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Prudential Files “2.0” Version of Highest Daily VA Rider

Posted on June 6, 2012 by -

On May 14, Prudential Financial’s Pruco Life subsidiary filed an application with the Securities and Exchange Commission for an update of its popular Premier Retirement variable annuity contracts, which includes a new version of the company’s well-known Highest Daily Lifetime Income rider.

Prudential declined to discuss the application. Under SEC regulations, companies can’t discuss contract applications until the SEC approves them.     

The latest iteration of the rider is called “Highest Daily Lifetime Income 2.0.” It is the only guaranteed lifetime withdrawal benefit (GLWB) that Prudential is now offering on its Premier Retirement VA. It comes in single or joint-and-survivor versions and with or without an enhanced death benefit.

HD 2.0 maintains the 5% minimum annual increase in the guaranteed benefit base during the accumulation period (if no more than one withdrawal is taken), but alters the so-called “age-bands” so that a contract owner doesn’t qualify for a 5% annual payout until age 65 (up from 59½) and doesn’t qualify for a 6% annual payout rate until age 85. The rider is now available to contract owners who are age 50 and older, an increase from age 45.

The client must defer withdrawals—except for a one-time non-Lifetime Withdrawal—for at least 12 years to lock in a benefit base that is at least double the original account value. In the earliest version of the rider, clients could lock in this deferral bonus after just 10 contract years.  

The changes, though not large, reflect the ongoing reductions by certain major issuers of variable annuities in their exposure to the risks associated with the lifetime income riders on such products. Prudential’s HD roll-up was as high as 7% going into the financial crisis and has since been reduced, in steps, to 6% and 5%. 

The general industry pullback—in which some life insurers stopped selling VAs entirely while others raised prices, reduced benefits, or shifted risks to contract owners—accelerated after the market plunge last August and the Fed’s announcement that it would suppress interest rates until 2014.   

For instance, MetLife, which in 2011 sold an industry-high $28.44 billion in VA contracts with a guaranteed minimum income benefit rider (whose lifetime guarantee is linked to the purchase of an income annuity), told Wall Street analysts in its first quarter 2012 earnings call that its “target range for VA sales in 2012 is $17.5 billion to $18.5 billion.” 

The cost structure of the latest iteration of the Prudential Premier Retirement VA is significantly different from that of earlier versions. It splits the customary annual mortality & expense fee ratio—about 130 basis points in the past—into two separate fees: a “premium-based” fee and an M&E fee.

The premium-based fee ranges from 70 basis points to 15 basis points, depending on whether the premium is less than $50,000 or less or $1 million or more. It lasts only for the first seven years of the contract, and it is based on the size of the original premium, not the account value. The annual M&E ratio (plus an administration fee) is 85 points a year for the life of the contract, and it is based on the account value, which is subject to market fluctuations.  

“They’ve changed the charging structure of the M&E fees to split out the money that goes to recoup upfront commissions from their [insurance] fee income.  The advantage is that you match the known commissions outflows—and potentially other upfront fees—with a known income,” said Ryan Hinchey, an actuary and blogger at NoBullAnnuities.com.

“That minimizes DAC [deferred acquisition costs] write-downs,” he added. “This issue, among other things, got some insurers into a bit of trouble during the meltdown when they based all their fees off of AUM [assets under management]. Then when the assets performed poorly, they didn’t recoup all the upfront expenses and had to write down losses.”

The GLWB rider fee for HD 2.0 is slightly higher than the rider for the previous iteration. It is 100 bps for a single contract and 110 basis points for a spousal benefit. The optional enhanced death benefit adds another 40 basis points and the median portfolio charge is 114 basis points.

The Contingent Deferred Compensation Schedule allows for more liquidity than in past contracts and may indicate reduced compensation for the independent brokers and advisors who typically sell the product. For premiums less than $50,000, the first-year surrender fee is 5%—not the 7% or 8% associated with a typical “B share” contract, in which the insurer pays the intermediary a commission and gradually recoups it from the client. For premiums of $500,000 or more, the first-year surrender fee is only 2%.

At least since launching the HD series prior to the financial crisis, Prudential has protected itself from the product’s market risk by automatically shifting up to 90% of policyholder assets out of equities and into fixed income investments during stock market declines, and moving assets back into equities as markets recovered. This modified form of Constant Proportion Portfolio Insurance (CPPI), helped reduce the declines in policyholder account balances during the market crash of 2008-2009 by as much as 50%.

© 2012 RIJ Publishing LLC.

What’s Good for General Motors…

Posted on June 6, 2012 by -

Joe Bellersen got a morale boost last week when General Motors announced plans to end its pension obligations to retired salaried workers by offering them either a lump-sum buyout or a lifetime income from a GM-funded group annuity from Prudential.

Bellersen, the founder of Cincinnati-based Qualified Annuity Services, Inc., has for years urged defined benefit plan sponsors to convert their pensions to group annuities, but with only scattered success. GM’s decision, he thinks, could be a game changer.

“This may be a watershed event,” said Bellersen, who has arranged similar pension/annuity swaps for smaller companies. “This is the first large deal of its type with any significance. There’s likely to be a lot of follow-on activity.”

Fitch Ratings seems to agree. Commenting on the GM-Prudential deal, Fitch analysts wrote, “This is the first time a pension plan of this size has been defeased in this way, and today’s transaction could spark other companies to consider similar transactions in the future to reduce exposure to plan volatility.”

“Looking ahead,” the statement added, “Fitch expects other companies with significant pension obligations to consider similar transactions, although the significant cash costs required to effect plan transfers will likely limit the number of companies that are able to do it.”

The GM decision follows by about a month a decision by Ford Motors to offer 90,000 retired and former salaried workers a lump-sum payment to settle their pension obligations. Towers Watson, the actuarial and consulting firm, called the Ford deal the “first such program to target retirees without being part of a broader plan termination.”

The Ford and GM offers “symbolize a major shift in corporate pension perspective,” said Carl Hess, global head of Towers Watson Investment Services, in a release. “Improved pricing, coupled with continued market uncertainty and increased desire to focus on core operations, may result in additional companies exploring these types of actions.”

The GM offer differs from the Ford offer in that GM is terminating an existing DB plan, putting active and recently separated salaried employees in a new DB plan, and offering a Prudential life annuity to certain salaried retirees who don’t take the lump-sum offer. GM’s retired hourly workers are not affected by the deal.

Deal details

Prior to the announcement, GM’s combined salaried and hourly pension plans were about 13.1% underfunded, with assets of $94.3 billion and obligations of $108.6 billion. On completion of the plan, GM’s pension obligations will decline about $26 billion and its pension assets will decline about $25 billion, to obligations of $82.6 billion and assets of $69.3 billion. Overall, the underfunded status of all GM pensions will decline by about 7%.

About 42,000 of GM’s 118,000 salaried retirees who retired between October 1, 1997 and December 1, 2011 will be offered a choice of the lump-sum payout, a continuation of their current pension payment (as a life annuity from Prudential), or a life annuity with slightly different payout terms (single, or joint with 50% or 75% to the survivor) from Prudential.

“GM’s getting quite a good deal,” Bellersen told RIJ. “Retirees will get a Prudential check instead of a GM trust check. All the risks and costs of the pension will be transferred, and GM won’t have to pay investment management fees, or PBGC [Pension Benefit Guaranty Corporation) premiums, or the administrative costs for writing pension checks every month, and it won’t be on the hook for adjustments in longevity. It’s been my premise, the premise of my business, that corporations are better off shifting these risks.”

GM, though it required government support to survive the financial crisis, has enough excess cash to pay for the pension buyout without having to borrow for it, according to Fitch. “As of March 31, 2012, GM’s automotive cash, cash equivalents and marketable securities totaled $31.5 billion, well above the $20 billion level that Fitch views as the target amount that the company needs to operate its business through the cycle,” a Fitch release said.

Prudential, in return for assuming GM’s obligations, will receive the $25 billion in assets that are currently backing up those obligations, plus an additional $1 billion so that the assets equal the present value of the liabilities, plus a negotiated premium of $2.5 billion to $3.5 billion that may depend on how many GM retirees take the lump sum and the life expectancy profile of the retirees who either stay in the plan or take the annuity.

In this context, the word “premium” doesn’t mean what it does in the retail annuity market. It is the amount above the plan sponsor’s accounting liability that the insurer requires to assume the risk. “The accounting liability is comparable to a real estate appraisal, and the premium is the amount needed to bring that up to the market price,” said Matt Hermann, leader of Towers Watson’s retirement risk management group.

Favorable timing

GM and Ford have apparently pursued these deals this year because of certain regulatory developments. In the past, according to Stephen Brown, a fixed income analyst at Fitch Ratings in Chicago, companies had to use 30-year Treasury rates as the discount rate in calculating lump-sum payouts.

But under provisions of the Pension Protection Act of 2006 that came into full force this year, plan sponsors can discount their pension obligations at a blend of short, intermediate and long-term high quality corporate bond rates, which are higher than the corresponding Treasury rates. The lump sums are now smaller and cost the company less.

“That is absolutely why they did it,” said Leon Labrecque, an attorney-accountant-financial planner in Troy, Mich., some of whose clients are GM salaried retirees. “The lump sum would have been prohibitively expensive a year ago.”

“Neither company said so publicly, but I would not be surprised if the change in calculation affected their decision,” Brown agreed. “The companies also get a payout that’s closer to the way they value the obligations on their balance sheets,” Brown said. “They don’t want a pension obligation valued at, say, $500,000 on their balance sheet when it would cost them $600,000” to pay off in reality.

GM and Prudential also appear to have structured the buyout offer to minimize adverse selection, Brown said. Only salaried workers who retired after October 1, 1997 are eligible for the lump sum. Had older retirees been eligible, they might have disproportionately opted for the lump sums, leaving Prudential with the higher longevity risks associated with a younger (on average) annuitant population.

“Assuming that the projected number of people opt for the lump sum, Prudential will take on more of a mix of older and younger retirees,” he said. “If GM hadn’t placed the restrictions [that keep older retirees in the plan], Prudential would take on an annuitant population more skewed to younger people with longer time horizons.”

On the other hand, Brown added, relatively fewer GM people might take the lump sum than in the Ford deal, where retirees of any age could take it. 

Participant behavior

It remains to be seen how many GM retirees take up the lump-sum offer. Labrecque has published a 30-page document for his clients and prospects that outlines the factors that they should consider before deciding. 

One of his GM retiree clients is a man born in 1945 with a spouse born in 1943. Under the GM pension, they’ve been receiving $5,700 a month, and the spouse will receive $3,800 a month if the participant dies.

The couple can now choose to maintain the status quo, take a one-time lump sum of $850,000, or take either of two annuity payout options: $5,700 a month with $2,800 a month to the survivor or $5,500 a month with $4,100 a month to the survivor.

“You can also hybrid this, and split it between a lump sum and an annuity,” Labrecque said, but to do that participants would have to take the full lump sum and buy an annuity at less favorable rates in the retail annuity market.

The retirees’ decisions, Labrecque’s paper shows, will also depend on their age, state of health, current expenses, savings outside the plan, tax situation, etc. In fact, Labrecque’s analysis of the annuity vs. lump-sum choice would be useful to anybody (or their advisor) who is faced with the choice between buying an annuity or holding onto their assets throughout retirement.

Bellersen, whose business could conceivably boom if more companies converted their pensions to annuities without offering lump-sum buyouts, worries that too many retirees will opt for the lump sum. That might be good for GM, because a lump sum is the cheapest way for it to discharge its pension obligation, but it might not be good for a risk-averse participant, who would lose not only an under-priced annuity but also a chance for long-term peace of mind.   

“There are plenty of people who will do the money grab,” Bellersen said somewhat ruefully. “A lot of people will want to pay off the boat, the house, or their medical expenses. And Wall Street [encourages that with its] mantra that in the long-run you always do better in the market.”

Though he wasn’t familiar with the exact terms of the deal, Sandy Mackenzie, a former International Monetary Fund staffer and Washington, D.C.-based author of two scholarly books on annuities, was concerned when he heard about the GM buyout offer that the size of the lump-sum might blind people to the amount of longevity risk and investment risks that they were shouldering.  

“My first thoughts were, would the discount rate be appropriate or would retirees be ripped off,” he told . “There’s an analogy between what’s been going on in the country in the last 30 years in terms of the transition from defined benefit to 401(k) plans and this development.

“Companies are reducing their uncertainty, and people who opt for a buyout [instead of maintaining their pensions] are increasing theirs,” Mackenzie added. “They give up security for insecurity. It concerns me that people see the allure of what looks like a large sum of money, and then discover that they’ve been creating problems for themselves.”

© 2012 RIJ Publishing LLC. All rights reserved.

Plan Sponsors Awaken to Leadership Role

Posted on June 6, 2012 by -

As more and more Baby Boomers continue to retire without a traditional pension plan, employers are faced with the formidable task of helping their employees prepare themselves to fund their “golden” years.

A recent study conducted by Cogent Research® indicates that employers are far from shirking their responsibilities toward the welfare of their employees. In fact, automatic enrollment is embraced by 38% of all 401(k) plans, while automatic rebalancing is employed by 39%.

These and other findings are included in the annual Retirement Planscape® study, based on a representative survey of over 1,500 defined contribution (DC) plan sponsors across all plan sizes and industries.

What follows is a detailed analysis of how employers are adjusting 401(k) plans to help plan participants more easily get started and, hopefully, reach their goals, using a combination of automatic plan features, investment advice and retirement income product offerings to help employees steer the course.  

Key Findings

1. Automatic enrollment and automatic rebalancing have become widely accepted practices.  Automatic enrollment and rebalancing has been adopted by nearly 40% of all 401(k) plans. While the trend is consistent across the spectrum of plan size, some important variations do exist:

  • Usage of automatic enrollment among Small Plan sponsors ($5 million to $20 million in assets) has increased significantly from the previous year with nearly half (48%) now utilizing this feature.
  • Roughly one-third (37%) of Micro Plan sponsors (less than $5 million in DC plan assets) have incorporated automatic enrollment into their plans, compared to nearly two-thirds (65%) of Mega Plan sponsors ($500 million or more in DC plan assets).
  • There is more consistency in the use of automatic rebalancing across all plan sizes, ranging from 39% among Micro Plan sponsors to 50% among Mid-sized ($20 million to $100 million in assets) and Large Plan sponsors (DC plans with assets of $100 million to $500 million).

2. The vast majority (90%) of employers offer some sort of investment advice to their DC plan participants, and a significant number offer multiple advice options. Once enrolled in a DC plan, many participants seek assistance in selecting the appropriate asset mix to meet their retirement goals, and our data indicate that employers are recognizing this need.

Common advice conduits include: An online investment model provided by the plan provider or independent third party, access to a financial advisor, and one-on-one advice provided by an independent third-party only.

Among the key findings:

  • Just over half (51%) of all DC plan sponsors offer access to a single type of advice, while one-quarter (25%) provide participants with access to two methods of advice. Only a handful (14%) of plan sponsors offers investment advice via three or more channels.   
  • Distinct preferences can be seen among plan size segments: Micro Plans most often provide access to a financial advisor as a means for delivering advice, while Large and Mega Plans rely more heavily on online models offered by their current plan provider and from independent third parties, respectively.

Retirement Income Product Offerings

1. Interest in retirement income products is on the rise. Encouragingly, plan sponsors are recognizing that employees need help making the transition from accumulation to decumulation, and are becoming more amenable to offering DC plan participants investment options designed to generate an income stream in retirement. (See Exhibit 1 below)

  • Overall, a third of all plan sponsors (35%) offer products designed specifically to help participants generate an income stream. However, Micro and Small Plan sponsors are the most likely to offer these investment vehicles. Interestingly, Mega Plan sponsors show the strongest interest in adding retirement income options, which may influence the structure and pricing of such products going forward.

About the Study

The Retirement Planscape® study was conducted by Cogent Research® last February to April 2012, surveying over 1,500 plan sponsors across Micro, Small, Mid-sized, Large, and Mega plans. Respondents were screened to ensure that they were decision makers and had sufficient levels of knowledge about key plan features.  The study allows plan providers to pinpoint competitive strengths and weaknesses in brand, loyalty, and key plan sponsor experience metrics to maximize acquisition opportunities and minimize attrition. The report provides a detailed analysis of plan sponsors’ needs, their selection process for plan providers and investment managers, as well as their attitudes and loyalty toward providers, investment managers, and advisors.

About Cogent Research®

Cogent Research® helps clients gain clarity, obtain perspective, and formulate direction on critical business issues. Founded in 1996, Cogent Research® provides custom research, syndicated research products, and evidence-based consulting to leading organizations in the financial services, life sciences, and consumer goods industries. Through quality research, advanced analytics, and deep industry knowledge, Cogent Research® delivers data-driven solutions and strategies that enable clients to better understand customers, define products, and shape market opportunities in order to increase revenues and grow the value of their products and brands.

[email protected]

No Fluke: Income Annuity Sales are for Real

Posted on May 29, 2012 by -

Despite persistent low interest rates, life insurance companies sold a record $8.48 billion worth of income annuities last year, and conversations with four of the top five marketers of such products suggest that that record may not last a full year.

From interviews with executives at MetLife, MassMutual, Pacific Life and Nationwide (which ranked second through fifth in SPIA sales last year after leader New York Life, which RIJ wrote about two weeks ago), certain themes emerge:

  • People buy their income annuities at about age 70, on average, or several years later than they buy variable annuities with guaranteed lifetime withdrawal benefits.
  • The average SPIA premium is over $100,000.
  • Life with cash refund is a popular contract structure; companies that haven’t had a cash refund option are adding one.
  • Marketers are positioning income annuities as a complement to mutual funds, and saying that the combination can produce more income over a long lifetime than systematic withdrawal plans or variable annuities with lifetime income riders would.

Here are comments from Kevin McGarry of Nationwide, Phil Michalowski of MassMutual, Bennett Kleinberg of MetLife, and  Chris van Mierlo and Christine Tucker of Pacific Life, about the state of income annuity sales and marketing at their respective firms.

Nationwide

Nationwide was the fifth largest seller of fixed income annuities in 2011, and in April 2012 the company spruced up its Income Promise SPIA by adding a cash refund death benefit and a wider choice of inflation adjustment options. The new produce is called Income Promise Select. “The potential is enormous,” said Kevin McGarry, who became the director of Nationwide’s Institute of Retirement Income about 18 months ago. 

“We’ve seen tremendous growth in the immediate annuity space,” McGarry told RIJ.  “Last year, we were fifth in overall sales, with $330 million. In the first quarter of 2012, we are up 90% from the first quarter of 2011. The average premium is about $130,000 and the average purchaser is 70 years old.”

In a low-yielding bond environment, annuity payouts look comparatively generous. “People are looking for six or seven percent withdrawals and an immediate annuity is the only way to provide that,” McGarry said. As for distribution, “We’re working with Wells Fargo on their Envision plan,” he added. “Sales through our career force are less than 10% of the total.”

Nationwide’s value proposition for SPIAs is a familiar one—people should buy enough annuity income to cover necessary expenses that aren’t filled by Social Security or pension income, and use the rest of their money for discretionary purchases or growth. It’s a proposition that all SPIA marketers can use, McGarry said. 

“Industry-wide, we need to look at the idea that an income annuity should be a component of a larger retirement income plan,” he told RIJ. “[At Nationwide], we tend to say that a client has both essential and discretionary needs, and that if he or she has a gap of $5,000 or greater in covering discretionary needs, the income annuity allows them to fund that gap with the fewest dollars. They can confidently use other investments for growth, knowing that market volatility won’t affect their ability to cover basic expenses.”

The Columbus, Ohio-based company, which converted back to a mutual ownership structure in 2008, is using an updated version of the hallowed “Give ‘em the razor, Sell ‘em the blades” strategy. Advisors can get free access to Nationwide’s bucketing/product-allocation tool, RetireSense, which was introduced in 2009, and are encouraged to sell Nationwide SPIAs, among other products, to fill some of the buckets.

Nationwide has also begun offering advisors an illustration software tool that lets advisors and clients compare income generation strategies. In addition, the company maintains an income planning desk that advisors can call when they need help. “Most advisors want handholding from the income planning desk,” McGarry said. “Decumulation takes more time and effort than accumulation.” 

It was no accident that Nationwide put a cash refund in its new Income Promise Select contract. It’s a direct response to industry trends. “For the [SPIA] industry as a whole, about 24% of all sales had a cash refund last year,” he added. “We had no cash refund. You can sell without a cash refund, but it’s a feature a lot of folks have asked for.” The new SPIA also offers the option to increase payouts each year by four percent or five percent, thus broadening the previous offerings of one, two or three percent.  

MassMutual

MassMutual was the number three seller of SPIAs in 2011 with $436 million in premiums, behind New York Life and MetLife. MassMutual was second only to New York Life in 2010. In the first quarter of 2012, the Boston firm says it sold $120 million worth of income annuities.  

About half of the sales came through its career force and half through the Fidelity SPIA platform and other channels. (MassMutual said it doesn’t sell through the independent advisor channel.) Last February, TDAmeritrade announced that it planned to begin offering MassMutual SPIAs through its direct sales annuity platform.

Not unlike Nationwide’s customers, MassMutual’s average SPIA customer is about 70 years old and has an average purchase premium of about $126,000. A slight majority of the purchasers are women (54% to 46%) and non-qualified contracts slightly outnumber qualified contracts (52% to 48%).

Two years ago, MassMutual published a SPIA Synergy Study, which subsequently guided the company’s SPIA marketing strategy. “’Sound Retirement Solutions’ came out of that study, and the core piece is identifying three critical components, Growth, Access and Predictable Income,” said Phil Michalowski, MassMutual’s assistant vice president, annuity business development. “Those are the ‘buckets.’”

“People who are at or in retirement can use the SPIA to fill the ‘predictable’ income bucket. We’ve spent a lot of time pushing education around that and providing additional tools, promoting a process to distinguish their necessary expenses from their discretionary expenses, and drawing a sharp line between those two,” he added.

“We’ve created a workbook to help folks with that process, and helps them identify if they have a gap [between their guaranteed income and their necessary expenses]”. “If they do, the workbook shows the size of it. We have recently automated that workbook, and built into our education system,” Michalowski said.

“The sale is easier when it’s not just a product push. The SPIA is provided in a larger context. We hear from the field that when the product is described to clients as a solution in a larger context, the customer feels more comfortable. The portion of the client’s assets that is used to buy the SPIA is customized to each situation. It’s not just a product push.

“We’re having a decent sales year. The majority of our contracts are fixed-payment as opposed to inflation-adjusted. We’re selling a lot of life with cash refund and 10-year period certain. We think it’s better to default to life with cash refund [when first presenting the product to clients]. The agent and customer can decide to move to something else if they want to.”

MetLife

MetLife, the second largest seller of SPIAs last year, intends to unveil a new SPIA offering in the third quarter of 2012 and has engaged a consultant who specializes in messaging and marketing language to help fine-tune the strategy. (In its most recent earnings call, MetLife CEO Steve Kandarian announced that the company would intentionally de-emphasize  variable annuities in 2012, after selling a record volume in 2011.)

“We’re focusing on SPIAs this year,” said Bennett Kleinberg, a vice president and senior actuary at MetLife. “In 2011 we sold about $625 million worth of SPIAs, and we’re up 8% to $165 million in the first quarter of 2012. We’re rethinking about how to position SPIAs, thinking about whom we need to educate, and paying close attention to what words we use to describe the product.

“We’re also working on product enhancements,” he added. “Our current SPIA product doesn’t have cost of living adjustments or liquidity features. We’re also talking about introducing a means of accessing money early. The new features will look like other companies’ liquidity features—nothing brand new but in line with the market expects. That will be coming out in the third quarter.

“The other thing were focusing on is wholesaling and training. We’re helping wholesalers learn more about SPIA, we’re focusing on training more. “We have a tool called Income Selector that shows a continuum between two extremes—solutions that are fully liquid but don’t have guarantees and solutions that aren’t liquid but have strong guarantees. A VA with a GMIB, for instance, would fit somewhere in the middle of that continuum,” Kleinberg told RIJ.

“As we look at where [SPIA] sales are coming from, we’re seeing more volume from a greater number of firms. Sales are not as concentrated. We think this will be a growing market,” he said. “LIMRA expects $12 billion in annual SPIA sales by 2014 and 15% annual growth thereafter. We expect something similar.”

Like Nationwide and MassMutual, MetLife has found that the life-with-cash-refund is a popular contract structure, even though it can be more expensive than a life-only contract. “People are willing to give up a little bit of income to get back the [balance of the] premium,” Kleinberg said. “People are averse to losing money. A SPIA is still the least expensive way to get guaranteed income you can’t outlive. Life-only achieves the most income, but life with period certain or life with cash refund is more acceptable to people.”

Pacific Life

Pacific Life is a fairly recent entrant in the SPIA market, but it has come on quickly, emerging in 2011 as the fourth highest SPIA seller. Unlike other big mutual insurers, Pacific Life doesn’t have a captive agent force. It felt that it needed a SPIA in its product lineup so that its wholesalers would have everything an advisor might need.

“We needed a SPIA in order to tell a well-rounded story,” said Christine Tucker, vice president, marketing, Retirement Solutions Division. Pacific Life now offers the retirement market a variable annuity, a fixed indexed annuity, a SPIA, a single premium deferred annuity, and long-term care insurance.

“It used to be that VAs were 94% of our business; now they’re only about 60% of our business, said Chris van Mierlo, chief marketing officer and senior vice president, sales, Retirement Solutions Division. “The SPIA has gone from a dead stop to selling at an annualized pace of $500 million this year.” Like the other top SPIA marketers, Pacific Life has found cash refund contracts to be “something that clients can wrap their minds around” better than life-only contracts,” he noted.

More than 40% of Pacific Life’s annuity sales come through the bank channel. About 38% come from independent financial planners. The other 20% comes through wirehouses and regional broker-dealers. These channels are served by 84 wholesalers—a team that van Mierlo said might need to be expanded because its members are at the upper limit of productivity.

To create a marketing story around its retirement products, Pacific Life decided to license the Retirement Security Quotient method developed by Moshe Milevsky, the York University (Toronto) finance professor and prolific author whom Research magazine recently described as a “rock star” among retirement income consultants. ManuLife and John Hancock have also employed Milevsky’s method. As Milevsky explains in online videos he made for ManuLife, a person nearing or in retirement can increase his or her RSQ by owning SPIAs (as protection against longevity risk), variable annuities with lifetime income guarantees (as a hedge against sequence of returns risk) and mutual funds (to mitigate inflation risk).

© 2012 RIJ Publishing LLC. All rights reserved.

A Fish Tale, and ‘The Most Exotic Marigold Hotel’

Posted on May 29, 2012 by -

The trout in Ute Creek were not biting on Monday. Instead, a half-dozen of them idled smugly in the channel by the bank, almost near enough to touch. They ignored every temptation that I sent past them.

Memorial Day weekend is not the best time to fish the upper Rio Grande in south central Colorado, when the snowmelt still runs high and fast and few if any of the right insects have hatched.

The outfitters in the fly shop in Creede (Pop. 290) had been divided in their opinions on whether I could land anything at all under current conditions. One of them thought a large fuzzy black streamer or a strike indicator with a trailing nymph might work. They didn’t.

In the 1980s and 1990s, fly-fishing sometimes served as a rite of passage for rising male managers. An invitation to join C-level executives on a trip to a blue-ribbon trout stream in Labrador signified future success for an up-and-coming 35-year-old. Or so it seemed from the outside.

Today, the prospect of endless fly-fishing strikes me as one way to cast old age in a better light, just as the prospect of heaven helps some people tolerate the inevitable. A high percentage of the older owners of the cabins in the former dude ranch where I stayed last weekend are passionate fly-fishermen who’ve each invested a small fortune in their version of paradise.

How passionate are they? Enough to have installed photo-voltaic panels on the roofs of their cabins for their CPAP machines, so they can wake up refreshed and ready to fish in the morning.

Active, age-defying boomers are easy to find in the West. Near Laguna Beach in Orange County, California, where I was biking, silver-haired surfers owned the weekday beach. An 80-something widower, who was power-walking along the Pacific Coast Highway when I asked him for directions, agreed that the weather in Southern California is ideal for the young in spirit. But he groused about his $24,000-a-year property tax bill.

A few days later, in Mineral County, Colorado, a friend and I stopped to offer two jerry cans of water to a tall, white-bearded, and slightly rhinophymatic Arizonan whose 1946 Chevrolet flatbed truck (he was delivering an eight-wheeled Army surplus jeep to a customer in Denver) had overheated on the ascent to Wolf Creek Pass. 

For better or worse, I now study the circumstances of older people wherever I go. Even at the movies. Case in point: “The Most Exotic Marigold Hotel.”

This heavily marketed heart-warmer, whose predictable storylines are redeemed by an all-star ensemble of British actors and by the gritty visual charms of urban India, may be the first film whose premise is the middle-class retirement-and-health-care savings crisis.

The film follows a group of superannuated Britons who, because they can’t afford to retire comfortably in their home country, have all fecklessly responded to a glossy ad for a supposedly luxury residential hotel for European retirees in Jaipur, India.   

Dame Judi Dench plays Evelyn, an earnest widow whose late husband’s legacy is a mountain of debt. Dame Maggie Smith is Muriel, a “health care tourist” who is traveling to India for a low-cost hip replacement because she doesn’t want to wait six months for a free one from the National Health Service.

Bill Nighy and Penelope Wilton play an unhappy couple who invested their life savings in their daughter’s Internet startup, with unfortunate results. Celia Imrie portrays four times-divorced Madge, who has been living uncomfortably and unhappily with her daughter and son-in-law.

Rounding out the cast are Ronald Pickup as Norman, a skirt-chasing wastrel with whom old age has suddenly caught up, and Tom Wilkinson as Graham, a never-married judge who has plenty of money but only months to live, and wants to reunite with an old friend in India while he still can.     

The South Asians in the story bring much-needed sunshine to all this potential pathos. In dramatic juxtaposition to the oldsters’ despair is the optimism of entrepreneurial Sonny (Dev Patel, of “Slumdog Millionaire” fame), who has inherited a dilapidated white elephant of a hotel and hopes to get rich and marry Sunaina, the girl of his dreams (Tena DeSae), by cashing in on the Westerners’ needs for a discount foreign retirement option. 

I won’t spoil the ending of this seriocomedy (or dramedy), but you can expect a couple of weddings and a funeral. Fly-fishing doesn’t enter the picture at all.

© 2012 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on May 29, 2012 by -

Buffett is the ideal advisor: Allianz Life survey

Among famous personages, Berkshire Hathaway CEO Warren Buffett is the one that baby boomers and their parents would most like their financial advisors to resemble, according to the 2012 American Legacies Pulse Study by Allianz Life.  

Ben Stein, the economist-lawyer-actor-author, ran a distant second (9% of boomers and 6% of elders) to Buffett, but Stein was well ahead of Katie Couric and Ellen DeGeneres, whom only about 2% of boomers and even fewer older people suggested as their ideal advisor.

Most people would rather inherit “family stories” than money, the Allianz Life study suggested. Eighty-six percent of boomers (ages 47 to 66) and 74% of those ages 72 and older say that “family stories” are the most important aspect of their legacy, ahead of personal possessions (64% for boomers, 58% for elders) and the expectation of inheritance (9% for boomers, 14% for elders). A similar Allianz Life study in 2005 found that 77% of both boomers and elders called “family values and life lessons” the most important legacy.

In both the 2005 and 2012 studies, only 4% of boomers and elders said they felt the previous generation “owed” them an inheritance. The share of elders who feel they owe their children an inheritance fell to 14% in 2012 from 22% in 2005—perhaps because they have less excess savings to bequeath in the wake of the financial crisis.

Boomers and their parents are not equally focused on legacy planning, however, The 2012 study showed that 75% of elders have obtained help from a lawyer, financial professional, accountant or estate planner in planning their inheritance and 79% have discussed legacy planning with their children.

In comparison, fewer than half of boomers have obtained professional legacy planning assistance and nearly 50% have not talked with their own children about inheritance issues. A fourth of boomers, but only a twentieth of elders, have not planned their inheritance.    

“Honest and trustworthy” are the characteristics that boomers and elders continue to seek in advisors (89% and 91% in 2012, up from 74% and 67% in 2005). Those surveyed also looked for advisors who “explain things in an easy to understand way” and are “good listeners.”

Concern over taxes has risen sharply over the past seven years. In 2005, 51% of boomers and 43% of elders cited the importance of their financial professional’s ability to “help minimize taxes.” In 2012, 75% of boomers and 70% of elders indicated the same skill. 

The 2012 American Legacies Pulse Study was commissioned by Allianz Life Insurance Company of North America and conducted online by SNG Research Corporation during the week of January 12-19, 2012. About 2000 boomers and elders were surveyed in both 2005 and 2012.   

Nationwide introduces fee disclosure ‘Solutions Kit’   

Nationwide Financial has developed a “408(b)(2) Solutions Kit” to help retirement plan sponsors and advisors comply with Department of Labor (DoL) regulations generally and with the fee disclosure regulations that take effect July 1 in particular.  

The Solutions Kit includes:

  • A guide to Nationwide’s tools and services that help plan sponsors understand and comply with the new requirements.
  • Summaries of the DoL requirements and of the plan fiduciary’s responsibilities for establishing that the fees paid to service providers are “reasonable.”
  • A handbook that helps plan advisors explain their services to plan providers.

Nationwide said it will send updates to retirement plan advisors on its 408(b)(2) resources via emails and conference calls. Through Nationwide’s ERISA and Regulatory Online Resource, advisors can consult regulatory specialists. 

Saving habits determine retirement security: Putnam  

Americans who defer 10% or more of their income to employer-sponsored retirement plans will be best prepared for retirement, according to the most recent edition of the Putnam [Investments] Lifetime Income Score survey of about 4,000 Americans.

The survey showed that U.S. households are on track to replace 65% of their current income in retirement, on average. Households that were best prepared (with scores of 100% or more) have a total household retirement savings rate of 27.4%, while those least prepared (with scores of 0% to <45%) save only 5.1% of their income.

Spark Institute creates 403(b) participant disclosure information form

The SPARK Institute has created an “Investment Provider Information Form for Multivendor 403(b) Plan Participant Disclosure” that will help facilitate compliance with the Department of Labor’s participant disclosure regulations by investment providers and record keepers serving 403(b) plans with multiple vendors.

“As service providers prepare to comply with the 404a-5 participant disclosure regulations for multivendor 403(b) plans, it may be necessary for them to contact and coordinate disclosures with other investment providers,” said Larry H. Goldbrum, General Counsel of The SPARK Institute.

“In order to assist in this process, we have developed a short information form that will help record keepers and investment providers locate the appropriate contacts at other companies so their disclosures may be coordinated.”  The information form also includes some basic information about the investment provider’s compliance approach and timing, he said.

Goldbrum said The SPARK Institute has already collected contact information from many of the leading 403(b) plan vendors.  The completed information forms are available upon request and free of charge to 403(b) plan record keepers and investment providers, including non-SPARK Institute members.

Investment providers are asked to complete the form with respect to their disclosure efforts prior to receiving the other investment providers’ information.  A blank form, including instructions for submission, is available at www.sparkinstitute.org.  Record keepers and investment providers may request the completed information forms by sending an email to [email protected]. 

The SPARK Institute represents the interests of a broad-based cross-section of retirement plan service providers and investment managers, including banks, mutual fund companies, insurance companies, third party administrators, trade clearing firms and benefits consultants. Its members serve approximately 70 million participants in 401(k) and other defined contribution plans.

© 2012 RIJ Publishing LLC. All rights reserved.

Public/private pension concept gains foothold in California

Posted on May 29, 2012 by -

The Secure Choice Pension (SCP), a program that would allow employees of private small businesses to participate in their state’s public pension plan—and perhaps create competition for 401(k) providers—is the subject of a new bill in the California legislature.

The SCP is a creation of the Washington, D.C.-based National Conference on Public Employee Retirement Systems (NCPERS), the largest trade group for public sector pension plans. Its executive director is attorney Hank Kim. California state senator Kevin de Leon (D-Los Angeles) has used NCPERS’ SCP proposal as the model for his Retirement Savings Act (SB1234). The Senate Committee on Public Employment and Retirement and the Senate Labor Committee recently approved it.

The bill proposes a “new retirement plan that would be immune to stock market fluctuations and sudden economic downturns and would provide their employees with a guaranteed monthly pension benefit for life after they stop working,” according to an NCPERS release.

NCPERS unveiled the SCP in late 2011 (see RIJ, Sept. 21, 2011) in response the general shortage of retirement plan availability in small businesses. Under the proposal, each state would establish its own professionally managed SCP as an adjunct to the state pension plan, allowing small business employees and employers to contribute. The state pensions’ economies of scale and professional management would, NCPERS has argued, produce higher overall returns at a lower cost than the typical small-business 401(k) plan could.

A survey of 505 owners of small (2 to 49 employees) businesses in California conducted in late April for NCPERS by Lake Research Partners showed support for the plan. According to the survey:

  • 53% of California small business owners are interested in the SCP for their own employees, while 71% support the concept.
  • SCP is supported by 70% of small business owners who already offer a retirement plan and 73% of those who do not offer retirement benefits.
  • 78% of Democrats and 70% of Republicans favor the SCP idea. Among Republican small business owners who currently do not offer retirement benefits, 77% support it.  
  • 76% of men under age 50 and 73% of men age 50 and over favor the concept, as do 71% of women under 50 and 59% of women age 50 and over.
  • 73% of owners of minority-owned businesses favor the SCP, as do 64% of owners of women-owned businesses.
  • In the San Francisco Bay area, 68% of small business owners favor the plan; in Northern California (excluding the Bay area), 81% support it. In Los Angeles County, 64% favor the plan, as do 75% in the rest of Southern California.
  • While a majority of small business owners believe their employees need retirement benefits, 60% say that offering a currently available retirement plan is too expensive.

NCPERS’ full proposal for the Secure Choice Pension is available at www.retirementsecurityforall.org. Its California Small Business Survey findings are available at www.ncpers.org.

© 2012 RIJ Publishing LLC. All rights reserved.

Separately managed account inflows rebound in 2012: TrimTabs

Posted on May 29, 2012 by -

Separately managed accounts received estimated net inflows of $34 billion in the first quarter of 2012, reversing outflows of $104.6 billion in the last two quarters of 2011, according to TrimTabs Investment Research and Informa Investment Solutions Plan Sponsor Network.

“Separate accounts investing in bonds and foreign equities attracted $59 billion and $16 billion, respectively, in the quarter. In contrast, $48.5 billion flowed out of U.S. equity separate accounts in the same period,” said Minyi Chen, vice president and head of TrimTabs research.

Separate accounts, which are managed by investment companies on behalf of pension funds, pooled funds, insurance companies, or wealthy individuals, allow investors substantially more control over their holdings compared to investments in mutual funds, hedge funds and exchange-traded funds.

In a research note, TrimTabs reported that first-quarter flows into separate accounts—favoring fixed-income securities and shunning U.S. stocks—match investor demand for other major investment vehicles including mutual funds, ETFs and hedge funds.

“These flow numbers suggest investors are unconvinced that the global economy will remain in recovery mode going forward,” said Charles Biderman, CEO and founder of TrimTabs. “Separate account managers see limited potential for capital appreciation in stocks and they are putting a premium on current income in a low-yield environment.”

Flows into separate accounts for the three quarters ending March 31 tell much the same story, according to TrimTabs. While U.S. equity accounts lost $158.1 billion, foreign equity accounts gained $28.9 billion and bond accounts gained $31.9 billion.

© 2012 RIJ Publishing LLC. All rights reserved.

You have a 10-year window to trek in the Andes

Posted on May 29, 2012 by -

Although average life expectancy at age of 65 in Great Britain is 17.6 years for men and 20.2 years for women, the healthy life expectancy is just 9.9 years for men and 11.5 years for women, according to research from British insurer Prudential plc (unrelated to U.S.-based Prudential Financial).

Despite facing a high risk of ill health during their late 70s and 80s, however, not many people are preparing for it. Prudential’s recent ‘Class of 2012’ study into the finances and expectations of those planning to retire this year shows that only 20% have set money aside for unexpected health care expenses. Among those age 65 and over, only 16% have.    

Prudential’s research also found that only 45% of this year’s retirees have planned for the fact that they may need more income in retirement as they get older.

“Although life expectancy is increasing, healthy life expectancy is flat-lining,” said Vince Smith-Hughes, a retirement expert at Prudential. “With the average person now working until they are aged 63.4, people are enjoying fewer healthy years in retirement. Spending the first few years of retirement trekking in the Andes and running around after grandchildren may be a reality for some, but it is important not to forget that health will worsen as pensioners get older.”

Across Great Britain, those planning to retire this year in Wales are the most likely to have prepared for the risk of ill-health in retirement (32%), while those in the East of England (7%) are the least prepared.

The British government is currently considering recommendations from the Dilnot Commission on the Funding of Care and Support which, in July 2011, proposed that an individual’s contribution to long-term care–“social care” in the U.K– should be capped at GBP35,000 ($54,700), with any additional costs paid by the government.

© 2012 RIJ Publishing LLC. All rights reserved.

Sun Life ‘nets’ Celtics branding rights

Posted on May 29, 2012 by -

Sun Life Financial has acquired naming rights to the Boston Celtics “Courtside Club” as part of a multi-year partnership beginning in the 2012-2013 season. Financial terms were not disclosed.

The Courtside Club, the Celtics’ primary hospitality venue in the TD Garden, is used to entertain team owners, courtside ticket holders, corporate partners and VIP guests during each Celtics home game. It will be designated as the Sun Life Courtside Club. Sun Life has been a sponsor of the Boston Celtics since the 2010-11 season.

Sun Life’s brand will be featured throughout the venue, including entry and directional signage pointing guests to the club and the club’s interior, as well as on staff uniforms and courtside tickets and passes required for club admission.

Sun Life will also receive seat-back signage on the first-row courtside sideline seats for all Celtics home games, the opportunity to host customer events in the Courtside Club, and courtside season tickets and club passes.

Sun Life will also receive additional promotional and marketing assets, including extensive presence in the arena through courtside signage, branded in-game promotions and features, 21 “Sun Life Honorary Ball Kid Experiences” and the rights to use Boston Celtics team marks and logos in external and internal marketing and advertising campaigns.

As a sponsor of Celtics.com, Sun Life will receive exposure on one of the most highly trafficked sites in professional sports, including presenting sponsorship of Celtics Minute, a daily video vignette. Celtics.com averages more than 8.5 million page views and 1.5 million unique visitors per month, for a total of 70 million page views each season.

The partnership also calls for Celtics executives, legends and personalities to participate in Sun Life programs, initiatives and meetings with the Celtics leprechaun mascot, Lucky, and to make appearances at local community organizations in conjunction with Sun Life’s philanthropic initiatives.  

© 2012 RIJ Publishing LLC. All rights reserved.

DTCC issues first-quarter annuity 2012 sales data

Posted on May 22, 2012 by -

The newly created Analytic Reporting for Annuities service of the Insurance & Retirement Services division of the Depository Trust & Clearing Corporation, has issued data on annuity sales in the first quarter of 2012. A pdf of the report includes charts that summarize the data described below.

I&RS said it processed 12 million annuity transactions totaling over $38 billion for:

  • 106 insurance company participants (representing 42 parent/holding companies
  • 111 broker/dealers 
  • 2,954 annuity products

Inflows for the quarter totaled almost $21 billion, outflows totaled almost $18 billion, and net cash flows totaled over $3.3 billion. The transactions processed by I&RS reflect the activity at a broad range of broker/dealers, with a particular concentration in non‐proprietary distribution.

The top ten insurance parent/holding companies captured $16 billion of inflows, or 77% of total inflows in the first quarter. Twenty-four insurance parent/holding companies accounted for over $8.3 billion in positive net cash flows for the quarter. Eighteen insurance parent/holding companies experienced negative net cash flows totaling over $5.2 billion.

Products

Of the 2,954 annuity products for which I&RS processed transactions:

  • 579 products had positive net flows totaling more than $16 billion.
  • 2,372 products had negative net flows totaling more than $13 billion.
  • 34 products had more than $100 million in positive net flows.
  • 2 products had more than $1 billion in positive net flows.
  • The top 10 annuity products captured 38% of all inflows.

Cash flow retention

Net flows ranged from a high of $2 billion to a low of ‐$1.6 billion. Sixteen of the 42 insurance parent/holding company groups had a retention ratio of more than 50%, meaning that there was $2 or more of inflows for every $1 of outflows. The retention rate of cash flows in qualified account types far exceeded that of non‐qualified accounts, which had negative net cash flows for the quarter.

Inflows by type of account

The divergence of inflows between qualified accounts and non‐qualified accounts continued in March. Inflows into qualified accounts were slightly less than 61% while inflows into non‐qualified accounts were slightly above 39%. Sixty-one percent of all inflows went into qualified accounts and 39% went into non‐qualified accounts.

Distribution

Six distributors, out of a total of 111, had more than $1 billion in annuity inflows. The top 10 distributors accounted for two thirds of all inflows.

© 2012 Depository Trust & Clearing Corp.

AnnuitySpecs.com releases 1Q 2012 indexed annuity sales

Posted on May 22, 2012 by -

Forty-four indexed annuity carriers participated in the 59th edition of AnnuitySpecs.com’s Indexed Sales & Market Report, representing 99% of indexed annuity production. Total first quarter sales were $8.0 billion, down just under 3% from the previous quarter. As compared to the same period last year, sales were up more than 13%.

Allianz Life maintained its position as the #1 carrier in indexed annuities with a 17% market share. Aviva maintained its position as the second-ranked company in the market, while American Equity, Fidelity & Guaranty Life, and Great American (GAFRI) rounded-out the top five, respectively.

Allianz Life’s MasterDex X was the top-selling indexed annuity for the 12th consecutive quarter. Driving sales of indexed annuities, Guaranteed Lifetime Withdrawal Benefit (GLWB) elections were elected on nearly 56% of total indexed annuity sales this quarter. The riders are increasingly being utilized to guarantee income; more than 10% of indexed annuity owners that had elected a GLWB rider are actively taking guaranteed lifetime income payments under the endorsement today.

For indexed life sales, 46 insurance carriers participated in the AnnuitySpecs.com’s Indexed Sales & Market Report, representing over 99% of production. First quarter sales were $255.9 million, a decline of over 20% as compared to the previous quarter. In contrast to the same period in 2011, sales were up nearly 34%.

Items of interest: Aviva recaptured its former number one position in indexed life, with a 13% market share. AXA Equitable was second, while AEGON Companies, Pacific Life Companies, and Allianz Life rounded-out the top five companies, respectively. AXA Equitable’s Athena Indexed UL was the top-selling indexed life insurance product for the fourth consecutive quarter. Average target premiums on indexed life increased to $7,702 for the quarter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basel III could lower big banks’ ROE by 20%: Fitch

Posted on May 22, 2012 by -

Analysts at Fitch Ratings in New York and London released a report last week summarizing the environment that faces the world’s 29 largest financial institutions as they prepare for the higher capital requirements of the so-called Basel III rules promulgated by the Bank of International Settlements.

The report, “Basel III: Return and Deleveraging Pressures,” reflects the urge by global banking authorities, in the wake of the global financial crisis, to reduce the risk profile of financial institutions that are so large that governments would have to support them—i.e., “bail them out”—if they were in risk of insolvency.

The Federal Reserve endorsed the Basel III rules last December and said that it would apply the rules to all U.S. financial institutions with more than $50 billion in assets. The new rules will be implemented between the end of 2012 and the end of 2018.

29 G-SIFIs

Timetable for meeting Basel III targets

The 29 global systemically important financial institutions (G-SIFI) might need to raise roughly $566 billion in common equity in order to satisfy new Basel III capital rules, according to a Fitch analysis based on year-end 2011 figures.

That represents a 23% increase relative to the aggregate common equity of $2.5 trillion of these institutions, which as a group represent $47 trillion in total assets. Basel III will not be fully implemented until six and a half years from now, but banks face both market and supervisory pressures to meet these targets earlier.

To address these shortfalls, banks will likely pursue a mix of strategies, including retention of future earnings, equity issuance, and reducing risk-weighted assets (RWA). Absent additional equity issuance, the median G-SIFI would be able to meet this shortfall with three years of retained earnings, which might constrain dividend payouts and share buybacks.

New capital requirements would hurt ROE

This potential capital increase could reduce these banks’ medium return on equity (ROE) by more than 20%, from about 11% (their experience over the past several years) to approximately 8% to 9% under the new rules.

Basel III thus creates a tradeoff for financial institutions between declining ROE, which might reduce their ability to attract capital, versus stronger capitalization and lower risk premiums, which benefits investors.

Banks that continue to pursue ROE targets in the mid-teens (e.g. 12%–15%) would have to reduce expenses and raise prices on borrowers and customers where feasible, Fitch said. Banks may also seek to increase ROE through riskier activities that maximize yield on a given unit of Basel III capital, including the use of new forms of regulatory arbitrage.

How G-SIFIs might respond

G-SIFIs face a trade-off, with higher capital requirements potentially offset by competitive advantages stemming from their official status as systemically important institutions. Some investors and counterparties might perceive these institutions as more likely to receive government support in a distress scenario. This perception, coupled with the G-SIFI’s higher capital standards, could in turn reduce funding costs and stimulate business flow from more risk-averse customers. Conversely, institutions that deem G-SIFI status as a regulatory burden might seek to reduce or limit their size and complexity in order to avoid this designation.

© 2012 RIJ Publishing LLC. All rights reserved.

Annuicide Prevention Tool

Posted on May 22, 2012 by -

The fact that investment advisors have their own pejorative term—“annuicide”—for the act of moving a client’s money into a life annuity tells you just how deeply the prejudice against selling such products runs among many financial intermediaries.   

Traditionally, annuitized assets were “dead assets.” They might generate a modest commission and perhaps a trail for brokers, but they didn’t contribute to a firm’s all-important assets under management (AUM). Fee-based advisors couldn’t levy a fee on annuitized assets. Income annuities, it was said, just didn’t fit the distributors’ business models.

But the financial environment has obviously changed a lot in the last few years. Wirehouse brokers, independent broker-dealer reps and financial planners now recognize that older clients, made risk-averse by the 2008 crisis, yearn for the guarantees (and bond-beating yields) that income annuities can offer.

“Annuicide” remains an obstacle to broader sales of annuities, but the industry is working to remove it. A task force of major life insurers, distributors, and technology companies has been developing an industry-wide standard for assigning a market value to in-force income annuities and making that value a part of an advisor’s or distributor’s AUM.

Assembled in December 2010, the task force is directed by Gary Baker, U.S. president of Cannex, the Toronto-based data provider, and operates under the neutral umbrella of the Boston-based Retirement Income Industry Association. Baker spoke with RIJ two weeks ago, and shared a position paper and an FAQ sheet on the project.

“We started by asking the question: ‘If SPIAs are so great, why aren’t more advisors promoting them?’,” Baker said. “The answers were that they didn’t fit advisors’ business models and they’re a pain to deal with, operationally. Now we’re trying to take out as many barriers where advisors might say, ‘I can’t sell that.’ We’re taking one of the thorns out of the lion’s paw.” 

A standard “Income Value” calculation

Income annuities aren’t marketable securities so they don’t have a market price. When insurance companies want to value them, they might use either the statutory reserve method, the initial premium, a compensation-based value, or a commutation value. But a fair market value was what distributors wanted to carry on their books.

“The large broker-dealers said, ‘We need something that’s market-value adjusted,’” Baker said. The values of the other holdings in a client’s account fluctuated with the market, and it was felt that the value of the income annuity should too.

While there’s a simple formula for calculating the present value of an annuity, the factors that go into pricing each annuity—like the discount rate—can differ by insurer. And none of the values commonly placed on in-force annuities reflect a market-based replacement value—i.e., the cost of a contract’s income stream at today’s interest rates.

After considering several alternatives, the task force decided on a methodology that involved the creation of a common Income Annuity Yield Curve, to be calculated daily by Cannex. To come up with a standardized discount rate for valuing in-force income annuities, Cannex will continuously monitor the top 10 payouts on new income annuity contracts, then derive the discount rates that the payouts imply. They will average those discount rates, build an interest rate yield curve out of them, and interpolate monthly discount rates.

For any in-force annuity, the value of every future monthly payment will be based on the rate on the Income Annuity Yield Curve that corresponds to that month, and adjusted by the probability (which grows smaller over time) that each payment will be made until the annuitant’s 115th birthday.

By adding up the values of all those future monthly payments, they will arrive at a present replacement value or market value for each existing annuity. That value will fluctuate, going down as interest rates rise and vice versa, and it will decline each month (or quarter or year) as each new payment is deducted.

The market value of the annuity can then be carried on a distributor’s books. It will contribute to the tally of assets-under-management, possibly serve as the basis for calculating a trail commission, if there is one, and perhaps count toward an advisor’s bonus goals. Fee-based advisors—a virtually virgin market for income annuities—could use it as a basis for assessing fees. 

“The distributor has always relied on the proprietary calculation of the carrier [for the value of an in-force annuity],” Baker said. “Now the carriers will use a standard calculation.” The calculations will be called the “Income Values” and carriers will deliver them to distributors each month via the Depository Trust & Clearing Corporation (DTCC).

Merrill Lynch leads the way

One distributor, Merrill Lynch, has been especially attentive to the income annuity valuation problem. Its advisors sell SPIAs on commission from MetLife, New York Life, Pacific Life, and Nationwide, so an annuity replacement value is something they need for compensation purposes. They want a market value in order to prevent annuity assets from disappearing from AUM.  

“Feedback from our specialists tells us that this was always a potential hurdle [to annuity sales],” said Robert Rohrbach, a Merrill Lynch executive who manages the approval of annuities for sale by the wirehouse’s advisors, and who has been part of the SPIA task force. “Having the valuation means that, if the advisor sells a $200,000 income annuity to a $1 million household, it doesn’t suddenly become an $800,000 household.”

Merrill Lynch has been using the statutory reserve method of valuing annuities (which uses the interest rate when the annuity was sold as the discount rate for future payments) but will start using the Income Value numbers in the fall.

“We knew that the industry would eventually be coming up with a value but we moved ahead with our approach. The feeds are coming in from the insurers and we’re sending the data through to the advisor and they’re crediting the annuity on the clients’ household statements. But we’ll switch over to the Income Value in September. We want to be consistent with the industry,” Rohrbach told RIJ.

More splinters to be removed

Establishing a standard market value for in-force annuities is considered a necessary but not a sufficient condition for the growth of SPIA sales.

“[Market-valuation of SPIAs] is one of a handful of things that, combined, will help sales,” Baker said. Evaluation alone won’t be a game changer, but it will be an improvement over the status quo. It will make it easier for advisors to put income annuities into a financial plan, for instance. There are maybe five splinters in the lion’s paw, Baker said, and this will take out one of them.

As for the other ‘splinters,’ there’s still some tax code ambiguity that manufacturers are wrestling with. “The tax code was written 30 years ago, and it still defines income annuities as single-premium products that must begin paying out within 12 months after purchase. So, technically, there should be no such thing as longevity insurance,” he said.

“There are also some operational issues. Straight-through-processing is still in its infancy for income annuities; they’re lagging behind the variable annuity world. Advisors still feel that SPIAs are a pain to deal with. We’ve got to make it as easy as selling a mutual fund”—or as easy as selling an irrevocable product can be.

One unresolved question is whether firms should put the market-value of income annuities on client-facing statements. Merrill Lynch disfavors showing the value to clients, Rohrbach said, because clients might think the assets are accessible.  

“The industry wants to create this value as a client-facing value,” he told RIJ. “I’m not sure we will do that. We will have to have a lot more discussions around that, and create clear guidance for clients. We’ll be using Income Value so that the advisor doesn’t lose credit for those assets.” Either way, he’s excited about the potential for income annuity sales at Merrill Lynch. “It’s never been a huge piece of our business,” he said, “but it will be a bigger piece going forward.”

 © 2012 RIJ Publishing LLC. All rights reserved.

Older minds don’t necessarily think alike: Hearts & Wallets

Posted on May 20, 2012 by -

Older investors generally fit into one of three categories, according to the latest study from Hearts & Wallets, the Hingham, Mass.-based consulting firm led by Laura Varas and Chris Brown.

The findings of the study, “Shining a Light on Pre- and Post-Retirees: What 3 Different Retirement Lifestyles Reveal about Language, Attitudes and Experiences with Advice and Retirement Income,” was based on responses from nationwide focus groups.

The full report is available from Hearts & Wallets. 

Here’s how Hearts & Wallets described the three demographic sub-segments:

  • Full-Steam Aheads. They plan to work at least part-time in retirement “to avoid mental deterioration and keep their options open.”
  • Balancers. – They view part-time work in retirement “as an insurance policy for the future and a way to earn spending money.”
  • Leisure Pacers. They plan to stop working in retirement but are “more involved with their finances now than ever before.”

Overall, Hearts & Wallets found that simply promoting your capabilities as a retirement income specialist will not automatically bring older Americans running to consolidate their assets with you or your company. The older market is more nuanced than that.

“The term ‘retirement income’ means three wildly different things to different types of older investors,” said Varas. “Many firms think of ‘retirement income planning’ as a service that helps older Americans plan how to take income from their personal assets. But using one lifestyle segment as an example, Full Steam Aheads often think the term ‘retirement income’ refers to ‘entitlements,’ like pensions or Social Security.

“Since Full Steam Aheads tend to take responsibility for themselves and others, they don’t even think ‘retirement income’ applies to them! This misunderstanding is a tragedy because many of these offerings are specifically designed to help people like them.”

The myth of asset consolidation

Contrary to what many companies hope, older Americans general don’t plan to put all their eggs in one service provider just because that provider is adept at “retirement income.” Many older investors express a reluctance to consolidate assets with one firm. Only a minority of older investors will consolidate with a single provider.

“Retirement income services may help providers increase wallet share,” said Brown. “But they need to be careful about asking for everything. And they need to understand trust-drivers and -eroders.”

Some investors have had bad experiences with advisors who have put their own interests ahead of the client. Some still work with an advisor but put in extra hours checking up on advisor recommendations.

A note about trust and calculators

A few key trust drivers/eroders include:

  • An advisor who takes time to get to know the client.
  • An advisor who offers reasonable and clear fees.
  • Staff or advisor turnover is a key trust eroder.

The study also details how investors connect with financial services providers and advisors. Many investors met their provider or advisor through a workplace retirement plan.

Receptivity to retirement calculators is mixed. Many older investors like using calculators to try on different decisions before having to make them. But others see calculators as rigged and as prompting the investor to put more money than necessary into mutual funds. The full study provides a review of investor opinions on the usefulness of retirement calculators, how they use them or would like to, and how advisors can use retirement calculators with clients.

Investor receptivity to three retirement income concepts

The study also examined techniques older Americans use to generate retirement income today, their likes and dislikes, and language that might support optimal income solutions.

The study explored how older Americans are currently executing three popular techniques:

  • Establishing a guaranteed “Income Floor”
  • Breaking up assets into “Time-based Buckets” that can be used in different periods of life
  • “Sustained Withdrawal,” or seeking to take income from an overall diversified portfolio

In the full report, different types of older investors provide detailed responses to these concepts. Interestingly, there were some signs of thawing in attitudes to annuities, which can perform the important, attractive economic function of providing steady income and pooling longevity risk.

Unfortunately, consumer misfortune with poor business practices, such as over-engineering or excessive fees and sales commissions, means resistance runs deep. On the other hand, the term “income annuities” doesn’t hold the same negative connotations as “annuities.”

© 2012 RIJ Publishing LLC. All rights reserved.

Look to Asian bonds for growth: AGI

Posted on May 20, 2012 by -

Allianz Global Investors is bullish on Asia, according to a recent report in Investments & Pensions Asia. The firm expects Asian bond funds to become more available to Western investors, and expects Asian currencies to appreciate in the years ahead, despite some volatility.

Andreas Utermann, global chief investment officer at AGI, was quoted as saying that “investors remain completely risk averse [regarding Asia] but their risk assessment is based on experiences over the last 30 years – and this is wrong.”

“Asian asset classes will outperform Europe and the US between 2010 and 2020 but there will be times when they will not and these are the times when you want to go in,” said Stuart Winchester, Senior Portfolio Manager, Oriental Income, at AGI. “You have to be patient like a hawk waiting for a big fish.”

David Tan, the new head of investments at AGI Singapore and CIO of Pan-regional Asian Bond Mandates, said that the Asian financial crisis of the late 1990s was “a necessary adjustment for Asia to go through” toward better fundamentals.

 “Most of the Asian economies are export-driven and they have to switch to different ways of getting rich – and one of them is to let the currency appreciate,” said Utermann, adding that the Chinese government “won’t do anything that might spoil the once-in-a-lifetime opportunity of the RMB becoming a global currency.”

Helen Lam, Senior Portfolio Manager RMB and Fixed Income strategies at AGI, expects the RMB to become a fully convertible currency “maybe by 2020” but first China will “have to liberalize the interest markets,” among other things. Recently, the first RMB bonds were launched on the London Stock Exchange, and Lam thinks that New York, followed by Tokyo and maybe Sydney might be next.

© 2012 RIJ Publishing LLC. All rights reserved.

The Mad Men of Wall Street

Posted on May 20, 2012 by -

The New York Times published an article on May 14, 2012 concerning the question of whether the rich, from a moral standpoint, are good or bad. The story reported that “A recent study found that 10% of people who work on Wall Street are ‘clinical psychopaths’ and that they exhibit an ‘unparalleled capacity for lying, fabrication, and manipulation.'”

The vivid term “clinical psychopath” brings to mind the berserk buzz-saw wielding investment banker played by Christian Bale in the film “American Psycho.”  

Since some 3.9 million people work in the financial services industry, a clinically-diagnosed horde of lunatics numbering almost 400,000 people would certainly be a matter of public concern, though it might only confirm some journalists’ views of American capitalism.

It is fair to ask what is the provenance of this “study.” The New York Times cites its source as a March 12, 2011 story in THIS WEEK, which attributes the psychopath data to an estimate made by freelance writer Sherree DeCovny in CFA Magazine, in an article entitled “The Financial Psychopath Next Door.”  

She wrote that “studies conducted by Canadian forensic psychologist Robert Hare indicate that about one percent of the general population can be categorized as psychopathic, but the prevalence rate in the financial services industry is 10%.”

The problem here is that Hare never conducted a clinical study of the financial service industry, and never did research showing that 10% of its members were psychopaths.

John Grohol, the editor of World of Psychology, after the publication of DeCovny’s article, asked Hare about the putative study. Hare told him,  “I don’t know who threw out the 10% but it certainly did not come from me or my colleagues.” 

The closest he came to such a claim was in a research paper he co-authored that analyzed the responses submitted by 203 corporate professionals from seven companies, none of which were on Wall Street. Nor were these 203 people randomly selected. He found that the answers of only eight people—approximately 4% of the sample—indicated psychopathic tendencies on a scale he had devised.

Even though this was not a clinical study, the responses of these eight people, who may not even have worked in financial services, were transformed via the blogosphere into a supposedly scientific finding, cited in one of our most respected newspapers, that one-tenth of those working on Wall Street are psychopaths.

As Ryan Holiday, author of “Trust Me, I’m Lying: Confessions of a Media Manipulator,” explained to me, “Headline-grabbing trend manufacturing such as this now dominates the pseudo-news cycle on the Web.”

Welcome to the Internet, which is not known for its source-checking. Unfortunately it is then only a short leap to the so-called newspaper of record, which is happy to serve up to the public this non-existing study, which demonizes financiers. As a result, we now have mad men of Wall Street running amok in the public imagination.

Edward Jay Epstein is author of “Myths of the Media” and many other books.

‘We Should All Work To Age 70’

Posted on May 20, 2012 by -

We are all getting older and staying in good health for longer. But even though carrying on working for longer would seem a logical next step, we’ve stayed where we are for decades, with no change in the official retirement age.

So many vested interests in so many countries see the age of 65 as sacred and an acquired right that is not up for negotiation. Indeed, one thing that helped François Hollande win the recent French presidential election was his irresponsible promise to reintroduce a retirement age of 60, after it only recently rose to 62.

In most Western countries, people stop work at between 60 and 62, while the ‘workability index’ for most European countries is 75. According to the OECD, a retirement age of 70 would currently be realistic, while working for longer has also been shown to result in people living longer and remaining in relatively better health. In other words, society is letting eight productive years go to waste.

Apart from trade union rigidity and politicians’ inability to take decisions, we ourselves are the biggest barriers to longer working lives. Employers are doing too little to anticipate longer life expectancies in their workforce, with salary structures still based on rising salaries. Opportunities for retraining and updating skills so as to make more flexible use of older employees are being used too little and too late.

Similarly, working environments are not being adapted to accommodate older people, while pension, tax and insurance products are not yet equipped for longer working lives. We need to rid ourselves of the perception that ‘old is expensive.’

But employees, too, are doing too little to anticipate change. Few people are taking responsibility for planning their personal financial future, whereas doing this properly is a way of anticipating the need to continue working into the fourth quarter of your life. The challenge now is to devise a series of cohesive measures to massage society into making better – and obviously responsible – use of those eight years of extra productivity.

I can already hear politicians claiming a special status for people in physically demanding jobs. There, too, anticipation – and at a younger age – is vital. Although there will, of course, always be some groups of people deserving special care, the fact remains that we need to accept that working until you reach an average age of 70 should become the norm.

The question now is what employers should be doing to anticipate society’s need for change. What is the government actually doing? How flexible are trade unions being in helping to devise solutions? Who is educating citizens – particularly young people – to be more aware of the need for financial planning?

The results of a recent ‘stakeholder’ survey disappointed me. People obviously see what is happening, but there are absolutely no signs of any cohesive policies or combined efforts to create the right conditions. There is not even any basic research into what kind of action employers and employees could and would be willing to take.

I would suggest it’s now high time to get that done. The various stakeholders seem trapped in a web of agreements, with the change needed in the retirement age simply being swapped for another issue in the political game. No one dares take that vital first step, with everyone looking at someone else to avoid having to step outside his agreed circle of maneuver.

Some people are happily looking at France and the plans to reverse the increase in the retirement age, with ‘growth’ as the new magic word. But who’s going to invest and come up with the money at this stage of the crisis? The missing eight years of extra productivity all too easily get forgotten when policy for responsibly lengthening working lives is being devised.

I sense there’s little point in waiting for action from politicians. Perhaps we should talk about ‘making existing pension plans more flexible’ rather than ‘increasing the retirement age.’ Insurance companies, pension funds and social security systems will need to anticipate people wanting to work longer. That means coming up with new products to allow delayed retirement on conditions that are satisfactory to all parties. In other words, finding a way of rewarding people who contribute to society for longer.

Perhaps those accepting hybrid retirement will be able to persuade governments, employers, unions and others that many people will be keen and able to remain in the workforce – providing the conditions are right and efforts are made to accommodate the different parties’ wishes. There are also, of course, substantial numbers of older people whose provisions for retirement are inadequate and for whom continuing to work – possibly on a part-time basis – will simply be a necessity.

Harry Smorenberg is an independent strategist in the financial services industry and chairman of the WorldPensionSummit.