates and new regulations created.

But Bermuda Triangle deals also include low-transparency transactions between affiliated companies, which makes some industry-watchers worried. They fret that reinsurers might be undercapitalizing the annuity liabilities and that their asset management-partners might be taking too much risk with the annuity assets.

State and federal regulators and economists at elite universities started tracking this phenomenon in the wake of the Great Recession. That crisis drove many big changes in the life/annuity business, such as the departure of foreign-owned companies from the industry, MetLife’s spin-off of its individual annuity business as Brighthouse, the purchases of life insurers by private-equity firms, the popularity of index-linked annuity contracts, and so forth.

Researching the history of this trend, I found a 2014 study, “Variable Annuities—Recent Trends and the Use of Captives,” by analysts David (Fengchen) Du and Cynthia Martin, then at the Boston Fed. They focused on “insurers’ use of reinsurance captives to transfer the risks of the VA guarantee exposures.”

Here’s a summary of the tale they tell. In 2009, the Great Recession exposed, among other things, the vulnerability of the implicit put options (i.e., insurance against a big market drop) in the guaranteed lifetime withdrawal benefit (GLWB) riders on variable annuities. (By then, Moshe Milevsky of York University had warned that the riders were underpriced for the potential risks they posed to life insurers.)

When the stock market crashed in 2008, the value of securities backing the contracts’ promises of lifetime income fell. That required annuity issuers to put up more capital, even though many of their guarantees were decades from coming due. In response, life/annuity companies with big books of VA/GLWB business relieved pressure by the transferring liabilities to reinsurers they themselves owned. (Traditional third-party reinsurers had little appetite for the business at the time.)

Those moves saved the companies a fortune. “Without the RBC [risk-based capital] benefit derived from captive transfers, an estimated $14.4 billion to $34.9 billion of additional statutory capital would be required of the top 10 VA life insurers transferring VA risk to captives,” the Boston Fed analysts wrote.

The analysts also flagged the lack of transparency in the early affiliated reinsurance deals, the use of “contingent” assets to back the reinsured liabilities, and the potential for using “capital arbitrage” to hide undercapitalization of the liabilities—the liabilities being the retirement savings of millions of American households.

Martin and Du recommended new regulations to prevent an epidemic of capital arbitrage. They saw a need for “consolidated capital requirements” to prevent the flight of liabilities to havens like Bermuda where capital requirements were lower.

“The use of affiliated reinsurance captives does not transfer risk outside of the consolidated organization, yet their use allows VA writers to hold less RBC and enables the transfer of risk to a regulatory regime with lower capital requirements. Thus, the use of reinsurance captives obscures existing statutory capital adequacy assessments and can leave VA statutory writers and their insurance holding companies with less ability to absorb market and other tail risks which emanate from this significant and volatile business.”

Those regulations were never created. Instead, private equity companies began identifying opportunities to gain access to annuity assets through reinsurance deals and even the purchase of distressed life/annuity companies—starting with Harbinger’s purchase of Old Mutual in 2013—so that they could reinsure and refinance annuity contracts that they themselves create.

KKR, Blackstone, Apollo, and the Carlyle Group are now among the giant asset managers with stakes in the life/annuity business, with close ties to Global Atlantic, F&G, Athene and Fortitude Re, respectively. Ares Management recently entered the arena through the formation of Aspida Financial. Asset managers have set up “Insurance Solutions” divisions to guide life/annuity companies through the reinsurance and reinvestment (i.e., Bermuda Triangle) process.

Over the past year, RIJ has heard concern expressed by a variety of sources—a retired reinsurance executive, an adviser unsure about the financial health of indexed annuity providers, and a life/annuity executive principal involved in a current reinsurance deal, a Federal Reserve analyst, a Treasury official and academics—about potentially dangerous capital arbitrage and excessive risk-taking with annuity assets.

While they’ve seen the benefits of reinsuring underfunded liabilities and leveraging the “loan origination” savvy of buyout firms, they worry about the quantity and the quality of the assets supporting reinsured annuities in regulatory havens like Bermuda, Vermont, Arizona and elsewhere. Lacking adequate insight into the reinsurance transactions and the investment practices of the buyout firms, they see the ingredients for a potential life/annuity industry funding crisis—just when retired annuity owners start asking for their money back.

Aspida Financial to begin issuing annuities in 2022

Posted on July 28, 2021 by Editorial Staff -

Another private equity-led insurer has jumped into what RIJ has called the “Bermuda Triangle” business, and a former actuary from Athene, America’s leading seller of fixed indexed annuities, will run its reinsurance arm.

Aspida Holdings Ltd., an indirect subsidiary of Ares Management Corporation, closed earlier this month on its acquisition of Global Bankers Insurance Group, LLC, a US based insurance service provider and operations company.

The acquisition is pursuant to the regulatory and court approved settlement agreement related to Aspida’s previously disclosed transaction with Pavonia Life Insurance Company of Michigan. Going forward, Aspida will be rebranded as Aspida Financial Services, LLC, or Aspida Financial.

Jon Steffen, new president of Aspida Re.

Separately, a subsidiary of Aspida has also recently entered into an agreement to acquire a US life insurance company that is broadly licensed nationwide. In combination with Aspida Financial, these two entities will form the foundation for Aspida’s nationwide life and annuity platform, which is expected to be in position to begin issuing annuities and other products in 2022.

“Bermuda Triangle” refers to a three-corner strategy involving the generation of annuity liabilities by a life/annuity insurer, an affiliated offshore reinsurer, and an affiliated asset manager experienced in loan origination and asset securitization. The strategy may be led by any of the three entities.

The acquisition of Aspida Financial is expected to complement Aspida Re, a Bermuda-domiciled life and annuity reinsurer launched last year. With approximately $2.3 billion in assets under management as of March 31, 2021, Aspida plans to “underwrite new insurance products, execute reinsurance transactions, and pursue opportunistic acquisitions.”

On July 26, Aspida Life Re Ltd., a reinsurance company and subsidiary of Aspida Holdings Ltd. announced that Jon Steffen has joined Aspida Re as President. Steffen was previously the Approved Actuary for Athene Life Re Ltd. from January 2015 to June 2021.

Aspida Re was launched in December 2020 following the acquisition of F&G Reinsurance Ltd. by Aspida, which is backed by Ares Management Corporation. Based in Hamilton, Bermuda, Aspida Re “provides solutions to insurance partners that are looking to optimize their balance sheets and best position their businesses for future growth,” according to a release.

Ares Management Corporation is a global alternative investment manager offering clients complementary primary and secondary investments across the credit, private equity, real estate and infrastructure asset classes.

As of March 31, 2021, including the acquisition of Landmark Partners, which closed June 2, 2021, and the acquisition of Black Creek Group, which closed July 1, 2021, Ares Management’s global platform had approximately $239 billion of assets under management with approximately 2,000 employees operating across North America, Europe, Asia Pacific and the Middle East.

Honorable Mention

Posted on July 28, 2021 by Editorial Staff -

White House nominates Lisa Gomez to lead EBSA section of the DOL

Lisa Gomez has been nominated by President Joe Biden to become the head of the Employee Benefits Security Administration (EBSA) in the Department of Labor (DOL), the White House announced this week.

If the US Senate approves the nominate, she’ll run a department that Phyllis Borzi led during the Obama presidency and Preston Rutledge led during the Trump presidency. She’ll serve under DOL Secretary Marty Walsh, the former mayor of Boston.

Gomez is a partner with the law firm Cohen, Weiss and Simon LLP and the Chair of the Firm’s Management Committee. She specializes in employee benefits law, representing various Taft-Hartley and multiemployer pension and welfare plans, single employer plans, jointly administered training program trust funds, a federal employees health benefit (FEHB) plan, supplemental health plans, and VEBAs.

She is a graduate of the Fordham University School of Law (J.D. 1994) and Hofstra University (B.A. 1991).

Blackstone to manage almost $100 billion for AIG by 2027

American International Group, Inc., and Blackstone announced that they have reached a definitive agreement for Blackstone to acquire a 9.9% equity stake in AIG’s Life & Retirement business for $2.2 billion in an all-cash transaction, according to a release this week.

Blackstone will manage an initial $50 billion of Life & Retirement’s existing investment portfolio upon closing of the equity investment, with that amount increasing to $92.5 billion over the next six years.

Upon the closing of these transactions, which are expected to occur simultaneously by the end of the third quarter of 2021, Jon Gray, President and Chief Operating Officer of Blackstone, will join the Life & Retirement Board of Directors. These transactions are subject to HSR (Hart-Scott-Rodino Antitrust Improvements Act of 1976) approval and other customary closing conditions.

Separately, AIG and Blackstone Real Estate Income Trust (BREIT) announced that BREIT will pay about $5.1 billion in cash for AIG’s interests in a US affordable housing portfolio, subject to customary closing conditions. The deal is expected to close in the fourth quarter of 2021.

The ratings agency AM Best has commented that the credit ratings of AIG and its subsidiaries remain unchanged pending the completion of the deal, which was announced last July 14. In a release, AM Best said it “expects the sale to increase liquidity and add available capital to AIG while receiving the benefits of Blackstone’s extensive expertise in real estate and property management.”

American International Group, Inc., will report financial results for the second quarter ended June 30, 2021 after the market closes on Thursday, August 5, 2021. AIG will also host a conference call on Friday, August 6, 2021 at 8:30 a.m. ET to review these results. The live, listen-only webcast is open to the public and can be accessed in the Investors section of https://www.aig.com.

DOJ nixes Aon-WTW mega-merger

Aon and Willis Towers Watson have mutually agreed to end their proposed acquisition following an “impasse” with the US Department of Justice (DOJ), according to a July 27 report in Captiveinsurancetimes.

Aon will pay Willis Towers Watson a termination fee of $1 billion, following which both firms will move forward independently. The proposed acquisition would have merged two of the three largest global insurance brokers, with an implied combined equity value of around $80 billion.

The business combination was announced in March 2020 between Aon, a risk, retirement, and health solutions provider, and Willis Towers Watson, an advisory, broking and solutions firm.

Although the European Commission conditionally approved the acquisition under divestment conditions of the EU Merger Regulation, last month the DOJ filed a civil antitrust lawsuit against the acquisition on the grounds that it would jeopardise industry competition, increase prices and weaken innovation. This suit was said to have created a non-negotiable “impasse” that made it impossible for the acquisition to go ahead.

American Equity issues new FIA with income, disability riders

American Equity Investment Life Insurance Company has launched a new 10-year fixed index annuity (FIA), the EstateShield 10. The contract has 12 interest crediting options, including and one- and two-year crediting strategies linked to five different indices.

For investors seeking retirement income, protection against the expense of disabilities, and protection for beneficiaries, the product carries a lifetime income benefit rider, a “Wellbeing Benefit” and an enhanced death benefit for no additional fees. Income payments and the enhanced death benefit are based on a notional Benefits Account Value (BAV).

The Wellbeing Benefit is part of the income benefit rider. It allows for increases in eligible withdrawal amounts by up to 150% for single and 200% for joint owners, for up to five years, if medical eligibility requirements are met.

Lifetime income payments can begin after 10 years, but the contract can grow indefinitely as long as it remains active. Contract owners can withdraw up to 10% of purchase payment each year, beginning after the first year, penalty free.

The enhanced death benefit is based on the BAV amount at the date of death. Beneficiaries can receive 75% of the BAV as a lump sum, or 100% of the BAV is a series of equal payments over five years. There is also a base death benefit option that provides access to the contract value, paid in a lump sum with no surrender charges.

Rising liabilities offset market gains at big corporate pensions: Milliman

The market value of assets for the 100 largest US corporate pension plans (members of the Milliman 100 Pension Funding Index) increased by $20 billion in June 2021, according to a Milliman, Inc., release this week.

But an increase in pension liabilities offset those gains. The funded status of those pensions decreased by $30 billion for the month, and the funded ratio slid to 97.2%.

“We’ve had a great run of pension funding improvements over the last eight months, pulling within 2% of full funding, but that momentum ran out in June,” said Zorast Wadia, author of the Milliman 100 PFI. “Full funding remains within reach, thanks to our year-to-date 6.9% improvement in funded status.”

Under an optimistic forecast (with interest rates reaching 3.04% by the end of 2021 and 3.64% by the end of 2022) and asset gains (10.2% annual returns), the funded ratio would climb to 105% by the end of 2021 and 122% by the end of 2022, Milliman said.

Under a pessimistic forecast (2.44% discount rate at the end of 2021 and 1.84% by the end of 2022 and 2.2% annual returns), the funded ratio would decline to 93% by the end of 2021 and 85% by the end of 2022.

To view the complete Pension Funding Index, go to www.milliman.com/pfi. To see the 2021 Milliman Pension Funding Study, go to www.milliman.com/pfs. To receive regular updates of Milliman’s pension funding analysis, contact us at [email protected].

SIMON offers its first VA, from Midland National

SIMON Annuities and Insurance Services LLC has added the first variable annuity (VA) contract to its investment and insurance product distribution platform. The LiveWell VA is issued by Midland National Life and administered by Sammons Retirement Solutions (a division of Sammons Institutional Group).

LiveWell is the first VA on SIMON’s Marketplace platform, joining fixed indexed annuities, fixed annuities, and structured annuities. Additional carriers will join SIMON’s variable annuities marketplace in the coming months, a SIMON release said.

Variable annuities (VAs) can help accumulate assets for retirement with tax deferred growth, offering flexible, tax-free reallocations, and optional death benefits for heirs. Often employed as a part of a long-term retirement planning strategy for tax-efficient growth,

SIMON gives financial professionals access to tools and resources with which to analyze the products on the platform, including rider illustrations, allocation analytics, fund options and performance statistics, and historical performance data.

Annuity Sales Rebound in 2Q2021; RILA Sales More Than Double

Posted on July 28, 2021 by Editorial Staff -

Total preliminary US annuity sales were $67.9 billion in the second quarter of 2021, up a healthy 39% from second quarter 2020. Year-to-date, annuity sales reached $129 billion, up 23% from 2020, according to the Secure Retirement Institute (SRI) US Individual Annuity Sales Survey.

“Strong equity market gains and lower volatility, as well as rising interest rates all contributed to the remarkable rebound in the annuity market,” said Todd Giesing, assistant vice president, SRI Annuity Research.

“We expected sales to improve as the country opened up and the economy normalized. There is significant pent-up consumer demand for products providing tax-deferred investment growth and guaranteed income. The last time quarterly annuity sales surpassed this level was fourth quarter 2008, during the Great Recession.”

Source: LIMRA Secure Retirement Institute, July 27, 2021. ($billions)

At $32.8 billion, total variable annuity sales in the second quarter were up 55% year-over-year, their best quarter in nearly six years. In the first half of 2021, total annuity sales were $62.8 billion, up 33% year-over-year.

Sales of traditional VAs were $22.7 billion, up 37% increase from second quarter 2020. Year to date, traditional VA sales totaled $43.6 billion, up 16% from prior year. Sales benefited from the bull market in equities and low volatility.

“Traditional VA products offer tax-deferred investment options, [so they] may have been helped by the current administration’s proposed tax plan, which, if enacted, would retroactively raise capital gains rates,” Giesing said.

Registered index-linked annuity (RILA) sales exceeded record level sales in the second quarter, to $10.1 billion, up 122% from second quarter 2020. For the first half of 2021, RILA sales were $19.3 billion, 105% higher than prior year.

“We expect RILA sales growth to level off in the second half of the year,” said Giesing. “If interest rates improve, fixed indexed annuities may become more attractive to investors who want greater principal protection.”

Fixed indexed annuity (FIA) sales grew 28% in the second quarter to $15.4 billion. Year to date, FIA sales were $28.9 billion, up 2% year-over-year.

“While the FIA market hasn’t returned to the levels seen in 2019, rising interest rates and product innovation enabling carriers to raise cap rates suggest FIA sales will continue to improve throughout 2021. SRI is forecasting FIA sales to increase more than 5% in 2021,” according to SRI.

Fixed-rate deferred annuity sales were $16.1 billion in the second quarter, 26% higher than prior year results. This represents the highest quarterly sales results for fixed-rate deferred annuities since second quarter 2009. In the first six months of 2021, fixed-rate deferred annuity sales totaled $30.7 billion.

Sales of fixed-rate deferred annuities in banks and broker-dealers continue to thrive as crediting ratings for them are far more attractive than CDs. “However, SRI saw pending contracts in June drop by double-digits, a sign that sales are likely to level off or decline in the second half of 2021,” Giesing said.

Immediate income annuity sales were $1.8 billion in the second quarter, up 29% from second quarter 2020. Year to date, immediate income annuity sales were $3.3 billion, level with prior year results.

Deferred annuity sales increased 52% to $540 million in the second quarter. Interest rates are improving, but are still low enough to undermine sales of income annuities. In the first half of 2021, DIA sales were $1 billion, 17% higher than prior year.

Total fixed annuity sales rose 27% in the second quarter to $35.1 billion. Year to date, total fixed annuity sales were $66.2 billion, 15% above the first half of 2020.

Preliminary first quarter 2021 annuities industry estimates are based on monthly reporting, representing 85% of the total market. A summary of the results can be found in LIMRA’s Fact Tank.

The top 20 rankings of total, variable and fixed annuity writers for second quarter 2021 will be available in September, following the last of the earnings calls for the participating carriers.

US Annuity Sales, Second Qtr 2021

Posted on July 28, 2021 by No Author -

Number of PE-Owned US Insurers Jumped 31% in 2020: NAIC

Posted on July 22, 2021 by Editorial Staff -

In a new Capital Markets Special Report, analysts at the National Association of Insurance Commissioners have collected data on the investments of “private equity-owned” US life insurers as of year-end 2020. Large PE firms began acquiring life insurers and blocks of life/annuity contracts in 2010, and have become a force in the fixed indexed annuity business in particular.

As of year-end 2020, PE-owned US insurers accounted for $487 billion in book/adjusted carrying value (BACV) of total cash and invested assets, up 41% from about $344 billion at year-end 2019, the NAIC reported. The BACV of total cash and invested assets for PE-owned insurers was 6.5% of the U.S.insurance industry’s $7.5 trillion at year-end 2020, the report said.

In number, PE-owned insurers comprised about 3% of the total number of CoCodes (117 out of 4,530) at year-end 2020, compared to about 2% (89 out of 4,482) at year-end 2019. Consistent with prior years, US insurers were identified as PE-owned via a manual process.

The NAIC Capital Markets Bureau identifies PE-owned insurers as those who reported any percentage of ownership by a PE firm in Schedule Y. Others were identified using third-party sources. The number of PE-owned US insurers continues to evolve. Of the 117 PE-owned insurers, 58 were identified via Schedule Y; 44 reported being wholly owned.

Highlights of the report include:

The number of private equity (PE)-owned US insurers identified by the NAIC Capital Markets Bureau totaled 117 at year-end 2020; total cash and invested assets for these insurers was approximately $487 billion in book/adjusted carrying value (BACV).
The majority of PE-owned US insurers were life companies.
Similar to the overall US insurance industry, bonds were the largest asset type for PE -owned insurers, at 74% of their total cash and invested assets; corporate bonds were the largest bond type, at about 49% of total bonds.
The concentration of nontraditional bonds—i.e., asset-backed securities (ABS) and other structured securities (which includes collateralized loan obligations, or [CLOs])—was higher for PE-owned insurers in terms of the percentage of total bonds, compared to the overall US insurance industry at year-end 2020.
About 95% of unaffiliated corporate bond exposure carried NAIC 1 and NAIC 2 designations, implying high credit quality.
Other long-term invested assets (as reported in Schedule BA) remained constant as a percentage of total cash and invested assets year over year (YOY). However, total BACV increased.
Schedule DA investments for PE-owned insurers increased by 2.6% from 2019 to 2020 in terms of BACV; one PE-owned insurer accounted for about 35% of the exposure at year-end 2020.

How The Elephant in the Room Evolved

Posted on July 22, 2021 by Kerry Pechter -

The economists Ralph Koijen of the University of Chicago Booth School of Business and Motohiro Yogo of Princeton University have been studying the finances of US life/annuity companies for the past decade, as the industry has adapted to low interest rates and tighter reserve requirements.

In a 2014 paper, “Shadow Insurance” (NBER Working Paper 19568), they documented the growing reliance of US life insurers on transferring capital-intensive liabilities to off-balance sheet affiliated offshore reinsurers to free up reserves and relieve pressure to raise prices on their products.

Ralph Koijen

One product class in particular—variable annuities (VA) with a guaranteed lifetime income benefit riders—has been both lucrative and problematic for life insurers. Collectively, life insurers—including Jackson National, MetLife and Prudential—currently earn annual fees on some $2 trillion in VA assets, according to Morningstar data.

But VA riders also carry market risks, longevity risks, and policy owner-behavior risks. These are expensive to hedge and require high reserves. Indeed, the costs of managing the liabilities associated with VAs has driven many life/annuity companies out of the VA business. Retail sales of VAs have declined steadily and outflows from VA contracts have risen in recent years, even as a rising stock market has driven up the total value of assets in in-force VA contracts.

Variable annuities are the subject of Koijen and Yogo’s latest paper, “The Evolution from Life Insurance to Financial Engineering” (NBER Working Paper 29030). They claim that managing “long-maturity put options” on the performance of the mutual fund assets in VAs has changed the life/annuity business in ways that demand new types of regulation.

“The minimum return guarantees change the primary function of life insurers from traditional insurance to financial engineering,” Yogo and Koijen write. “Life insurers are exposed to interest risk because they have not sufficiently increased the maturity of their bond portfolio or used derivatives to offset the negative duration and the negative convexity from variable annuities.

“Life insurers are also exposed to long-run volatility risk, which is difficult to hedge with traded options that are short term,” they add. “The presence of high leverage and risk mismatch makes life insurers similar to pension funds. However, the minimum return guarantees make life insurers different from pension funds because they are engineering complex payoffs over long horizons that are difficult to hedge with traded options.”

Motohiro Yogo

As a result, “The risk profile of life insurers has become increasingly complex and opaque over the last two decades because of variable annuities, derivatives, and reinsurance.”

To bring this conversation down from the stratosphere: The VA with a living benefit started out in the late 1990s as the perfect answer to the Boomer’s retirement income dilemma. They delivered guaranteed lifetime income without the illiquidity and low internal rates of return associated with traditional income annuities.

These products were particularly suitable for life/annuity companies that had demutualized and gone public. VAs gave them the high, transparent, predictable, fee-based revenues that pleased Wall Street analysts, not the low and slow corporate bond-based earnings of a mutual insurance company.

But the low interest rate regime and the tougher regulations that followed the Great Financial Crisis of 2008 blew up that seemingly perfect formula. The risks and costs associated with offering VAs shot up. Publicly held life insurers reacted in various ways—divestiture, reinsurance, new products, higher prices, and stingier guarantees.

The rest is history—written in part by Yogo and Koijen, who have migrated among various institutions over the last decade, including such capitals of financial research as the London Business School, the Minneapolis Federal Reserve, and New York University.

“In the early part of the sample before the 1980s, life insurance was larger than annuities,” their latest paper says. “Since the 1990s, variable annuities have grown rapidly and are now the largest liability. In 2017, variable annuities and traditional annuities together accounted for 4.9% of household net worth, which is about twice the size of 2.4% for life insurance. The label ‘life insurance companies’ was appropriate back in 1945, but they should perhaps be relabeled ‘annuity and life insurance companies’” in modern times.

Honorable Mention

Posted on July 22, 2021 by Editorial Staff -

Prudential sells its retirement plan business to Empower

The low-margin retirement plan recordkeeping business continues to consolidate. Reinsurance helped financed the latest multi-billion dollar divestiture.

Empower Retirement has agreed to buy Prudential’s full-service retirement plan recordkeeping and administration business, subject to regulatory approvals, for $3.55 billion, Prudential announced this week. The transaction is expected to close in the first quarter of 2022.

The business includes more than 4,300 workplace savings plans with about four million participants and $314 billion in savings. “[It] will be supported by $2.1 billion of capital through a combination of the balance sheet of the transferred business and Empower capital and surplus,” according to a Prudential release.

At closing, Empower will acquire Prudential’s defined contribution, defined benefit, non-qualified and rollover IRA business in addition to its stable value and separate account investment products and platforms. The deal will increase Empower’s participant base to 16.6 million and its retirement services recordkeeping assets to approximately $1.4 trillion administered in approximately 71,000 workplace savings plans. Empower will add a business also includes more than 1,800 employees who provide retirement recordkeeping and administration services to financial professionals, plan sponsors and participants.

“The acquisition will allow Empower to expand services to the broadening spectrum of workplace savings plans it now serves, which includes mega, large, mid-size and small corporate 401(k) plans; government plans ranging in scale from state-level plans to municipal agencies; not-for-profit 403(b) plans; and collectively bargained Taft-Hartley plans,” the release said.

Empower will finance the acquisition with both a share purchase and a reinsurance transaction. Great-West Life & Annuity Insurance Company will acquire the shares of Prudential Retirement Insurance and Annuity Company and business written by The Prudential Insurance Company of America will be reinsured by Great-West Life & Annuity Insurance Company and Great-West Life & Annuity Insurance Company of New York (for New York business).

Prudential will keep its Institutional Investment Products business, its Individual Annuities business and its global asset management firm, PGIM. Following the close of the transaction, Prudential’s remaining retirement business will consist of Pension Risk Transfer, International Reinsurance, Structured Settlements, and Institutional Stable Value wrap product lines.

Prudential expects to use the proceeds from the transaction for general corporate purposes, including share buy-backs. The Newark, NJ-based insurance giant now expects to return $11.0 billion to shareholders through 2023, up from the $10.5 billion announced in May 2021, and intends to reduce financial leverage.

Empower acquired Personal Capital, the digital financial device platform, in 2020, and will offer it to its new participants.

Eversheds Sutherland served as legal counsel and Goldman Sachs & Co. LLC and Rockefeller Capital Management served as financial advisors to Empower. Debevoise & Plimpton served as legal counsel and Lazard served as exclusive financial advisor to Prudential.

Headquartered in metro Denver, Empower Retirement administers approximately $1 trillion in assets for more than 12 million retirement plan participants as of March 31, 2021. Prudential has more than $1.5 trillion in assets under management as of March 31, 2021, with operations in the US, Asia, Europe, and Latin America.

A Monster First Half for Fund Flows: Morningstar

U.S. equity funds collected nearly $18 billion in June after two straight months of muted flows, according to Morningstar Research’s monthly fund flows report. Large-blend funds pulled in $10 billion, the most of any Morningstar Category in the group.

Large-value funds remained in favor, pulling in $6.8 billion. They’ve posted positive net flows in all six months of the year, including a record $20 billion in March. Their year-to-date intake of $50 billion led all U.S. equity categories. Small-value funds have enjoyed even greater success in 2021 in terms of organic growth. Their 7.1% tally for the first six months was easily the highest among the nine U.S. equity categories, with large-value’s 3.8% coming in second place.

While large-growth equity funds posted positive flows for just the eighth month over the past 36, small- and mid- growth funds saw outflows of $1.4 billion and $1.8 billion, respectively, Morningstar said. Through the first six months of the year, large-growth funds are the only U.S. equity category with negative flows and have the steepest outflows over the trailing 12 months.

Small- and mid-growth funds have managed to stay just above water over those same periods but have generally experienced outflows over the past three years as well. While equity investors may have been rebalancing away from growth stocks because of their strong performance in recent years, they haven’t changed their tune in 2021 despite value-oriented stocks posting stronger results. The Morningstar US Market Broad Value Index’s 16.9% return during 2021’s first half beat the Morningstar US Market Broad Growth’s 13.4%.

Bull market in stocks helps public pensions: Milliman

Milliman, Inc., the global consulting and actuarial firm, this week released the second quarter (Q2) 2021 results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans.

Propelled by a strong bull market, the funded ratio for these plans climbed above 80% for the first time since Milliman began tracking the PPFI in 2016, a Milliman release said. Q2 2021 marked the fifth consecutive quarter of high-water marks for both public pension assets and liabilities, with the estimated funded status of the PPFI plans growing from 79.0% at the end of March 2021 to 82.6% at the end of June.

An estimated investment performance of 4.26% for the quarter generated a $191 billion funded status improvement, while the deficit dropped below $1 trillion – to $975 billion – for the first time in the study’s history.

“This was a banner quarter for public pensions, though the individual plans in our study saw a range of investment returns – from an estimated 2.54% to 6.75%,” said Becky Sielman, author of Milliman’s Public Pension Funding Index.

“In the coming months, plan sponsors will begin to understand the extent to which the pandemic has affected liabilities, including higher death rates and the impact of furloughs on benefit accruals, pay levels, and contributions from active members.”

Looking forward, the strong market run-up, combined with the current low yields on fixed income, may also push defined benefit plan sponsors to continue to lower their interest rate assumptions, the release said.

TIAA Broker-Dealer Settles SEC Allegations for $96 Million

Posted on July 22, 2021 by Wagner Law Group -

In what the Wagner Law Group believes may be the first of many prosecutions to come, the Securities and Exchange Commission has fined a TIAA-CREF broker-dealer $96 million in a settlement over its rollover practices. This action also resolved a parallel action by the Office of the New York Attorney General.

TIAA-CREF Individual and Institutional Services, LLC, a subsidiary of Teachers Insurance and Annuity Association of America is alleged to have failed to adequately disclose conflicts of interest and to have misled customers.

Dually registered as a broker dealer and an investment adviser, TIAA Sub was charged with incenting or pressuring its advisors to recommend that participants in retirement plans record-kept by the parent company roll assets out of those employer-sponsored plans into TIAA Sub’s more expensive managed account program. Those incentives and pressures included paying more variable compensation than what was paid for alternative programs and punishments for failure to meet sales targets.

Pressure to sell the managed account program

Seeing the leakage from assets it held as plan participants retired, TIAA Sub created a new division to offer managed accounts. Rather than move assets to other providers, retiring participants could move their account to the managed program. They were encouraged to bring in new assets also. Fees ranged from 0.40% to 1.15% of assets per year (in addition to fund costs), compared to no additional fees for accounts held in the employer-sponsored plans. Advisors were trained to recognize the “pain points” for those clients and to convince them that the managed option was the right solution for them.

Advisors were paid significantly more for putting clients in managed accounts versus other products and an additional bonus could be earned. During regular meetings with advisors, supervisors praised those who gained rollovers into the managed accounts and placed advisors who failed to meet sales goals on performance improvement plans.

Misleading Statements, Failed Disclosures and Deficient Policies and Procedures

TIAA Sub’s practices, not surprisingly, led to a flood of new managed accounts. The SEC found that the advisors made misleading statements when they told clients they provide “objective” and “disinterested” advice that was in the clients’ “best interest” and that they acted as “fiduciaries.” It also found that the conflicts of interest were not adequately disclosed in the firm’s Form ADV Part brochure when it stated that the incentive compensation was proportionate to the effort required to recommend a product “designed to meet more complex needs” like a managed account.

Finally, the SEC found that TIAA Sub’s own policies and procedures were not properly implemented. The firm did have written manuals that incorporated components of FINRA Regulatory Notice 13-45, which requires broker dealers to present clients with four options for rollovers: (i) leaving the client’s assets in the employer-sponsored plan; (ii) rolling over the assets into a self-directed individual retirement account (“IRA”) or managed IRA such as a managed account; (iii) rolling over the assets to a new employer’s plan; and (iv) cashing out the account value/taking a lump sum distribution. It also required advisors to discuss other factors, including fees and expenses relating to the rollover options.

These policies were not enforced, however, when supervisors directed advisors not to follow them and some training materials encouraged advisors to avoid discussing fees and expenses with clients. Rollover recommendations regularly lacked any documentation confirming that fees and expenses about the managed program were discussed with a client or how they compared to expenses inside the employer-sponsored plans.

Observations

1. We believe that this action by the SEC is meant to be fair warning and that other advisors can expect the SEC to bring charges for their rollover practices.

2. Variable compensation is problematic. Industry practitioners have known this for some time but it is clear that paying different compensation for different advisory products brings conflicts of interest and so does paying more to roll assets outside of an employer-sponsored plan. Advisors will always be incentivized to sell what pays them more. The DOL now offers its new prohibited transaction exemption, PTE 2020-02, as guidance for how to adequately deal with compensation differentials. It remains to be seen, however, how the SEC will respond with attempts to mitigate these inherent conflicts.

3. Compliance manuals are not merely window dressing. It is critical that advisors maintain appropriate policies and procedures, monitor that the procedures are being followed, and keep adequate records of their findings. Firms must scour all their writings, including training manuals, firm meeting scripts and client communications, to ensure that they are consistent with their formal policies and procedures.

We encourage advisory firms to hire competent counsel and consultants to draft adequate policies and procedures, including forms that detail comparative costs and expenses.

4. Fiduciary advisors will be able to continue to rely on the DOL’s nonenforcement policy in FAB 2018-02. That release stated that the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with “Impartial Conduct Standards” for transactions that would have been exempted in the now invalidated 2016 exemptions. Similar to the SEC’s findings in this action, the DOL requires compliance with three components – a best interest standard, a reasonable compensation standard, and a bar on misleading statements to plan investors about investment transactions. We understand that the IRS will follow a similar non-enforcement policy.

None of this prevents actions by private parties, actions by federal regulators who believe there has not been a good faith effort to comply, DOL action taken as soon as the nonenforcement period expires, or further state enforcement action. We encourage all firms to prepare diligently by implementing appropriate policies and procedures and to train, train, train.

Allianz Life offers in-plan indexed annuity with living benefit

Posted on July 22, 2021 by Editorial Staff -

Allianz Life Insurance Company of North America (Allianz Life) has entered the defined contribution market with a guaranteed income option for participants in employer-sponsored plans, according to a release this week.

The offering, Allianz Lifetime Income+ Annuity, is a deferred fixed indexed annuity with a guaranteed lifetime withdrawal benefit (GLWB) that’s intended to give participants a “flexible and portable” income that can supplement Social Security income in retirement.

“The innovative design features growth potential, protection from market loss and guaranteed lifetime income that has the potential to increase annually for life to help address the effects of inflation,” the release said.

This new product adds to the in-plan annuity options that plan sponsors can consider offering to their participants. It differs from the first generation of in-plan income options, such as Prudential’s Income Flex, in that a living benefit is added to a fixed indexed annuity (FIA) rather than a variable annuity (VA). Relative to VAs, FIAs are less volatile and therefore less risky for life insurers to offer.

But FIA contracts and lifetime withdrawal benefits are each complex and could require substantial education so that participants can make sophisticated decisions about them. This part of the annuity market is new and relatively untested.

New hire Mike De Feo will lead Allianz Life’s new Defined Contribution Distribution team. Previously, he held similar positions at VOYA Investment Management and Nuveen Investments.

According to the client brochure:

The product’s specs include a minimum initial premium of $2,000 and an annual 0.50% product fee. If the participant dies, his or her spouse can continue it; otherwise, the account value goes to the designated beneficiary. Lifetime income payments can begin anytime after age 60.

There’s an annual 2% “Income Builder” credit to the “Lifetime Income Value” (the notional benefit base used to calculate monthly payments in retirement, not the account value) starting at age 50 when no other interest accrues.

There’s also an annual 150% “Income Accelerator” credit to the Lifetime Income Value on any fixed or indexed credit, less withdrawals. The two credits can continue to enhance income during retirement, after the income stream begins. Contract owners can apply the account value to the purchase of a life annuity if they wish.

A market value adjustment may be assessed on withdrawals under certain conditions.

Plan participants can allocate their contributions to the following options:

Fixed rate
Annual point-to-point or monthly sum with a cap on the S&P 500, Russell 2000 or Nasdaq 100 (price-only index; no dividends)
Annual point-to-point with a participation rate on the Bloomberg US Dynamic Balance Index ER II or PIMCO Tactical Balance Index ER (volatility-managed custom indices)

“The product is flexible,” Matt Gray, head of Employer Markets, Allianz Life, told RIJ in an email. “Each plan’s version of the product can have one or more allocations and one or more age bands for the payout percentages. Payout percentages are based on the economic environment over time.”

A recent Allianz Life survey showed this evidence of demand for its offering:

73% of participants would consider a lifetime income option if available in their plan.
64% of participants said market volatility caused by COVID-19 has increased their interest in such an option.
59% of participants would consider adding an annuity to their plan if available.
77% said such an option would demonstrate their employer’s interest in their retirement readiness and wellbeing
65% said this option would increase their loyalty to their employer.

Private Equity-Owned Insurers Own 2.5x as Much Structured Securities

Posted on July 22, 2021 by No Author -

White House nominates Lisa Gomez to lead EBSA section of the DOL

Blackstone to manage almost $100 billion for AIG by 2027

DOJ nixes Aon-WTW mega-merger

American Equity issues new FIA with income, disability riders

Rising liabilities offset market gains at big corporate pensions: Milliman

SIMON offers its first VA, from Midland National

Prudential sells its retirement plan business to Empower

A Monster First Half for Fund Flows: Morningstar

Bull market in stocks helps public pensions: Milliman

Pressure to sell the managed account program

Misleading Statements, Failed Disclosures and Deficient Policies and Procedures

Data Connection

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