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No Fluke: Income Annuity Sales are for Real

Posted on May 29, 2012 by Kerry Pechter -

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).

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

Posted on May 29, 2012 by Editor Test -

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.

The Bucket

Posted on May 29, 2012 by Editorial Staff -

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.

Public/private pension concept gains foothold in California

Posted on May 29, 2012 by Editor Test -

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.

Separately managed account inflows rebound in 2012: TrimTabs

Posted on May 29, 2012 by Editor Test -

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.

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

Posted on May 29, 2012 by Editor Test -

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.

Sun Life ‘nets’ Celtics branding rights

Posted on May 29, 2012 by Editor Test -

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.

Financial / Retirement Planning Software Directory

Posted on May 24, 2012 by Editor Test -

Click here to open the full directory of software for Financial and Retirement Planning.

“Quote” of the Week

Posted on May 23, 2012 by Editor Test -

DTCC issues first-quarter annuity 2012 sales data

Posted on May 22, 2012 by Editor Test -

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.

AnnuitySpecs.com releases 1Q 2012 indexed annuity sales

Posted on May 22, 2012 by Editor Test -

Forty-four indexed annuity carriers participated in the 59^th 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 12^th 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 Editor Test -

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.

Annuicide Prevention Tool

Posted on May 22, 2012 by Kerry Pechter -

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 115^th 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.”

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

Posted on May 20, 2012 by Editor Test -

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.”

Look to Asian bonds for growth: AGI

Posted on May 20, 2012 by Editor Test -

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.

The Mad Men of Wall Street

Posted on May 20, 2012 by Edward Jay Epstein -

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 Henry Smorenberg -

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.

No Tower of Babel, or Babble, from Babbel

Posted on May 16, 2012 by Editor Test -

Whenever the topic of selling income annuity arises (and it arises more frequently these days than ever) David Babbel’s white paper on income annuities, “Investing Your Lump Sum at Retirement,” inevitably comes to mind.

The paper, written by the Wharton School professor in 2007 under the sponsorship of New York Life, makes the case for buying an income annuity better than any glossy marketing brochure you are ever likely to find.

No photos of sailboats or white-haired captains in this document. No his-and-hers Adirondack chairs at the end of the dock.

Anyone who markets or sells income annuities for a living should not only read this document but carry a creased, dog-eared and heavily-underlined copy of it in his or her coat pocket at all times.

Babbel supplies the background that someone new to annuities might need, then tackles what he calls the seven—a magic number in gambling and in advice manuals; just ask Stephen Covey—myths about annuities and provides a bullet-proof response to each one.

If you have time, I urge you to read the entire paper. For those who don’t have time, I’ll summarize his call-and-response below. First the annuity myth, then a summary of Babbel’s rebuttal.

1. They cost too much. When you calculate the expense ratio that you pay year after year on an actively managed mutual fund, the one-time commission that you pay when buying the typical income annuity will seem quite small.

2. What if I get sick? An income annuity, especially one that offers accelerated payments in case of serious illness, can be a versatile and thrifty alternative or supplement to long-term care insurance.

3. What if inflation returns? Won’t my fixed payments become worth less? Many of today’s income annuities offer inflation-protection, either in the form of an annual increase or a peg to one of the versions of the Consumer Price Index.

4. Isn’t it cheaper to use some sort of homemade strategy that mimics the behavior of life annuities? That way I can cut out the insurer! Babbel articulates the insurance principle and compares not having an annuity to playing Russian roulette with your financial security.

5. If I put all of my money in a life annuity, will there be anything left for my kids? If you buy an annuity that covers your basic needs, you may be able to give part of the remainder of your wealth to your children today, rather than making your death the prerequisite of an inheritance.

6. If I purchase an irrevocable life annuity at retirement, don’t I lose control over those funds? Yes, says Babbel, and that’s a good thing! An income annuity can remove the burden, the anxiety and the risk of handling stocks and bonds at an advanced age.

7. Shouldn’t I wait to buy in case interest rates go up? You can—but life expectancies may also go up, making annuities more expensive in the future. And while you’re waiting, your investments could lose value. Indeed, what if rates go up and trigger a stock market crash? You might have less money to invest in an annuity.

And here’s Prof. Babbel’s stirring conclusion:

When individuals consider the list of positive attributes associated with life annuities, i.e., guaranteed payments you cannot outlive, low cost, access to invested capital, and reasonably priced features such as inflation adjustment and legacy benefits, the argument for this income solution in retirement is compelling.

By covering at least basic expenses with lifetime income annuities, retirees are able to focus on discretionary funds as a source for enjoyment. Locking in basic expenses also means that the retiree’s discretionary funds can remain invested in equities for a longer period of time, bringing the benefits of historically higher returns that can stretch the useful life of those funds even further.

Income annuities may also be a vehicle that enables retirees to delay taking Social Security benefits until they are fully vested, bringing substantially higher payments at that point.

The key in all of this is to begin by covering all of the basic living expenses with lifetime income annuities. Then, to provide for additional desirable consumption levels, you will want to annuitize a goodly portion of the remainder of your assets, while making provisions for extra emergency expenses and, if desired, a bequest.

These last two items can be accomplished through combinations of insurance and savings. When this is undertaken, you can enjoy your retirement without the burden of financial worries and focus on more productive uses of your time and attention!

Philadelphia Story

Posted on May 16, 2012 by George A. (Sandy) Mackenzie -

This conference, the latest in a long series of conferences organized by Wharton’s Pension Research Council and devoted to important aspects of retirement security, examined the vital issue of financial security from the legal, economic and social points of view.

In particular, it dealt with:

The lack of a uniform fiduciary standard for broker/dealers and investment advisers;
The reasons for the limited take-up of financial advice;
The effects of financial advice on clients;
The quality of advice.

Speakers included economists, lawyers, pollsters and industry professionals. What follows draws from the more interesting presentations and papers:

The legal basis for the regulation of financial advice is not coherent. New Deal legislation established one standard—that of suitability—for broker-dealers, and a more exacting fiduciary standard for investment advisors. As Arthur Laby explained in a thorough and well-written paper, that distinction worked tolerably well until the 1970s-1980s, when discount brokers emerged and the distinction between broker-dealer and investment adviser became harder to draw.

Recent efforts by SEC to establish a more watertight distinction have not been successful. Passage of new regulations is now complicated by the fact that it is expected that it be preceded by a cost-benefit analysis of the new rules. Meanwhile, the average investor does not understand the difference between the suitability rule that is to apply to broker–dealers (or to the act of brokering) and the fiduciary standard. Gerri Walsh of FINRA remarked that 401(k) plan members did not see themselves as investors!

Financial advice, despite its universal importance, remains the province of the affluent. Kent Smetters thought that most planners will eschew households with less than $500,000 in financial assets. The demand for advice is discouraged by the upfront fee, which is typically upwards of $3,000 per plan. Financial planners emphasize the skilled-labor intensive character of the work, a trait that has resisted the effects of technological advances in financial software. Online advice reduces its cost, but speakers argued that it could not yet compete with the human touch. The implication is that short of a subsidy or technological breakthrough, the average American will remain without this valuable service.

A paternalistic approach, where everyone gets advice regardless of their interest in it, may not be cost effective. A paper by Angela Hung and Joanne Yoong of Rand reported on a statistical analysis of a sample of older Americans and described the findings of an experiment aimed at determining what led people to seek financial advice. The statistical analysis was not very revealing—there was no significant relationship between either wealth or the level of financial literacy and the propensity to seek advice. Similarly, there was no obvious impact on investment decisions.

Those seeking advice were more likely to continue making their plan contributions, however, although they were also more likely to reduce them. The experiment divided participants into three lots: one that received no advice; a second, that received advice whether they wanted it or not; and a third that was offered a choice.

Those (in group 3) choosing advice were more likely to lack financial literacy than those who did not, suggesting that advice is a substitute for a do-it-yourself approach. The Rand researchers draw the conclusion that a paternalistic approach, where everyone gets advice regardless of their interest in it, may not be cost effective.

A definite relationship between taking advice and net worth, even when controlling for income, education and cognitive ability, was among the findings of an empirical study by Michael Finke of Texas Tech. Moreover, investors taking advice were less likely to cash out in a severe bear market. A survey carried out by the ICI and presented by Sarah Holden found that a major life event was often a trigger for an initial consultation, and that advice was sought more often when young than when old. The survey also found a significant relationship between education and wealth and the tendency to seek advice. Fear of loss of control often explained a refusal to seek advice.

One interesting paper by two well-known financial advisors, Paula Hogan and Rick Miller tried to integrate the insights of behavioral economics into a life-cycle approach. The life cycle approach is an advance over the traditional approach, because, among other reasons it recognizes the importance of the timing of the decisions to retire and claim Social Security as well as the importance of human and not just financial capital.

However, life cycle economics makes unreasonable demands on people’s understanding of their finances and their ability to foresee their needs many years into the future. The authors noted that their clients were often quite ignorant of their financial situation. Asking a 30-year-old about his retirement is pointless, because he or she will not know what his needs will then be.

Regarding Social Security, Matt Greenwald reported on a survey of financial advisors and the advice they gave on claiming Social Security and related decisions. Sound advice is critically important, especially given the outsized role the program plays in retirement finances. Matt found that many advisors did not have a good idea of how spousal benefits worked, and that they could give bad advice on the timing of retirement. Clients were often preoccupied with the issue of OASDI solvency, which reduced the amount of time available for other topics.

One particularly interesting finding related to the framing of advice on the claiming decision. This decision can be tilted away from delaying a claim by downplaying the insurance aspect of annuitization. Financial advisors favored the first approach. They also favored the break-even approach, as in “if you delay claiming Social Security for two years you can expect to break even in 14 years.” Remarkably, and as Olivia Mitchell noted, it appears that SSA agents have an incentive to encourage prospective claimants to claim early.

Anna Rappaport and Kelli Heuler addressed the important issue of encouraging annuitization, and in particular the role of advice. They contrasted what they called structured advice with active guidance. The former might take the form of a special website on the site of the plan sponsor, where employees could seek information on terms and premiums, and put questions to on-line advisors. Personal advice, as the name suggests, includes a personal touch. In the authors’ view, the second was far superior to the first, at least in encouraging annuitization. This paper noted that it was not uncommon for plan members to purchase more than one annuity, perhaps because state insurance schemes create an incentive to spread purchases out over more than one state. Zvi Bodie, drawing on his experience as a trustee at Boston University, argued that advisors remained biased against annuities.

Summary. The conference was certainly stimulating. One participant argued that its rather agnostic results argued for a default approach (as with the auto-IRA), there being no magic bullet to broaden the coverage of financial advice, improve its quality and make it more affordable. Another argued that target date funds (TDFs), given the way they worked, could be seen as a gateway to advice. For my part, I was left without a strong sense of how the coverage and quality of financial advice might be enhanced.

George A. (Sandy) Mackenzie is the author of “Annuity Markets and Pension Reform,” (Cambridge, 2006) and “The Decline of the Traditional Pension,” (Cambridge, 2010). A member of the staff of the International Monetary Fund for many years, he is a currently Senior Strategic Policy Advisor at the Public Policy Institute of AARP in Washington, D.C. The remarks made here are his own and do not represent the opinions of AARP in any way.

Talking DIAs with Matt Grove of NY Life

Posted on May 15, 2012 by Kerry Pechter -

RIJ: New York Life’s deferred income annuity, the Guaranteed Future Income Annuity, was introduced in July 2011. Who are the target clients for that product?

Grove: We realized in late 2010, when we started developing Guaranteed Future Income Annuity, that while guaranteed income was a big deal for people in their 60s and 70s, there was a bigger opportunity among people in their 50s and 60s who needed income later [in life]. There are more people in that group, and they have more money. And, while there’s still a fair degree of pension ownership among today’s retirees, people in their 50s and 40s have less pension ownership. So we thought we could pivot off our Guaranteed Lifetime Income product and extend our existing brand.

RIJ: From what we’ve heard, sales are going better than expected.

Grove (at right): We were shocked at the response from the field [agents]. We launched in July with low expectations. Usually, it takes a while to educate the field [agents]. We expected $20 million in sales and got $200 million. The number today is more like $400 to $450 million, and sales are accelerating.

RIJ: What’s driving those numbers?

Grove: The most important factor is that we went against popular opinion on positioning the product. The conventional wisdom is that income annuities are about longevity insurance, and that the typical purchaser would be a 60-year-old leveraging to age 75. Although there is a market there, we positioned GFIA as a solution that provides the financial security that a pension once provided, targeted at a person in his or her mid-50s who is buying a guaranteed income stream that starts in their mid- to late-60s. For them, the need is more personal. It’s less abstract than deferring income to a time when you might not be alive. It’s also a more positive message. A lifetime income product is about protection against living too long. GFIA is about having more income during retirement.

RIJ: It’s interesting that your sales are strong in a low interest rate environment.

Grove: Counter-intuitively, it’s an economic analysis that’s driving sales. People are convincing themselves that it would be a good investment, quantitatively. We just launched ads with the slogan, Get More Income. It showed that a 58-year-old who deferred income for nine years would get 30% more income from GFIA than from a GLWB with a 5% roll-up for nine years and then a 5% withdrawal from the benefit base. It’s really about relative value. The client is asking, ‘What are my alternatives?’

RIJ: But what if people are comparing the annuity to a systematic withdrawal plan from an investment portfolio?

Grove: We have a concept called ‘required yield.’ If Choice A was GFIA, and you got a 10% payout 10 years from now, and if Choice B was a systematic withdrawal plan with a pre-determined distribution rate of 5% from an investment portfolio starting ten years from now, what returns would you need to earn over ten years to match the first-year income that you’ll get from the annuity? That’s the hurdle rate you have to get over in order to match the first-year income [from an investment portfolio with that of an annuity]. We find that those hurdle rates are typically very high.

RIJ: It’s surprising that a deferred income annuity is getting so much traction, relative to expectations at least, when you consider that the required minimum distribution rules force most rollover IRA owners to start taking money out of their accounts at age 70½.

Grove: A lot of people would defer longer if not for the required minimum distributions. We see in our nonqualified business that people would like to defer past that age. The Treasury Department has a proposal out right now that would relax the age 70½ restrictions, with some constraints. That would expand our market.

RIJ: By taking income earlier, aren’t people also giving up some of the so-called mortality credits that come from investing in an income annuity?

Grove: The mortality credit becomes compelling at about age 70. But if you look only at the mortality credit you’re failing to understand the true value of the product. Firms like Fidelity and others that are focused on retirement income are selling income annuities to a younger population. They’ve done their homework, and they understand the value of income annuities in the broader portfolio. The entire point of Modern Portfolio Theory, the bedrock of it, is that you have to look at all of the assets in the portfolio in conjunction with each other. Thinking about them as stand-alone investments makes no sense whatever. It’s the same when you add annuities to the mix.

RIJ: So you’re making the argument that income annuities have benefits aside from mortality credits?

Grove: There are reasons why income annuities improve outcomes. They aren’t correlated with the market. And they remove sequence of returns risk from one segment of the portfolio. Most of the problems that people will have are related to sequence of returns risk. That’s the single biggest threat to their financial health in retirement.

RIJ: You’ve said elsewhere that many clients are choosing cash-refund GFIAs. Doesn’t that structure wipe out the mortality credit?

Grove: It’s not accurate to say that you’re wiping out your mortality credits by choosing a cash refund. You’re still pooling mortality. With the cash refund, we guarantee the principal but not the interest. We’re mortality-pooling your interest, while also giving you the benefit of a steady payout. Although an economist might tell you to buy a life annuity, most people are uncomfortable with the idea that if they were hit by a truck they would lose their money.

RIJ: Some people might prefer to buy an immediate income annuity later than buy a deferred income annuity today. Is there any point in acting now?

Grove: When we write a single premium immediate annuity, the average duration of the liability is eight or nine years. So we buy a bond portfolio with an eight- or nine-year duration. The duration of the GFIA is 18 years. Because of the upward sloping yield curve, we can earn higher returns and that drives higher payout rates.

RIJ: Some people say that New York Life sells the most income annuities because it has such a strong career agency, and that career agents have an easier time selling annuities. Is there any truth to that?

Grove: We have a 30% market share. The nearest competitor has a 5% to 10% share. Our career agency represents about half of our income annuity sales, so we would still be number one if we had no career agents. There is no special aspect of career agency that favors income annuity sales, with the possible exception that the career agency is more insurance-focused and the third-party distributors are more asset-management oriented.

RIJ: What about the fee-based advisor channel? There’s a lot of money there, but it’s resistant to annuities.

Grove: There have been attempts to establish annuities as a viable fee-based option. We have created a no-load version of our income annuity. We’ve begun to see some major distributors say that they would count the value of an annuity to their AUM. There might be no explicit charge for managing the annuity. Its value would just be counted toward their book of business. There have been discussions about charging a reduced fee for the annuity assets, more like 30 basis points.

RIJ: It’s not easy to change the way advisors think about income annuities.

Grove: The economics of the advisor business were built around asset accumulation. But in retirement, for many customers, the asset base will be shrinking. The time that needs to be invested in client relationships can also go up because you have more people who are worried. But our understanding is that retirement-based practices are going pretty well, and that advisors [who specialize] in retirement aren’t overwhelmed by calls from their clients. It’s a good demographic for advisors.

RIJ: Thank you, Matt.

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