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Nationwide expands variable life and annuity investment lineup

Posted on May 8, 2012 by -

Nationwide Financial Services, Inc. today announced several enhancements to the investment lineup for its variable annuity and variable life insurance products, including 15 new fund options.  The changes were effective May 1, 2012.

Nationwide will begin offering the following options from Dimensional Fund Advisors for its variable life products:

  • VA Global Bond Portfolio
  • VA US Large Value Portfolio
  • VA US Targeted Value Portfolio
  • VA International Value Portfolio
  • VA International Small Portfolio
  • VA Short-Term Fixed Portfolio

For the first time at Nationwide, advisors will have access to actively managed target volatility funds for both variable life insurance and annuity products. These funds include:

  • Goldman Sachs VIT Global Markets Navigator Fund
  • AllianceBernstein VPS Dynamic Asset Allocation Portfolio

Other fund additions to the life and annuity line-up will enhance investment options in high yield, asset allocation and mid-cap asset classes:

  • Invesco VI Mid Cap Core Equity Fund
  • MFS VIT New Discovery Series
  • PIMCO VIT All Asset Portfolio
  • Ivy Funds VIP High Income
  • Ivy Funds VIP Mid Cap Growth

Nationwide is also offering two new funds to enhance its high yield bond asset class options for the America’s marketFLEX Series product:
Direxion Insurance Trust Dynamic VP High Yield Bond Fund
Fidelity VIP High Income Portfolio

As of May 1, 2012, Nationwide’s investment lineup includes:

  • 92 variable annuity investment options.
  • 96 variable life investment options.
  • Coverage across 34 Morningstar categories.
  • Access to over 33 money managers.
  • 23 asset allocation investment options.
  • More than 59 variable annuity options with a five-year track record and 49 options with a 10-year track record.
  • More than 68 variable life options with a five-year track record and 58 options with a 10-year track record.

Soft yen cited as cause of first-quarter losses for Prudential

Posted on May 8, 2012 by -

A weakening of the Japanese yen in relation to the U.S. dollar and certain other currencies was cited as the reason for the net loss of $988 million ($2.09 per common share) of financial services businesses attributable to Prudential Financial, Inc., the company reported.

The company took a pre-tax charge of approximately $1.5 billion from net changes in value relating to foreign currency exchange rates and changes in market value of derivatives. The currency-driven value changes were largely offset by corresponding adjustments to accumulated other comprehensive income which are not reflected in net income or loss.

After-tax adjusted operating income for Prudential’s Financial Services Businesses was $741 million, or $1.56 per Common share, compared to $1.62 per Common share for year-ago quarter. In other items from Prudential’s quarterly report:

  • Individual annuities: Account values reach $124.1 billion at March 31, up 9% from a year earlier; gross sales for the quarter of $5.0 billion; net sales $3.2 billion.
  • Retirement accounts: Values reach $239.8 billion at March 31, up 12% from a year earlier; total retirement gross deposits and sales of $9.0 billion and net additions of $404 million for the quarter.
  • Individual Life annualized new business premiums of $79 million, up 22% from a year ago.
  • Assets under management: $636.8 billion at March 31, up 12% from a year earlier; net institutional additions for the quarter, excluding money market activity, $5.4 billion.
  • Group insurance: annualized new business premiums of $313 million, compared to $500 million a year ago.
  • International insurance: constant dollar basis annualized new business premiums of $819 million, up 24% from a year ago.

© 2012 RIJ Publishing LLC. All rights reserved.

Allstate launches indexed annuities

Posted on May 8, 2012 by -

Allstate, which serves 16 million households in the U.S. and Canada, launched the IncomeProtector and GrowthProtector fixed indexed annuities this week. Currently available in 40 states, the products are expected to be available in 49 states by year-end 2012.

The Allstate Protector annuities offer a minimum guaranteed interest rate combined with an interest rate linked to a market index, such as the Standard & Poor’s 500. Allstate offers two Protector annuities:

  • Allstate IncomeProtector is a deferred fixed indexed annuity whose guaranteed living benefit features a 7% annual deferral bonus that can produce an income base double the purchase premium if income is delayed for 10 years.
  • Allstate GrowthProtector is a flexible premium fixed indexed annuity offering a guaranteed rate of return.  

Both Allstate Protector annuities have a purchase payment bonus that remains part of the contract value or income base while the contract is in force. The bonus is fully vested after 10 years.

© 2012 RIJ Publishing LLC. All rights reserved.

Pacific Life licenses Moshe Milevsky’s “RSQ” income planning tool

Posted on May 8, 2012 by -

Pacific Life has licensed an online retirement income planning tool for advisors—which it has privately labeled Pacific Life Nautilus—from the Toronto-based QwEMA Group, which is led by the noted retirement expert Moshe Milevsky.

The tool, which ManuLife, John Hancock and other insurers have licensed in the past, generates a “Retirement Sustainability Quotient” based on a client’s age, current retirement savings and desired retirement income, and helps the advisor create an income plan using an optimized allocation to three product groups: investments, to protect against inflation risk; variable annuities with living benefits, to cope with sequence risk; and guaranteed lifetime income, to protect against longevity risk.

Advisors can use the tool to “financial advisors to engage clients in a conversation about how to build sustainable lifetime retirement income,” the company said in a release. “The tool helps differentiate the advisor in the art and science of creating retirement income.”

According to Pacific Life’s release: “The higher the RSQ, the more likely it is that the client’s current portfolio can generate the desired level of retirement income stream over his or her lifetime. The tool then offers up to three possible product allocation strategies with higher RSQs. These higher RSQ strategies illustrate how the client might increase his or her likelihood of creating a more sustainable lifetime retirement income.”

Pacific Life is supporting Nautilus with a new suite of sales, education, and promotional resources that focus on the product allocation concept. They include an interactive website and tools, as well as a comprehensive set of printed materials.

© 2012 RIJ Publishing LLC. All rights reserved.

The Truth about Taxes: Almost Everyone Pays Them

Posted on May 8, 2012 by -

Michael Greenstone, Director, and Adam Looney, Policy Director, The Hamilton Project

Today’s employment report showed continued growth in the labor market, although at a slower pace than over the previous four months. Furthermore, the unemployment rate ticked down from 8.3 percent to 8.2 percent in March. The economy has now produced positive jobs growth for the last eighteen months. Employer payrolls increased by 120,000 jobs in March, with manufacturing and health care posting large gains.

In past months, The Hamilton Project has examined employment trends over the last several years, as the Great Recession has taken its toll on many Americans across various segments of the population. This month, in honor of tax day, we explore how the current labor market has impacted one area affecting all Americans: taxes and, more specifically, who pays them.  We also continue to explore the nation’s “jobs gap.”

The positive signs of economic growth over the past several months are good news for policymakers and the American people. Inside the DC Beltway, however, there has been a renewed focus on the nation’s burgeoning deficit, and renewed calls to reform the tax system in ways that create more efficiency and, potentially, additional revenue. Congressional leaders are at a partisan standstill, with many misconceptions around the current tax system complicating the debate.

Who Pays Taxes?

A popular myth swirling around Washington, DC, and throughout the media these days is that many Americans do not pay taxes, and are therefore free-riding off of our society without contributing themselves. This has even been referred to by some as a “new orthodoxy.” The origin of this misconception is the observation that only about 54 percent of American households paid federal income taxes during recession-affected 2011. But that statistic is misleading because it provides an incomplete picture of the overall tax burden on American families, and because it incorporates individuals who naturally shouldn’t be paying taxes because of their age or economic circumstances due to the Recession. A closer look reveals that nearly all Americans do, in fact, pay taxes.

To help illustrate this point, let’s start with some basic fiscal background. Over the last two decades, tax credits for low-income working families with children, like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), have indeed decreased the number of American households paying federal income taxes. These credits reduce or eliminate income tax liabilities and sometimes result in a net income tax refund for low-income families.

But these credits are also an important component of the progressive tax system that help offset the burden of other taxes and raise poor working families out of poverty. Credits like the EITC and CTC have helped to reduce poverty, provide economic security, and offset declining labor-market opportunities for low-income workers. The EITC alone is responsible for raising 6.6 million children out of poverty. Perhaps most importantly, these credits expand the number of people contributing to the economy by causing many additional Americans to participate in the labor force and causing others to work more hours.

While this helps explain the declining number of low income families paying federal income tax, it does not address one key point: federal income taxes are only one component of the broader federal, state, and local tax system, and only one way in which Americans are able to contribute their fair share through taxes. Indeed, while some families do not pay federal income taxes, these households do pay other forms of taxes. Those who focus exclusively on the federal income tax ignore one of the most significant federal tax burdens on workers—the payroll tax.  In fact, most Americans pay more in payroll taxes than in income taxes.

As shown in the figure below, after incorporating payroll taxes, the proportion of American households who paid federal taxes in 2007, a non-recession year, jumps to 78 percent.

Who pays taxes chart

But, when we take the data a step further, even this statistic is misleading because it counts older households, who are often retirees, and young individuals, even if they are still in school. In fact, many households with no tax liability are young or old, meaning that they are likely to be led by students who subsequently will pay taxes or retirees who paid taxes over their lifetimes. The figure below illustrates the relationship between age and the odds of paying payroll and income taxes. The graph makes clear that younger individuals—those in their late teens and early 20s—pay taxes at relatively low rates, but that is largely because they are in school and not working.  But as they get older and find jobs, the evidence suggests that they will pay taxes. Similarly, after age 60, when more and more Americans are retiring and leaving the labor force, the fraction paying taxes falls rapidly. These retirees have certainly contributed to America’s revenue stream over their lifetimes. To this point, as the U.S. population ages into the future and a greater proportion of Americans reach the retirement age, it is inevitable that a growing percentage of the overall population will pay no income or payroll taxes.

Share of people paying taxes

But during middle age, almost all workers face a tax burden. When looking at those in middle-age, 84 percent faced a net payroll and income tax bill in 2007. This general theme also holds true for low-income households: even households that receive the child-related EITC generally only receive it temporarily, usually when their children are young. On net, even these families face a positive tax bill over time (Dowd and Horowitz 2008).

Furthermore, rising unemployment during the Great Recession has meant that the proportion of American families paying no federal taxes is unusually large today. Unemployed workers without incomes naturally don’t face tax liabilities. But as they find jobs and rejoin the labor force, they will once again contribute to the federal system. Indeed, some of the trends we see today are less illustrative of an unfair tax advantage for the poor; rather, the trends indicate the existence of a group of unfortunate families who have found themselves affected by hard times. And young people today have been particularly hard hit: many are unemployed or weathering the storm in graduate schools, meaning that they are, thus, not paying taxes. When looking more specifically at middle-aged workers with jobs, 96 percent paid federal income or payroll taxes.

Other Forms of Taxes Also Count

Finally, incorporating the additional—and significant—other forms of taxation into our calculation leads to the conclusion that nearly 100 percent of Americans pay taxes in some way, shape or form. All consumers bear the burden of state and local property, sales, and income taxes, as well as excise taxes on items like gasoline, alcohol, or cigarettes. These other taxes tend to be regressive, imposing more of a burden on low-income families than on high-income families—the state and local tax burden is over twice as large as the federal tax burden for the bottom fifth of households (Citizens for Tax Justice 2011). When you fill up your car with gasoline, you can’t avoid paying the tax. The pump does not differentiate between the richest Americans and the poorest families.

The March Jobs Gap

As of March, our nation faces a “jobs gap” of 11.3 million jobs.  The chart below, which reflects our updated assumptions about labor force growth, shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until March 2020—or eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by May 2016—not for another four years.

Conclusion

Virtually all Americans will pay taxes during their lifetime. The uncertainty that came packaged with the Great Recession has allowed for the proliferation of many other economic misconceptions, especially in regard to taxes. Today’s economic context for tax reform is very complex. Most immediately, the economy is still in the midst of a slow recovery with an unemployment rate that remains too high.  Even with robust rates of job growth, it will take years to close the jobs gap. An important role of fiscal policy in the near term is to support recovery in the labor market.

And in the longer-run, the United States is contending with three economic problems: a daunting outlook for budget deficit that imperils our well-being, an increasingly competitive global economy for many American workers and industries, and rising income inequality. The tax code affects each of these problems, and a successful tax reform effort will need to address each of them—or, at a minimum, avoid making any of them worse.

As policymakers return their attention to the nation’s fiscal crisis, reforming the tax system has become a focus of debate. To help inform discussions, The Hamilton Project will release a set of economic facts about taxes that provides an economic context for tax reform, and basic economic criteria that should be used when evaluating tax reform options. These facts will be released during a public forum on May 3 in Washington, DC.  As part of the policy forum, former Council of Economic Advisers Chair Martin Feldstein and Lawrence H. Summers, former Assistant to the President for Economic Policy and former U.S. Treasury Secretary, will discuss the broad economic case for tax reform.  They will be followed by a panel of distinguished experts who will focus on principles for a successful tax reform effort.

© 2012 The Hamilton Project/Brookings Institute.

New Allianz Life VA income rider enhances withdrawal rate, not benefit base

Posted on May 2, 2012 by -

There’s a novel approach to risk and reward built into Income Focus, the new optional variable annuity lifetime income rider from Allianz Life Co. of North America and Allianz Life Insurance Co. of New York.  

The new rider assures contract owners that for every year when their account value beats a certain hurdle rate (equal to the total expense ratio or, in the income phase, the expense ratio plus the payout rate), their withdrawal rate will go up by full percentage point.

In other words, instead of tempting the client with a guaranteed rollup in the benefit base every year, Income Focus enhances the withdrawal rate. And, instead of guaranteeing that enhancement, Allianz Life makes it contingent on market gains. 

That’s a “simplified way of managing the risks” of a living benefit rider, Allianz Life says, and managing risk is a sine qua non for U.S. VA issuers—especially for those issuers, like Allianz Life, whose parents are European-based and will be subject to the still undetermined Solvency II reserve requirements.

“To our knowledge, this is entirely new. We built this from scratch,” said Robert DeChellis, president and CEO of Allianz Life Financial Services, in an interview. “Our objective was to simplify the process for people who are trying to achieve a target income in retirement.”

Here’s an example of how the rider works:

If a 65-year man bought a single life version of the rider and paid an initial premium of $100,000, he would be eligible to withdraw 4.25% of his contract per year. At the conclusion of each contract year prior to taking income, if contract value (net of all fees) is greater than the contract value was a year earlier, then his withdrawal percentage would go up by one full percentage point.  

That is, if the client’s account value after one year is greater than $100,000 after all fees had been deducted—and the annual contract fees can run to 350 to 400 basis points, all in—then the withdrawal percentage goes up by a full percentage point.

For Income Focus, the withdrawal rates are 3.75% for contract owners ages 60 to 64, 4.25% for contract owners ages 65 to 79, and 5.25% for those ages 80 and over. The withdrawal rate mark-ups are available to contract owners ages 60 to 90. 

The client receives the withdrawal bonus uptick each year that the account value clears the fee hurdle rate during the accumulation period. When the income phase begins, the client can still receive an annual withdrawal bonus uptick, but only in those years when the account value clears a hurdle equal to the fees plus the distribution from the account.

As for downside protection, the contract guarantees that the owner will receive an annual income no less than the initial withdrawal percentage times the initial purchase premium. In the example above, that would be 4.25% x $100,000 or $4,250 a year. 

Over the years, “the hurdle will get harder and harder to beat” if the size of the withdrawals is increasing, DeChellis conceded, “but you still have the opportunity to benefit if the market goes up by 20% or 30%.” The rider fee is based on the account value, which is likely to shrink once the client starts taking income.

Along with the Income Focus rider, which became available on Allianz Life Vision, Vision New York and Connections VA contracts issued after April 30, 2012, two alternative riders are also available: the Income Protector (a GLWB with a 7% simple interest annual deferral bonus) and the Investment Protector (a GMAB, or guaranteed minimum account balance rider). Both of those have been available since 2007.

Contract owners who choose Income Focus must invest in one of the contract’s Managed Volatility Portfolios (MVP). Several such portfolios are available, with varying asset allocations, and all “use a risk management process intended to adjust the risk of the portfolio based on quantitative indicators of market risk,” according to the prospectus. The MVP fund managers can invest up to 20% of the assets in a combination of fixed income instruments and derivatives.

The annual cost of the Income Focus rider is 1.30% of the purchase premium (maximum 2.75% for single life and 2.95% for joint and survivor contracts). The mortality and expense risk fee is 1.40 to 1.75% (depending on the share class), and the portfolio expense ratios range from 0.52% to 1.73% a year. There’s an enhanced death benefit for an extra 30 bps a year. The surrender charge begins at 8.5% and lasts for none, four, seven or nine years, depending on the share class. 

© 2012 RIJ Publishing LLC. All rights reserved.

Springtime is for SPIAs, Etc.

Posted on May 1, 2012 by -

During one of the presentations at the 2012 Retirement Industry Conference in Orlando last week, Scott Stolz, a senior executive at Raymond James, asked the presenter, Aviva USA’s Mary Beth Ramsey, to explain an apparent annuity anomaly to him.   

Why is it, Stolz wanted to know, that a Raymond James client can get more monthly income in retirement—as much as 15% more, he said—from a fixed indexed annuity with a lifetime income benefit than from a deferred income annuity, assuming a 10 to 15 year deferral period?

Ms. Ramsey couldn’t comment on non-Aviva products. Approached after the presentation, Stolz said that he was assuming that the deferred income annuity (DIA) offered a cash refund, which provides the annuitant’s beneficiary a lump sum equal to the balance of the premium, if any remains unpaid.

A cash refund DIA? That’s how many if not most DIA contracts are structured, but is that the best way to judge the potential value of an income annuity to a client? “That’s the only way to make an apples to apples comparison,” Stolz said with an amiable shrug.

Here at RIJ, May is the month that we focus on the income annuity market, and so Stolz’ comments were especially timely. As we did last May, we’ll devote much of our content each Wednesday this month to the product family that includes SPIAs (single-premium immediate annuities), SPIVAs (single premium immediate variable annuities), DIAs (deferred income annuities), and ALDAs (advanced life deferred annuities).  

¶ Among other things, we’ll be talking to the leading sellers of income annuities, including New York Life, MetLife and MassMutual, who together account for about half of U.S. SPIA sales each year. New York Life has already collected more than $400 million in premiums for its new DIA, the Guaranteed Future Income Annuity, launched last July.

¶ We’ll be asking Gary Baker, president of Cannex USA, for a progress report on the efforts of a Retirement Income Industry Association committee to create compensation practices that make it easier for fee-based advisors to incorporate income annuities into their clients’ retirement income plans.

¶ We’ll discuss some of the ways that advisors can overcome the objections that clients might have toward income annuities, and explore some of the types of strategies that incorporate income annuities—like the strategy described in Someday Rich, the new book from Timothy Noonan of Russell Investments and Matt Smith (Wiley Finance, 2012).

Tune in next week for the beginning of those discussions. But now back to the question that Scott Stolz raised. The unique value of the income annuity arises of course from longevity pooling, which produces the so-called survivorship credit or mortality credit. The survivorship credit enables a life-contingent income annuity to offer more income per dollar of premium for policyholders for as long as they live than a GLWB can.

That’s why many academics and some advisors believe in income strategies that leverage the survivorship credit. They generally advise retirees to dedicate the payouts from life annuities to essential living expenses, and to rely on portfolio assets other than life annuities to satisfy their  needs or desires for liquidity and bequests.

But, to extrapolate from Stolz’ comments, independent investment advisors and RIAs apparently don’t think that way. They seem inclined to consider income annuities only in the most diluted forms—when they include a refund or other form of liquidity that weakens or eliminates the survivorship credit. The real challenge for a retirement advisor, it seems to me, would be to find a way to solve the need for liquidity while still capturing the survivorship credit. A DIA or a SPIA without a survivorship credit is a like a one-armed boxer. 

Regarding Stolz’ original question for Mary Beth Ramsey about how an FIA with a GLWB can produce more income than a DIA, he already suspected the answer. He believes that the issuer of an FIA/GLWB rider can assume a much higher lapse rate than the issuer of a DIA can. Therefore, if lapse assumptions prove true, the FIA issuer won’t have to keep as many of its lifetime income promises. “It’s a case of ‘Everybody will get the benefit’ [in the case of the DIA],” Stolz said, “versus ‘They may get the benefit [in the case of the GLWB].’” 

© 2012 RIJ Publishing LLC. All rights reserved.

Lounging by the (Mortality) Pool

Posted on May 1, 2012 by -

“Life is really quite stochastic in nature,” said Bob O’Donnell, the new president of Prudential Annuities, at the start of the LIMRA-LOMA-SoA 2012 Retirement Industry Conference at the Hilton Buena Vista in Disney World last Thursday morning.

Insurance people can be masters of understatement.

O’Donnell’s keynote, “The Complexities and Opportunities of Modern Retirement,” flew mainly at the 20,000-ft level but eventually touched down on a topic that Prudential executives have mentioned a lot lately: Contingent Deferred Annuities, or CDAs (aka Stand-alone Living Benefits, or SALBs).

Bob O'Donnell “Using CDAs to offer longevity risk protection on currently unprotected pools of assets” represents the next phase of Prudential’s annuity business and, O’Donnell (at right) suggested, the VA industry’s  future—especially now that the regulatory status of CDAs as life insurance products is being clarified.

“Our belief is that the CDA solves a fundamental challenge,” said the bearded O’Donnell, who came to Prudential when it acquired American Skandia in 2003 and who brought the basic chassis of what became Prudential’s “Highest Daily” VA lifetime income rider with him.

In response to a question from the audience about CDAs, he said: “We struggle with why our value proposition doesn’t reach a larger crowd… It’s not the complexity of the [VA] product or the fees. It’s a conflict introduced by the variable annuity industry.

“At a financial advisory firm or a broker-dealer, they offer investments and asset allocation, all wrapped in branded solutions. That’s how they live every day. Enter the annuities industry. We force advisors to make choices between their processes and our value proposition. That’s our fundamental constraining element in reaching the broader market,” he said. 

But CDAs can resolve that constraint, he said, and can invigorate the annuity business. “Substantial participants have left the VA business or dialed back their effort, but we will see firms that are not as prominent and firms that not currently participating in VAs enter this space. This is an enormous opportunity. There is high demand and low supply. That’s French for profit.”

(Prudential, the top VA seller in 2010, has been open about its intention to issue a CDA, which attaches a living benefit rider to mutual fund portfolios and managed accounts. In an interview with RIJ this week, Bruce Ferris, senior vice president, sales and distribution, at Prudential Annuities, said his firm’s CDA will employ the same dynamic asset transfer risk management method used in Prudential’s variable annuities. Prudential hasn’t said when it will introduce a CDA product.)

The framing guy and the statistics guy

O’Donnell was followed by Jeffrey Brown of the University of Illinois, who identified himself as “The Framing Guy.” Brown is a leading authority on annuity framing effects, a branch of behavioral finance that studies how and why people make annuity purchase decisions.

Brown has established, for instance, that people tend not to favor annuities when they are “framed” in a disadvantageous way—as a poor source of return relative to investments, for example, or as all-or-nothing bets against getting hit by a bus tomorrow.

Even worse for annuity sellers, he pointed out, is the fact that most financial planning tools ignore the dangers of longevity risk and most employer-sponsored retirement plans don’t even mention annuities as a strategy for funding retirement.

“If an annuity isn’t listed as an option, people will assume that it isn’t a good idea. This needs to change. We have to get annuity options into the plans,” Brown said. The RMD rules also have to change, he added: “You will run out of money if you follow [the current] recommendations.”

LIMRA’s Retirement Research vice president, Joe Montminy, who presents annuity sales statistics at the Retirement Industry conference each year, presented a slide show of his latest data. While 2011 VA sales rebounded to 2008 levels last year, he said, sales softened toward the end of the year as some VA sellers retreated from the market.


Indexed annuity sales, meanwhile, matched their 2010 record in 2011, with about $32 billion in sales. Some FIA manufacturers benefited in 2011 from the sales strategy of limiting distribution to a small number of highly-regarded independent marketing organizations, Montminy said. The FIA market is dominated by Allianz Life, Aviva USA and American Equity.

Despite the low interest rate environment, sales of fixed immediate annuities continued to climb from their low base, to a record $8.1 billion in 2011, according to LIMRA data. The average age of a SPIA purchaser is 71, 60% of SPIAs are funded with non-qualified money, all SPIA owners take income virtually right away, and the average premium is about $107,000, Montminy said. In comparison, the average purchase age for VAs with GLWBs is 61, 75% of VA/GLWB purchasers under age 70 use IRA rollovers to fund their contracts, only one in five GLWB owners is taking income, and the average premium is about $104,000.     

Montminy co-presented with Chris Raham, senior consulting actuary at Ernst & Young, which operates the Retirement Income Knowledge Bank. In response to a question about VA issuers who may be looking at potential ways to buy back in-the-money GLWB benefits in order to reduce the long-term risk of certain books of business, Raham said they should “be careful” about doing so because of the potential “liability” issues involved.

On a promising note, Raham seconded O’Donnell’s bullishness on CDAs, suggesting that E&Y clients in the investment distribution world are ready—though not necessarily pining—for lifetime income solutions: “They’re saying, ‘We want the best way to provide outcomes. We understand that we will have to bring in products that we’re not comfortable with, but we want to do it in a systematic way.’” 

© 2012 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on May 1, 2012 by -

In the wake of losses, Genworth CEO resigns

Genworth Financial chairman and CEO Michael D. Fraizer resigned on May 1, and the board has named chief financial officer Martin P. Klein as interim CEO while it searches for a successor, the company reported.

Fraizer led the insurer through its initial public offering by GE in 2004 and the recent financial and housing crisis. In a statement, he said this is “the right time for me to move on to other opportunities.”

The board named James S. Riepe, a company director since 2006, non-executive chairman. Klein will remain CFO while acting as CEO.

In addition to the top management changes, Genworth reported that its profit and revenue declined in the first quarter. Net income fell to $47 million, or 9 cents a share, for the three months ended March 31. That compares with $59 million, or 12 cents a share, in the same period last year.

The latest quarter included a loss of $41 million related to a transaction by its U.S. life insurance segment. Operating income, which excludes investment gains and losses, slipped to $31 million, or 6 cents per share, from $75 million, or 15 cents per share, last year.

Revenue slipped to $2.43 billion from $2.57 billion a year earlier, reflecting lower premiums. Results missed Street expectations. On average, analysts surveyed by FactSet forecast quarterly operating income of 13 cents per share and revenue of $2.6 billion.

Genworth’s Joelson to succeed Doll as CIO of Northwestern Mutual 

Ron Joelson, current chief investment officer of Genworth Financial, will join Northwestern Mutual on June 4, succeeding Mark Doll as the company’s chief investment officer. Doll will retire on June 30 after 40 years with Northwestern Mutual.

Joelson, who currently manages Genworth’s $75 billion investment portfolio, spent most of his career at Prudential Financial, where his last position was senior vice president and chief investment officer–asset liability and risk management. He oversaw investment strategy and portfolio performance for Prudential’s $230 billion general account.

Joelson earned a BA from Hamilton College and an MBA from Columbia.

Doll, Northwestern Mutual’s chief investment officer since June 2008, oversaw a $164 billion general account investment portfolio. 

Jackson launches MarketGuard Stretch for VA beneficiaries

Jackson National Life has introduced MarketGuard Stretch, a new variable annuity guaranteed minimum withdrawal benefit rider that “allows beneficiaries the flexibility to spread distribution payments over their lifetime, keeping more money in a tax-deferred account for continued growth potential.”

According to a Jackson release, policyholders can use MarketGuard Stretch to avoid a lump sum death benefit in favor of longer-term distributions, to provide for potentially young and inexperienced beneficiaries. The beneficiary’s required minimum distributions (RMD) will be determined annually based on the current account value and life expectancy.

“MarketGuard Stretch is the first stretch-friendly GMWB in the industry, allowing us to enhance the value proposition of variable annuities and expand Jackson’s relevance to a wider market,” said Clifford Jack, head of retail for Jackson.

MarketGuard Stretch is intended to give contract owners more control over beneficiaries’ distributions, allowing wealth to be spread to future generations. The withdrawal benefit can also help guarantee return of premium on a stretch contract over a number of years, regardless of investment performance.

Policyholders can take up to 5.5% of their protected balance each year, or their stretch RMD, if higher, depending on their age at the time of the first withdrawal. The options allow for distribution of the original investment amount without risking an excess withdrawal.

In some circumstances, remainder beneficiaries may also elect to continue the MarketGuard Stretch benefit, guaranteeing they will receive at least the remaining protected balance back while remaining in a tax-deferred contract.  

“The new policy gives us the opportunity to provide beneficiaries – who may be unfamiliar with the complexities of investing – with an approach to planning that can help ensure their long-term financial health,” said Alison Reed, senior vice president of Product and Investment Management at Jackson National.

In March 2011, Jackson introduced the Portfolio Construction Tool, an interactive online solution that helps advisers build customized investment portfolios inside Jackson variable annuities. In October 2010, Jackson introduced LifeGuard Freedom Flex, billed as the industry’s first customizable GMWB.

The Hartford to sell individual annuity new business capabilities to Forethought

Forethought, a Houston-based privately held diversified financials services company, has agreed to buy The Hartford’s Individual Annuity new business capabilities, consisting of the product management, distribution and marketing units, as well as the suite of products currently being sold.

The terms of the agreement were not disclosed, but are not considered material to The Hartford’s operations or financial results. The majority of the current employees that support The Hartford’s Individual Annuity new business capabilities will be offered positions with Forethought.

The Hartford will continue to write new annuity products during a transition period and Forethought will assume all expenses and risk for these sales through a reinsurance arrangement. The agreement does not include The Hartford’s in-force annuity book of business.

Nationstar Mortgage to buy MetLife Bank’s ‘Reverse Servicing Portfolio’

MetLife, Inc. is exiting the reverse mortgage business, and Nationstar Mortgage LLC will buy MetLife Bank’s reverse mortgage servicing portfolio, pending regulatory approvals and closing conditions. MetLife Bank will not accept new reverse mortgage loan applications and registrations.

MetLife’s retail banking business, including mortgages, represented less than 2% of MetLife’s 2011 operating earnings. But because MetLife owns a bank, it was considered a bank holding company and therefore underwent the Federal Reserve’s Comprehensive Capital Analysis and Review Test (“stress test”) in March and—despite MetLife’s financial strength as an insurer—failed it.

After the test, MetLife’s CEO clarified the situation. “The bank-centric methodologies used under the CCAR are not appropriate for insurance companies, which operate under a different business model than banks,” said Steven A. Kardarian. “The established ratios used to measure insurance company capital adequacy, such as the NAIC’s risk-based capital ratio, show that MetLife is financially strong. At year-end 2011, MetLife had a consolidated risk-based capital ratio of 450%, well in excess of regulatory minimums.”

In 2011, MetLife had already decided to sell its bank and relinquish its bank holding company structure. It has reached agreements to sell MetLife Bank’s deposit business to GE Capital and to sell the bank’s warehouse finance business to EverBank. In addition, the bank has ceased taking forward mortgage applications.

MetLife was advised by K&L Gates LLP and Deutsche Bank Securities Inc.

Hammond to succeed Bibliowicz in top job at NFP

National Financial Partners Corp., a provider of benefits, insurance and wealth management services, said it has begun to implement a management succession plan.

Jessica M. Bibliowicz, chairman and chief executive officer, will voluntarily step down as president immediately, to be succeeded by Douglas W. Hammond, the current chief operating officer.

Bibliowicz will step down as CEO on March 31, 2013, when Hammond will succeed her and she will become the non-executive chairman at such time.  Bibliowicz has been NFP’s president and CEO since April 1999.  She served as a director since June 1999 and as chairman since June 2003. 

Mr. Hammond, 46, has served as COO of NFP since 2008. He was NFP’s EVP and general counsel from 2004 to 2008. Before joining NFP in 1999, he was an attorney with the law firm currently known as Dewey & LeBoeuf LLP. He received his B.A. from Fairfield University and J.D. from St. John’s University School of Law.

Pension liabilities in UK dwarf GDP, in a sense

The United Kingdom’s total pension liabilities exceed £7trn (€8.1trn, $10.7trn) and are nearly five times Britain’s GDP, according to the Office of National Statistics (ONS), IPE.com reported.

State pension obligations make up more than three-quarters of total government liabilities, with both funded and unfunded obligations incurred through public pension plans accounting for the remaining £1.2trn of the £5trn in liabilities.

The £900bn in unfunded pension obligations amounted to 58% of GDP, while outstanding state pension payments were 269% of GDP, the report said.

Examining private sector obligations, ONS pensions analyst Sarah Levy said £1.3trn in obligations stemmed from defined benefit schemes, while a further £386bn of assets were located in defined contribution funds.

Mel Duffield, head of research at the National Association of Pension Funds, added: “These are big figures, but it must be remembered that public sector pensions cover millions of past and current workers and, in the case of the state pension, most of the UK population.”

The ONS stressed that all calculations covering obligations until 2010 were produced on a voluntary basis and should be viewed as “experimental statistics,” with refinements expected in future publications. The undertaking comes as European Union member states seek to comply with the European System of National and Regional Accounts proposed several years ago.

Levy, the author of the research, said she did not include any future obligations in her calculations. “As the European Central Bank has pointed out, in order to assess the fiscal sustainability of unfunded pension schemes, ‘the concept of pension entitlements needs to be extended to include entitlements that will be accrued in future, while at the same time comparing these ‘claims’ with future social contributions and tax payments’,” she wrote.

However, Levy stressed that all figures presented did not serve as an indicator of how financially sustainable the country’s pension system was at present.

Many financially unprepared for long lives: Northwestern Mutual  

Americans appear to be “startlingly unprepared financially” to live past age 70, according to a new Longevity & Preparedness Study from Northwestern Mutual Life. The study is the company’s second in a series.    

Only 56% of Americans surveyed (56%) feel financially prepared to live to the age of 75, while only 46% felt prepared to live to 85 and just 36% felt prepared to live to 95.  According to the Centers for Disease Control, among couples who are age 65 today, there’s a 50% likelihood that one partner will live to age 94 and a 10% chance that one partner will live to age 100. 

The research indicates:

  • Regardless of age, men are more likely than women to feel financially prepared to live to age 75 (65% vs. 48%), 85 (55% vs. 37%), and 95 (43% vs. 30%). 
  • Younger Americans (25-59) feel less prepared than older Americans (60+) to live to 75 (47% vs. 79%), 85 (37% vs. 66%), and 95 (29% vs. 52%)

The first study in this series of research, called the Planning and Progress Study, showed that 21% of Americans would like to be more cautious with their money but feel they have a lot of catching up to do.

Independent research firm Ipsos conducted the online survey of 1,015 Americans aged 25 or older between February 2 and February 13, 2012. Results were weighted as needed to U.S. Census proportions for age, gender, marital status, household size, region and household income. 

GDP growth slows, with consumer spending up and defense spending down 

U.S. Gross Domestic Product grew just 2.2% in Q1 2012  (Qtr over Qtr, annualized), below expectations of 2.7% and well under the 3% growth rate in Q4 2011. On an annual basis, GDP rose 2.1% (year over year) after 1.6% growth in Q4, according to Prudential International Investments Advisors.

Within GDP, consumer spending rose 2.9%, while business investment spending fell 2.1% and government spending declined 3%.  Consumer spending added 2% to Q1 GDP growth while government spending subtracted 0.6% and business investment subtracted 0.2% from Q1 growth.

Weaker inventory accumulation was a drag on growth, with inventories contributing just 0.6% to Q1 growth. Final sales (GDP ex inventories) grew 1.6% QoQ annualized after a weaker 1.1% growth in Q4. In other results:

•        Consumer spending grew 2.9% QoQ annualized in Q1, strengthening from 2.1% in Q4. Durable goods spending continued to grow at a strong pace, up 15.3% (with motor vehicles growing 28.7%) after 16.1%. Spending on non-durable goods was solid, rising 2.1% after 0.8%, while services spending increased 1.2% after 0.4%.   

•        Government spending fell 3% in Q1 after 4.1% decline in Q4.  Weakness in Federal government spending was mostly responsible for the decline, falling 5.6% in Q1 after falling 7% in Q4. Most of the decline in Federal spending was due to national defense cuts. Defense spending fell 8.1% in Q1 after falling 12.1% in Q4; non-defense spending fell just -0.6%. State and local spending fell 1.2% in Q1 after falling 2.2% in Q4. Government spending subtracted 0.6% points from growth after a 0.8% drop in Q4.

•        Trade contributed little. Exports rose 5.4% after 2.7%, while imports rose 4.3% after 3.7%. However, while exports added 0.7% to growth, this was offset by a -0.7% contribution from imports. Inventories added 0.6% to growth after a stronger 1.8% contribution in Q4.

•        Investment spending was weaker than expected in Q1. Business investment spending fell 2.1% after rising 5.2% in Q4. Structures investment was mostly responsible for the decline, sinking 2%. While equipment and software was weak, it still posted a modest gain, rising 1.7% after a stronger 7.5% in Q4.   However, residential investment was strong, rising 19%—the strongest since Q2 2010—after rising 11.7% in Q4. Nevertheless, since it is a small component of GDP, residential investment only added 0.4% to growth.

Despite the mild Q1 GDP disappointment, the U.S. economy remains on a moderate growth path.  Gradually rising household income and declining unemployment are likely to support consumption spending growth.

Further, household deleveraging appears to be largely complete and hence is unlikely to be a drag on consumer spending and GDP growth.  Business investment spending is expected to rebound on the back of strong profit and cash levels but offset to some extent by weaker orders recently. Government spending is likely to remain a drag with the huge debt and deficit levels requiring a combination of spending cuts and tax hikes. Trade remains a drag with Europe in recession. Q1 GDP growth is likely to be revised higher in the next estimate.  U.S. Q2 GDP growth is expected around 2.5%.  

Pentegra Retirement Services Announces New App

Pentegra Retirement Services has introduced its first app (called “Pentegra”) for mobile devices, offering Pentegra’s 401(k) participants the ability to view their 401(k) plan accounts using an iPhone, iPod Touch, iPad or Android device.

The app provides participants with the ability to view retirement plan account information, including account balances, transaction history, and portfolio performance, using their mobile device.

Fidelity, USAA, Vanguard are “top of mind” for affluent investors

Posted on May 1, 2012 by -

When affluent investors think about acquiring a new financial product or starting a new financial relationship, they think first about Fidelity, USAA and Vanguard, according to research on 50 companies tracked by Phoenix Marketing International. Other top-of-mind firms include American Funds, Charles Schwab, Franklin Templeton, T. Rowe Price, TD Ameritrade, and TIAA-CREF.

Not far behind are brands such as Genworth Financial, John Hancock, MassMutual, MetLife, Nationwide, Northwestern Mutual, New York Life, Prudential, The Hartford, and The Principal, said Phoenix in a recent release.

The Phoenix study polls about 2,000 affluent individual investors twice a year about their impression and consideration of numerous brands that provide diversified insurance and investment products.

A partial list of tracked firms includes Aetna, AIG, AIM, Alliance Bernstein, Allianz, American Century, American Funds, Ameriprise, Aviva, AXA, Charles Schwab, Berkshire Life, Edward Jones, E*Trade, Fidelity, Franklin Templeton, Genworth Financial, Goldman Sachs, Guardian, The Hartford, ING, Invesco, Jackson National, Janus, John Hancock, Lincoln Financial, MassMutual, Merrill Lynch, MetLife, Morgan Stanley, and Nationwide.

Other companies for which Phoenix has multi-year histories on brand health and advertising performance include Northwestern Mutual, New York Life, Oppenheimer, Pacific Life, PIMCO, Pioneer, Prudential, Putnam, Raymond James, State Farm, Sun Life, TD Ameritrade, TIAA-CREF, The Principal, Transamerica, Travelers, T. Rowe Price, US Trust/Bank of America, USAA, Wells Fargo, and Vanguard.

Over one-half of respondents participating in the April 2012 Phoenix brand health and advertising performance study reported that they expect to complete at least one of the following eight investment activities in the next month: 

  • “Meet with my financial advisor,”
  • “Start thinking about my financial future,”
  • “Consider purchasing additional retirement products,”
  • “Find out more about retirement products & services,”
  • “Change my investment strategy,”
  • “Establish a new investment account,”
  • “Close an account, but not terminate the relationship,” or
  • “Change my financial advisor(s).”

Debt can make you sick

Posted on May 1, 2012 by -

A recent study by the American Psychological Association found that money was respondents’ leading source of stress. An Associated Press/AOL, poll comparing those with high debt-stress with those who had low debt-stress, found the following:

  • 27% with high debt stress had ulcers or digestive tract problems, compared with 8% with low debt-stress.
  • 44% with high debt-stress had headaches or migraines, compared with 4% with low debt-stress.
  • 23% with high debt stress felt they were suffering from depression, compared with 4% with low debt-stress.
  • The heart attack rate of those with high debt-stress was double that of those with low debt stress.
  • 65% more people with high debt-stress suffered from muscle tension or lower back pain than those with low debt-stress.

Medicare budget numbers: bad, worse, and confusing

Posted on May 1, 2012 by -

The Trustees of the Social Security and Medicare trust funds have issued a message summarizing their 2012 Annual reports on the current and projected financial status of the two programs. RIJ reported on the Social Security Annual Report last week. This week, we are publishing the summary message issued by the trustees of the Medicare Health Insurance trust fund.

To summarize the summary:

  • The projected date of HI Trust Fund exhaustion is 2024, the same date projected in last year’s report, at which time dedicated revenues would be sufficient to pay 87% of HI costs.
  • The trust fund has been paying out more than it has been taking in since 2008, and will do so in all future years.
  • The share of HI expenditures that can be financed with HI dedicated revenues will decline slowly to 67% in 2045, and then rise slowly until it reaches 69% in 2086.
  • The HI 75-year actuarial imbalance amounts to 36% of tax receipts or 26% of program cost.
  • The Trustees assume an almost 31% reduction in Medicare payment rates for physician services will be implemented in 2013 as required by current law, which is also highly uncertain.
  • For the sixth consecutive year, projected non-dedicated sources of revenues—primarily general revenues—are expected to continue to account for more than 45% of Medicare’s outlays, a threshold breached for the first time in fiscal year 2010.

According to Medicare’s statement:

The Medicare HI Trust Fund faces depletion earlier than the combined Social Security Trust Funds, though not as soon as the Disability Insurance Trust Fund when separately considered. The projected HI Trust Fund’s long-term actuarial imbalance is smaller than that of the combined Social Security Trust Funds under the assumptions employed in this report.

The Trustees project that Medicare costs (including both HI and Supplemental Medical Insurance expenditures) will grow substantially from approximately 3.7% of GDP in 2011 to 5.7% of GDP by 2035, and will increase gradually thereafter to about 6.7% of GDP by 2086. The projected 75-year actuarial deficit in the HI Trust Fund is 1.35% of taxable payroll, up from 0.79% projected in last year’s report.

The HI fund again fails the test of short-range financial adequacy, as projected assets are already below one year’s projected expenditures and are expected to continue declining. The fund also continues to fail the long-range test of close actuarial balance.

The Trustees project that the HI Trust Fund will pay out more in hospital benefits and other expenditures than it receives in income in all future years, as it has since 2008. The projected date of HI Trust Fund exhaustion is 2024, the same date projected in last year’s report, at which time dedicated revenues would be sufficient to pay 87% of HI costs.

The Trustees project that the share of HI expenditures that can be financed with HI dedicated revenues will decline slowly to 67% in 2045, and then rise slowly until it reaches 69% in 2086. The HI 75-year actuarial imbalance amounts to 36% of tax receipts or 26% of program cost.

The worsening of HI long-term finances is principally due to the adoption of short-range assumptions and long-range cost projection methods recommended by the 2010-11 Medicare Technical Review Panel. Use of those methods increases the projected long-range annual growth rate for Medicare’s costs by 0.3 percentage points. The new assumptions increased projected short-range costs, but those increases are about offset, temporarily, by a roughly 2% reduction in 2013-21 Medicare outlays required by the Budget Control Act of 2011.

The Trustees project that Part B of Supplementary Medical Insurance (SMI), which pays doctors’ bills and other outpatient expenses, and Part D, which provides access to prescription drug coverage, will remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs.

However, the aging population and rising health care costs cause SMI projected costs to grow rapidly from 2.0% of GDP in 2011 to approximately 3.4% of GDP in 2035, and then more slowly to 4.0% of GDP by 2086.

General revenues will finance roughly three quarters of these costs, and premiums paid by beneficiaries almost all of the remaining quarter. SMI also receives a small amount of financing from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs.

Projected Medicare costs over 75 years are substantially lower than they otherwise would be because of provisions in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or ACA).

Most of the ACA-related cost saving is attributable to a reduction in the annual payment updates for most Medicare services (other than physicians’ services and drugs) by total economy multifactor productivity growth, which the Trustees project will average 1.1% per year. The report notes that sustaining these payment reductions indefinitely will require unprecedented efficiency-enhancing innovations in health care payment and delivery systems that are by no means certain.

In addition, the Trustees assume an almost 31% reduction in Medicare payment rates for physician services will be implemented in 2013 as required by current law, which is also highly uncertain.

The drawdown of Social Security and HI trust fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident.

For the sixth consecutive year, the Social Security Act requires that the Trustees issue a “Medicare funding warning” because projected non-dedicated sources of revenues—primarily general revenues—are expected to continue to account for more than 45% of Medicare’s outlays, a threshold breached for the first time in fiscal year 2010.

In their joint message, the Social Security and Medicare trustees added the following comments:

The long-run actuarial deficits of the Social Security and Medicare programs worsened in 2012, though in each case for different reasons. The actuarial deficit in the Medicare Hospital Insurance program increased primarily because the Trustees incorporated recommendations of the 2010-11 Medicare Technical Panel that long-run health cost growth rate assumptions be somewhat increased.

The actuarial deficit in Social Security increased largely because of the incorporation of updated economic data and assumptions. Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers.

Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.

Social Security and Medicare are the two largest federal programs, accounting for 36% of federal expenditures in fiscal year 2011. Both programs will experience cost growth substantially in excess of GDP growth in the coming decades due to aging of the population and, in the case of Medicare, growth in expenditures per beneficiary exceeding growth in per capita GDP.

Through the mid-2030s, population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment will be the largest single factor causing costs to grow more rapidly than GDP. Thereafter, the primary factors will be population aging caused by increasing longevity and health care cost growth somewhat more rapid than GDP growth.

© 2012 RIJ Publishing LLC. All rights reserved.

Ford to offer pension buy-outs; Towers Watson calls it a ‘first’

Posted on May 1, 2012 by -

 Ford Motor Company made the following announcement about its defined benefit plan this week:

“As part of the company’s long-term strategy to de-risk its global funded pension plans, Ford announced today that it will offer to about 90,000 eligible U.S. salaried retirees and U.S. salaried former employees the option to receive a voluntary lump-sum pension payment.

“If an individual elects to receive the lump-sum payment, the company’s pension obligation to the individual will be settled. This is the first time a program of this type and magnitude has been offered by a U.S. company for ongoing pension plans.

“Payouts will start later this year and will be funded from existing pension plan assets. This is in addition to the lump-sum pension payout option available to U.S. salaried future retirees as of July 1, 2012.”

Following Ford’s announcement, Towers Watson released the following statement:

The announcement by Ford Motor Company’s announcement “represents a significant development in the U.S. defined benefit pension marketplace,” said experts at Towers Watson this week.

According to the Towers Watson release:

Ford intends to provide a one-time voluntary lump sum offer to substantially all of its salaried retirees by the end of 2013. It appears to be the first such program to specifically target retirees without being part of a broader plan termination.

Historically, lump sum distributions, which allow plan participants to exchange receiving periodic annuity payments for a single lump sum payout, have been offered to participants only upon separation from active employment.

The announcement follows a recent trend by plan sponsors to provide a one-time lump sum offer to former employees who have not yet commenced an annuity payment (so-called “terminated vested” participants).

Although some industry experts have historically questioned the ability of plan sponsors to offer lump sum payments to retirees, Ford Motor Company did not imply they felt there were any legal reservations for them in moving forward, Towers Watson said.

Mike Archer, leader of intellectual capital for the North American Retirement practice of Towers Watson, commented, “There are many considerations, including potential regulatory issues, that plan sponsors contemplating a lump sum offer will need to examine closely. We believe some plan sponsors will conclude that the current regulatory framework will support a properly designed offer.”

“This development could have far-reaching implications for both plan sponsors and plan participants. For plan sponsors, the ability to provide a retiree lump sum offer provides greater flexibility to manage their retirement plans, including the ability to better manage the size of the plan relative to ongoing operations, as well as the ability to more efficiently administer the plan on an ongoing basis,” said Matt Herrmann, leader of the Retirement Risk Management group of Towers Watson.

“From a participant perspective, the decision to receive a lump sum distribution is completely voluntary. We believe that the option to select a lump sum provides plan participants with greater flexibility to plan for retirement income needs, including more control over the timing of retirement income, as well as more control over how retirement income assets are invested.” Archer added, “Each retiree will need to evaluate the trade-offs between greater investment control and the security of a guaranteed lifetime income stream.”

© 2012 RIJ Publishing LLC. All rights reserved.

Chamber of Commerce offers blueprint for private retirement industry

Posted on April 25, 2012 by -

In a new whitepaper, “Private Retirement Benefits in the 21st Century: A Path Forward,” the U.S. Chamber of Commerce, a lobby for business owners and advocate of private enterprise, articulates its recommendations for national retirement policy. Among other things, it calls for preservation of tax advantages for retirement saving and for an exception to the Required Minimum Distribution rules for purchasers of deferred income annuities (“longevity insurance”).

“While we work to enhance the current private retirement system and reduce the deficit, we must not eliminate one of the central foundations—the tax treatment of retirement savings—on which today’s successful system is built. Doing so would imperil the existence of employer-sponsored plans and the future retirement security of working Americans,” said the introduction to the whitepaper.

“The purchase of longevity insurance could reduce retirees’ exposure to the risk of running out of income,” the whitepaper added. “A way to encourage this purchase would be to exclude money used to buy the product from the RMD rules. Also, as with long-term care insurance, longevity insurance could be purchased through a cafeteria plan or with 401(k) plan savings.”

The Chamber also called for the removal of legal barriers to the expansion of “phased retirement” strategies, so that employers can more easily employ key workers in part-time capacities if anticipated labor shortages occur as a result of the retirement of the Baby Boom generation. 

© 2012 RIJ Publishing LLC. All rights reserved.

Macchia, the Man and the Machine

Posted on April 25, 2012 by -

I’ve flown many miles in the retirement space over the past six years, and chances were always good that, in the carpeted lobby of a four-star chain hotel in some city with a large airport, I’d run into David Macchia, the president of Wealth2k. We’d chat briefly; occasionally we’d sequester ourselves for a formal interview. But usually, after a quick exchange, we left each other to his work. 

And Macchia (right) works as hard as anybody I know in the retirement space. He’s an entrepreneur, so he feels a different kind of pressure from most. Entrepreneurs pressure themselves, and the passionate ones never let up. (Where does the passion come from? A need for redemption? Only they know.) He’s also one of the true students of the retirement game (insurance division). He’s played it a long time. He analyzes it. His goal is to win.     

David MacchiaWealth2k, Macchia’s 12-person multi-media marketing firm in Boston, developed Income for Life Model, the web-based, time-segmented, retirement income planning/marketing/communication tool that is the subject of today’s lead story in Retirement Income Journal. While researching that story, I asked Macchia what he has learned after ten years of promoting IFLM in meetings with broker-dealer executives, bankers and financial advisors.

He said that, after so many years, he’s still surprised by how much work remains to be done in changing the financial industry mindset from accumulation to decumulation, and to open the minds of investment-minded advisors to hybrid (insurance and investment) solutions to the retirement income challenge.

His own single-minded immersion in retirement income for the past decade led him to overestimate (not surprisingly, perhaps) the degree to which the Mississippi-like delta of the distribution world has not yet woken to the Boomer decumulation opportunity or learned how to exploit it.  

“My initial inclination was to imagine greater expertise around the retirement income issue than there actually is,” Macchia said. “Advisors are still trying to [use the principles] of the accumulation world in the retirement domain. They can be extremely helpful in creating accumulation portfolios, but they’re still not as good at creating hybrid or income portfolios.

“The level of experience, both on an individual and in many firms, is still undeveloped. That was something of a revelation. It was a revelation was that even competent financial advisors—seasoned, competent advisors—will often ask for or require advice on how to invest in the context of an income generation strategy.”

To go a step further, Macchia believes that most investment advisors in Macchia’s—and he states this without detracting from what they’re good at—have difficulty shifting their focal range from infinity—the indefinite time horizon of Modern Portfolio Theory—to the shorter depth of field that retirement (and death, to be specific) inevitably imposes.

 “Let’s say they’re building [an income] floor and using four time segments,” he said. “Most advisors aren’t used to the context or construct of providing a target rate of return over a specific time period. And many advisors, I think, need to be enlightened about the urgency for the inclusion of a lifetime income floor—at least for those clients who don’t have the flexibility or latitude [to tolerate a wide range of outcomes] because they’re close to being underfunded.”

Career-wise, Macchia started out in the insurance business, so he tends to think mainly about the risk side of the equation. “I can remember travelling around in 1988 or 1989 to various financial offices like PaineWebber and doing public speaking about life insurance and retirement,” he said. “I used to talk about the juggernaut of Japanese economy. At that time, the Nikkei average was over 39,000, and my frame of reference was that it would just keep going up. Here we are 23 years later and the Nikkei is still less than a third of what it was at its peak. Imagine the S&P 500 being a third of what it was in 1989. That experience taught me to have no level of security about imagining what can or can’t happen in the future.”

And, while IFLM itself accommodates investment and insurance products ambidextrously, it’s evident that Macchia believes in the need for insurance products in retirement. “The advisor who reflexively rules out insurance doesn’t have a bright future. If they do, my life experience makes me confident that they’ll be wrong for 85% of their clients,” he said. “The inclusion of a lifetime guaranteed income floor is no longer an economic decision. It comes down to a moral decision about how much risk a client can sustain. If your clients can’t sustain that risk, then how can you morally deny them a guaranteed income?”  

© 2012 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on April 25, 2012 by -

NASI offers ‘exit strategy’ for Social Security payroll tax holiday

With the “payroll tax holiday” set to end on December 31, a new fact sheet from the National Academy of Social Insurance suggests an “exit strategy” that could attract broad public support and help strengthen Social Security for the long term.

The exit strategy would gradually restore the workers’ contribution rate to 6.2% of earnings over several years, in order to smooth the transition from 4.2% (the reduced “holiday” rate) and avoid a sudden impact on the still-fragile economy.

One option would then be to gradually raise the rate from 6.2% to about 7.0% for workers and employers alike, to address Social Security’s projected long-term revenue shortfall.

 In combination with other changes, such as lifting the cap on earnings taxable for Social Security (now set at $110,100), a very gradual increase in contribution rates could keep the program in balance throughout the retirement of the baby boomers and beyond.

Social Security has four dedicated sources of income: contributions from workers and employers; dedicated reimbursement funds from general revenues; income taxes on benefits that some beneficiaries pay; and interest on the reserves held in the trust funds. The reimbursement funds ensure that revenue not collected during the temporary tax reduction is being made up dollar-for-dollar.   

The National Academy of Social Insurance (NASI) is a nonprofit, nonpartisan organization made up of the nation’s leading experts on social insurance.  

LPL Financial completes acquisition of Fortigent

LPL Investment Holdings Inc., parent of LPL Financial, has announced the completion of its parent company’s acquisition of Fortigent, LLC, provider of high-net-worth solutions and consulting services to RIAs, banks, and trust companies.

A new sister company of LPL Financial, Fortigent will maintain its brand and team, and will continue to deliver research, reporting and practice management solutions for banks, trust companies and independent advisory firms.  The acquisition will allow LPL Financial to support a wider range of financial advisor business models, according to a release.

Financial terms of the transaction were not disclosed.

Northwestern Mutual sells Russell Investments Center in Seattle  

In what is believed to be the largest single asset office sale in the western United States since 2006, Northwestern Mutual has sold the Russell Investments Center to CommonWealth Partners for $480 million.

Northwestern Mutual bought the 42-story, 872,000 square foot office building in the fall of 2009. The Russell Investments Center, located at 1301 Second Avenue in Seattle’s business district, was constructed in 2006.

The company increased the property’s market value by raising occupancy from a virtually empty building to 95% leased. In December, the company listed the building for sale as part of ongoing management of its real estate investment portfolio. 

“This transaction is an example of how we actively manage our $5.8 billion real estate equity portfolio to generate strong returns on behalf of our policyowners,” said Paul Hanson, managing director–real estate, Northwestern Mutual. “The company’s real estate strategy typically focuses on long-term holds; however, the Seattle market rebounded quickly, creating an excellent opportunity for the company to realize a gain for our policyowners.”

Northwestern Mutual’s real estate investments are part of its $166 billion general account investment portfolio, which backs the insurance and annuity products that are actively managed for the benefit of policyowners. The company manages its real estate equity portfolio through buying, developing and selling assets in various markets across the country. 

CBRE, the world’s largest commercial real estate services firm, served as broker for the transaction through a team led by Vice Chairman Kevin Shannon. The sale is not expected to cause disruption for tenants with long-term leases, including Russell Investments, Boeing, Nordstrom, Dendreon, JP Morgan Chase and Zillow.

NETFA, the first US-based ETF trade association, is formed 

Senior executives of leading US-based exchange-traded fund (ETF) companies have agreed to launch the National Exchange Traded Funds Association (NETFA) to represent and promote the US ETF industry. The new chairman of NETFA is John Hyland. The vice-chairman is Adam Patti.

Over the last five years, assets in US-listed ETFs have grown an average of 24% annually, from $408 billion on December 29, 2006 to $1,211 billion as of March 30, 2012. There are over 1,400 ETFs listed on US exchanges as of March 30, 2012 (source: 2011 ICI Factbook, Index Universe).

NETFA will provide industry statistics and commentary on ETF related issues to the US financial media, and advance industry issues with regulators, government agencies and interested third parties.

BNY Mellon and Investor Analytics introduce liability modeling  

BNY Mellon announced that it is adding enhanced liability modeling to its risk management solution for institutional clients. The new service, based on capabilities provided by Investor Analytics, will enable clients “to evaluate both asset holdings and liabilities in a common risk framework,” the company said in a release.   

“The enhancements enable clients to evaluate funded status and assess the risk analytics for total and individual assets and liabilities compared to selected benchmarks.  In addition, clients will be able to model the behavior of assets and liabilities under possible market stresses and yield curve changes,” the release said.

“We’ll provide our pension plan sponsor clients with a more complete picture of the impact of market events on their fund obligations,” said John Gruber, global product strategy head of the Performance & Risk Analytics group of BNY Mellon Asset Servicing.

“Our Risk Management service now provides asset owners with the ability to view and analyze how plan assets, liabilities and funding levels behave in response to a complete range of market shocks, scenarios and stresses,” said Damian Handzy, CEO of Investor Analytics.

New York Life introduces three-year term for MVA fixed annuity

New York Life has introduced a three-year initial interest rate guarantee and matching three-year surrender charge period on its Secure Term MVA Fixed Annuity.

The new offering provides a guaranteed 1.15% rate  tax-deferred, over the three-year term, compared to the national average of 0.69% for three-year CDs.

 The three-year term complements the product’s existing five-, six-, seven- and eight-year terms, and is now available to consumers through New York Life’s agency sales force as well as through select third parties.

According to LIMRA, New York Life was the largest seller of market value adjustment fixed annuities in the fourth quarter of 2011, with $134.3 million in sales.  In the first quarter of 2012, New York Life exceeded its fourth quarter sales with a company-record-setting $262.1 million in sales.

The Secure Term MVA Fixed Annuity offers the following features:

  • Multiple initial interest rate guarantee periods, including the new three-year term.
  • Tax-deferred growth.
  • Access to the funds when needed through a surrender-charge-free window during each policy year.  
  • A guaranteed death benefit where beneficiaries receive the policy’s full accumulation value.
  • The ability to convert accumulated assets to guaranteed lifetime income.

Linked LTCI attracting younger buyers

An increasing number of national insurance companies are offering protection that combines life insurance with potential long term care insurance benefits. According to the 2012 Buyer Study conducted by the American Association for Long-Term Care Insurance, these linked benefit (also called “combination”) products are gaining favor with individuals in their 40s and 50s.

The Association’s annual study of leading insurers found that 53% of buyers of these hybrid policies were under age 65 in 2011 compared to only 48% in 2010.  Some 42.5% of male and 38.5% of female buyers were between ages 55 and 64 explains Jesse Slome, director of the national trade group.  Nearly 10% of buyers were between ages 45 and 54.

The AALTCI study reported sales for the participating linked benefit insurers increased 14% in 2011 and the premium increased almost 20%.   

Pressure builds for passive pension management in Ireland

Posted on April 25, 2012 by -

A new survey from the British actuarial consulting firm, LCP, suggests that high levels of fees paid by Irish pension funds could be cancelling out the benefits of active asset management, IPE.com reported.

LCP’s Ireland Investment Management Fees Survey 2012 found that the fees charged for active management are at least three times those for passive management. The report asserted that because investment managers charge fees based on the level of assets under management, fee bases generally fail to align the interests of trustees with those of the investment managers.

Indirect costs remain high, while many plans may be paying high investment advisers’ fees because of the larger number of manager selection exercises and the increased complexity in monitoring investment arrangements.

Michael Butler, head of investment consulting for LCP in Ireland and the report’s author, said: “Clients are focusing on investment strategy reviews but neglect the fact they can renegotiate fees with their managers. Fees for both active and passive management have become more competitive because there are many more managers now offering investment services in Ireland.”

Butler reckons pension funds could save as much as 30% off managers’ standard fees by negotiation. More than 90% of the managers in the survey said they were willing to negotiate on fees, even for pensions with relatively low assets. He added fees could also be reduced by shrewd selection of active or passive management for different asset classes.

“Managers in specialist asset classes such as diversified growth funds and multi-asset funds often deliver added value by active management,” Butler said. “This means the performance can justify the fees being paid.”

But in other asset classes such as developed equities, active managers are not necessarily adding a lot of value, he said. Fees can, therefore, wipe out any value added.

“We are seeing clients move those asset classes to passive mandates,” he said. “However, there are many more pension funds that should be doing this.”

Butler also said more managers in Ireland could offer performance-related fee structures. At present, these are only generally offered by hedge funds, but LCP is putting pressure on the industry to make these structures more widespread.

Jerry Moriarty, director of policy at the Irish Association of Pension Funds, said: “The report is very helpful in giving trustees a benchmark as to what they should be paying and highlights the benefits of negotiating on fees with investment managers.”

He pointed to the report’s finding that differences between fees charged in the UK and Ireland had narrowed dramatically.

“When the Irish government introduced the pensions levy last year, to deflect criticism, they argued that pension funds paid much higher asset management fees than in the UK, and at much higher levels than the levy,” he said.

“This research shows the complete lack of substance in that argument, which was used to justify the levy.”

© 2012 IPE.com.