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The following is excerpted from “Social Security’s Financial Outlook: The 2012 Update in Perspective,” a research brief by Alicia H. Munnell, director of the Center for Retirement Research at Boston College and Peter F. Drucker Professor of Management Sciences at the Carroll School of Management at Boston College.

The 2012 Trustees Report shows a significant increase in the program’s 75-year deficit from 2.22 percent to 2.67 percent of taxable payroll and an advance in the date of trust fund exhaustion from 2036 to 2033. These changes reflect the slow recovery from the recession and rising disability rolls, among other factors.

While the deficit is larger and the date of exhaustion nearer, the story remains the same. The program faces a manageable financing shortfall over the next 75 years, which should be addressed soon to restore confidence in the nation’s major retirement program and to give people time to adjust to needed changes.

Over the next 75 years, Social Security’s long-run deficit is projected to equal 2.67 percent of covered payroll earnings. That figure means that if payroll taxes were raised immediately by 2.67 percentage points – 1.34 percentage points each for the employee and the employer – the government would be able to pay the current package of benefits for everyone who reaches retirement age at least through 2086.
A lasting fix for Social Security would require additional changes.

Solutions that focus just on the next 75 years sometimes involve the buildup of trust fund assets in the near term and the sale of those assets to pay benefits in the out years. Since the trust fund would have no further bonds to sell in the 76th year under this approach, the program would suddenly be short of money. Lasting solvency would require either a pay-as-you-go system with substantially higher pay- roll tax rates/lower benefits or the buildup of a trust fund larger than that required for 75-year solvency, the returns from which could cover some of the costs. Realistically, eliminating the 75-year shortfall should probably be viewed as the first step toward long-run solvency.

Social Security’s shortfall looks less daunting when outlays are shown as a percent of Gross Domestic Product (GDP). The cost of the program is projected to rise from 5.0 percent of GDP today to 6.1 percent of GDP in about 2050, where it remains even after the re- tirement of the baby boom because of the permanent decline in fertility rates discussed earlier (see Figure 3). The reason why costs as a percent of GDP more or less stabilize – while costs as a percent of taxable payroll keep rising – is that taxable payroll is projected to decline as a share of total compensation due to continued growth in fringe benefits.

Although the Trustees Report focuses on Social Security’s financial shortfall as a percent of either taxable payroll or GDP, it also reports the financing shortfall in dollars. One measure of the shortfall – the present discounted value of the difference between projected revenues and expenditures over the next 75 years – amounts to $8.6 trillion.

Although this number appears very large, the economy will also be growing. So dividing this number – plus a one-year reserve cushion – by taxable payroll over the next 75 years brings us back to the 2.67 percent deficit discussed above. As a percent of GDP over the next 75 years, this deficit is 0.9 percent.

The 2012 Trustees Report confirms what has been evident for two decades – namely, Social Security is facing a long-term financing shortfall which now equals 2.67 percent of taxable payroll or 0.9 percent of GDP. To put the magnitude of the problem in perspective, defense outlays went down by 2.2 percent of GDP between 1990 and 2000 and up by 1.7 percent of GDP between 2000 and 2010.

While Social Security’s shortfall is manageable, it is also real. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet. Despite the political challenge, stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement.

© 2012, by Trustees of Boston College, Center for Retirement Research.

Until recently, only a slim selection of NCSSF (National Council for Social Security Fund) mandates, out of the fund’s RMB7.4tr ($1.18tr) worth of pension capital, have been open to Western investors.

But demographic trends and growing deficits are pushing Chinese regulators into action, and the investment scope for pension assets is expanding.

Equity investment is being encouraged, especially into alternative assets such as private equity. Insurance and enterprise annuities (EAs) are also seeking to increase investment returns, presenting more sources of cash for investment managers to draw on.

With pension participation rates increasing and a greater sense of urgency among policy makers, China’s pension system is expected to balloon to RMB28tr ($4.48tr) by 2020.  
By the end of 2011, Investments & Pensions estimates that China’s pension system will have a total of RMB7.4tr in AUM, with insurance assets accounting for approximately 55% of all assets and public pension funds accounting for about RMB2tr.

Both segments of the industry, as well as EAs and the NCSSF, have their capital sitting in underachieving investment products – mostly fixed-income.   

The number of Chinese over the age of 60 will swell from today’s 178 million to 221 million by 2015. With more than RMB1.3tr ($208bn) in deficits existing in individual pension accounts, regulators are well aware that without reforms, deficits will increase RMB100bn ($16bn) annually. By 2020, the deficit could be as big as RMB6.2tr ($1tr) if contribution rates and investment returns do not rise. 
Regulators are already widening the pension system’s investment scope. NCSSF is looking more to alternative assets, and insurers and EAs are moving away from their riskless bank deposit and bond investments.

More importantly, the opportunities for mandates are increasing in all segments for both joint venture and foreign fund management companies (FMC) alike. EA licenses are being handed out, insurers are beginning to look beyond insurance asset management companies (AMC) and NCSSF is receiving more capital than it can manage.

To realize increased investment returns, assets will be outsourced to investment managers with expertise in private equity, equity or overseas markets. Interested parties need to weigh the benefits of directly applying for mandates from NCSSF or establishing a joint venture, such as an FMC, brokerage or trust, where they can obtain an EA license. Setting up an insurance AMC will be the optimal strategy to creating an investment portfolio that will cater to insurance AMCs’ risk appetite.

© 2012 IPE.com.

The Depository Trust & Clearing Corporation (DTCC) Insurance & Retirement Services (I&RS) has released its report on March and first quarter 2012 activity in the annuity market.

• Annuity inflows processed by DTCC in March increased by almost 10%, to $7.7 billion from $7 billion in February.
• Out flows processed in March increased by almost 12% to $6.4 billion from $5.7 billion in February.
• Net flows were almost unchanged in March, increasing one half of one percent from just under $1.3 billion to just over $1.3 billion.

The data comes from the Analytic Reporting for Annuities online information service, which leverages data from the transactions that DTCC processes for the industry. National Securities Clearing Corporation, a DTCC subsidiary, provides the service.

Inflows and Net Flows

Inflows and net flows have increased in each of the first three months of 2012, breaking a declining trend in 2011.  Inflows and net flows were down in the first quarter of 2012 compared to the first quarter of 2011. Out flows increased.

The increasing divergence of inflows between qualified accounts and non-qualified accounts continued in March. Inflows into qualified account types were slightly under 61% while inflows into non-qualified account types were slightly above 39%. Net cash flows into non-qualified accounts were negative for the third month in a row, meaning that in each of the last three months more funds were withdrawn than added.

In August 2011, DTCC began a partnership with the Retirement Income Industry Association (RIIA) to analyze cash flows by RIIA-defined broker/dealer distribution channels and product categories.

For the six distribution channels defined by RIIA, DTCC I&RS processed the following percentages of inflows in January:

• Independent broker/dealers, 29%
• Wirehouses, 16%
• Regional broker/dealers, 15%  
• Bank broker/dealers, 14%
• Insurance broker/dealers, 9%
• Others, 18%

DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC’s depository provides custody and asset servicing for almost 3.7 million securities issues from the United States and 121 other countries and territories, valued at US$39.5 trillion. In 2011, DTCC settled nearly US$1.7 quadrillion in securities transactions. DTCC has operating facilities and data centers in multiple locations in the United States and overseas. For more information, please visit www.dtcc.com.

Who was likelier to live a long life: the fitness nut who lifted weights and gobbled fish oil capsules while sailing on the Titanic’s maiden trip, or the couch potato who lost his boarding pass and missed the ill-fated voyage entirely?

To put the question another way: why do investors spend a Titanic amount of time tinkering with their portfolios’ asset allocations when other factors—like choosing a retirement age—are bigger determinants of financial well-being in retirement?  

That’s the question that three scholars at the Center for Retirement Research at Boston College raise—and answer—in a new article transparently entitled, “How important is asset allocation to financial security in retirement?”

Working longer can overcome sub-par investment performance. That’s not to say, however, that the authors recommend working longer and ignoring asset allocation during their accumulation years.

“I would never recommend working a day longer than necessary!” said Anthony Webb, who wrote the paper with CRR director Alicia Munnell and Natalia Orlova. In an email to RIJ, he wrote, “The idea was to give a sense of the relative power of the various levers, not to suggest that some of the levers should remain unused.”

To prove their point, the authors evaluated the weight of several factors in determining whether a hypothetical person will reach his or her retirement savings goal and (based on the 4% rule) achieve an adequate retirement income.  

To weigh the impact of allocation, they simulated the effect of moving from a conservative portfolio to a hypothetically ideal equity portfolio returning 6.2% a year. They compared that with the effects of other factors: the age when people started saving, the age when they decided to retire, whether or not they tapped home equity in retirement, and how fast they spent their savings.

The higher rate of return turned out to the weakest factor. For the average person, the best way to maximize financial wellbeing in retirement is to take Social Security at 67 instead of 62, the paper suggested. Achieving the 6.2% return would allow that person to retire at age 66.5—just six months earlier. In comparison, buying a reverse mortgage could reduce retirement age by 18 months and thrift during retirement could reduce it by a year.  

“Given the relative unimportance of asset allocations,” the paper concluded, “financial advisers will be of greater help to their clients if they focus on a broad array of tools – including working longer, controlling spending, and taking out a reverse mortgage.”

The effect of asset allocation was weakest for less affluent households, because rate of return matters less when there are fewer assets. But the overall results were similar for people of all wealth levels and risk appetites.  

© 2012 RIJ Publishing LLC. All rights reserved.

Long-term mutual funds received $29.3 billion in March to end the quarter with inflows of $106.3 billion, but U.S. stock funds experienced net outflows for the eleventh consecutive month, according to Morningstar, Inc.

Domestic stock funds lost $8.3 billion in March, while taxable-bond funds topped all asset classes for the seventh month in a row, with March inflows of $24.9 billion. For the quarter, taxable-bond funds saw inflows of $78.5 billion.

Additional highlights from Morningstar’s report on mutual fund flows:

• Actively managed U.S. large-cap stock funds saw their eleventh straight quarter of net outflows, with $20.9 billion heading to the exits.
• Intermediate-term and high-yield bond funds saw the greatest inflows in March and in the first quarter among fixed-income funds. Since January 2009, these two categories have absorbed new assets of $314.4 billion.
• Emerging-markets bond fund flows reached $6.1 billion in the first quarter, by far the largest quarterly intake for these offerings. Assets in the category have risen to $55.5 billion today from $35.9 billion a year ago.  
• DoubleLine Total Return saw first-quarter and one-year inflows of $6.4 billion and $15.4 billion, respectively, leading all U.S. open-end funds over both periods.

To view the complete report, please visit http://www.global.morningstar.com/marchflows12. For more information about Morningstar Asset Flows, please visit http://global.morningstar.com/assetflows. 

© 2012 RIJ Publishing LLC. All rights reserved.

LONDON—One in six citizens of the United Kingdom who plan to retire in 2012 will depend entirely on the State Pension to fund their retirement, according to Prudential plc’s “Class of 2012” study, which analyzed the financial expectations of Britons nearing retirement age. 

Women are more than twice as likely as men to have no other retirement savings or resources; 20% of women retiring in 2012 will depend exclusively on the State Pension compared with just 8%per cent of men.

Overall, Britons planning to retire this year will rely on the government for 34% of their income, on corporate pensions for 35% of income, and on a mixture of savings, investments, personal pensions, part-time work and assistance from family members for the remainder. State Pension payments are set to rise to £107.45 ($171.20) a week for single people on April 6.

Regionally, people retiring this year in the Midlands are the most likely in the UK to rely on the State Pension (40%). This compares with a quarter (28%) of those in Scotland, who claim to be the least reliant on the state for their retirement income.

The Prudential research also shows that 26% of people retiring this year either overestimate by more than £500 ($797) a year what the State Pension pays, or simply do not know.

“While the State Pension is a safety net for pensioners in the UK, it should only ever be regarded as part of an overall retirement plan,” said Vince Smith-Hughes, retirement income expert at Prudential. “For far too many people, the State Pension has become the default income option in retirement.”

Research Plus conducted Prudential plc’s online survey between December 2nd and 12^th, 2011, among 9,614 UK non-retired adults aged 45+, including 1,003 retiring in 2012.

© 2012 RIJ Publishing LLC. All rights reserved.

Prudential annuity executives move up 

Prudential Financial has named two long-time executives to lead the company’s Group Insurance and Annuities businesses.

Stephen Pelletier, who is currently President of Prudential Annuities, will become President of the Group Insurance Business, replacing Lori High, who has resigned. Robert O’Donnell, currently Senior Vice President, Head of Product, Investment Management and Marketing for Prudential Annuities, will become President of the Annuities business.

Pelletier joined Prudential in 1992. Before leading the Annuities Business, he served as chairman and CEO of Prudential International Investments, responsible for Prudential’s Investment Management Business in international markets, including China, Japan, Korea, Taiwan, Mexico, Germany and Italy. In addition, Pelletier was responsible for the company’s offshore investment products. He has also held executive positions at Chemical Bank and Manufacturers Hanover Trust. He received a B.A. from Northwestern University and an M.A. from Yale University.

O’Donnell joined Prudential in 2003 when the company acquired American Skandia. He started at American Skandia in 1997 and led the development and implementation of variable annuities, life insurance, mutual fund, and qualified plan products. The first 10 years of his career, which included time at The Travelers Insurance Company and Mass Mutual, were focused on finance and operational disciplines.

O’Donnell earned his bachelor’s degree in economics from Fairfield University and an M.B.A. in finance from Rensselaer.

Tim Pfeifer Joins Aria Retirement Solutions Board

Tim Pfeifer, actuary and president of Pfeifor Advisory LLC, has joined the board of directors of Aria Retirement Solutions, a provider of guaranteed income solutions to independent Registered Investment Advisors (RIAs).  

Pfeifer is a consultant to life insurance companies, banks, marketing organizations, regulators and mutual fund companies. A Fellow of the Society of Actuaries and has served on the Society’s Board of Governors, he has been a principal of Milliman, Inc. and a consultant with Tillinghast, a Towers Perrin Company.

Ibbotson joins Lincoln Financial Group’s LifeSpan platform 

Lincoln Financial Group’s Retirement Plan Services Business has enhanced its LifeSpan Custom Model Portfolios program to allow plan sponsors to “delegate the fiduciary responsibility associated with developing, monitoring and updating” their portfolios to Ibbotson Associates, a unit of Morningstar, Inc. 

Ibbotson will create a series of model portfolios, including target date, target risk, and retirement income, using each plan’s existing investment options to build the portfolios.

Lincoln’s LifeSpan program provides an open-architecture administrative platform that enables plan sponsors and consultants like Ibbotson Associates to develop customized asset allocation models for participants.

The platform is available to plans in Lincoln’s small-to-large retirement plan program and to consultants and advisors who wish to act as an ERISA 3(21) investment advice fiduciary or a 3(38) investment manager fiduciary.    

ERISA section 3(38) allows defined contribution plan sponsors to hire a registered investment manager and transfer investment-related liability to the investment manager for the oversight of plan investments.

 “This offering gives plan sponsors and their consultants an alternative to traditional off-the-shelf target date funds by providing an opportunity to create and manage custom model solutions, now with the option of discretionary management and 3(38) ERISA coverage from Ibbotson Associates,” said Eric Levy, senior vice president, head of Product and Solutions Management, Retirement Plan Services, Lincoln Financial, in a release. “These solutions can help provide both plan participants and plan sponsors the opportunity to generate better retirement plan outcomes.” 

The LifeSpan models may be offered as a Qualified Default Investment Alternative (QDIA) and are also available to ERISA and non-ERISA plans.

Three new sales directors at MassMutual Retirement Services

MassMutual’s Retirement Services Division has added three new sales directors to its sales and client management organization, led by senior vice president Hugh O’Toole. They are:

Dararith Ly, who joined the company in 2007, has been promoted to sales director. He will be responsible for retirement plan sales across Pennsylvania, Delaware, West Virginia and Southern New Jersey.   

John Randall has been hired as sales director, effective April 2. He is based in Seattle and serves clients in Washington, Oregon, Idaho and Alaska. Before joining MassMutual, he served as district manager with ADP.

Raymond Zittlow was promoted to sales director, effective January 1. Based in Minneapolis, he is responsible for retirement plan sales in Minnesota, Montana, North and South Dakota. Zittlow most recently served as western collective investment trust practice leader with the division’s Memphis branch. 

All three men report to Shefali Desai, emerging market sales manager with MassMutual’s Retirement Services Division.

Nationwide Financial enhances SPIA

Nationwide Financial has introduced an enhanced version, called INCOME Promise Select, of its existing INCOME Promise fixed immediate annuity, according to a release. The new version includes:

• Lump sum cash refunds for beneficiaries of clients who do not outlive their principal investment.
• The option to make lump-sum withdrawals in case of emergency or the need for extra cash.
• Two new cost of living adjustment (COLA) options—a 4% and 5% annual increase to go with the existing 1% and 3% options.  
• A new quote and illustration tool to help advisors demonstrate the benefits and features of Income Promise Select.

The product includes individual and joint annuitant options, as well as period certain or lifetime payouts. The emergency liquidity feature is available with term-certain or cash refund payment options.

© 2012 RIJ Publishing LLC.

The outcome of next fall’s presidential contest may well depend on how many Americans are convinced that cutting the trillion-dollar federal deficit (and the $15 trillion national debt) is Job One for the next administration. And if we make the wrong choice, some drastic and misguided policy decisions might get made.

Mitt Romney, with his recent endorsement of Rep. Paul Ryan’s budget proposal, has identified himself as a deficit hawk. As for the president, he’s probably a deficit dove at heart, but he seems determined not to look soft on the issue.

In fact, much of the country believes, as dogmatically as Colonial-era physicians believed in purging and bloodletting, that Washington should spend much, much less, starting right away. But one group of “heterodox economists,” the Modern Monetary Theorists, disagrees.

You may never have heard of MMT, but its practitioners, who tend to be admirers of the late economist Hyman Minsky, can be found all over the globe. They’re at the U. of Missouri–Kansas City (UM-KC), at the U. of Newcastle in Melbourne, Australia, and especially at the Levy Economics Institute of Bard College in Annandale-on-Hudson, NY. One the easiest ways to find them, as I did last week, is to attend the Levy Institute’s Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies, held every April at the Ford Foundation on E. 43^rd St. in Manhattan. 

This year’s conference, entitled “Debt, Deficits and Financial Instability,” was focused on the prospects for financial reform, not on MMT per se. But one of the speakers was L. Randall Wray, Ph.D., of UM-KC, who writes a lot about MMT in academic journals and the mass media. Having read several of his papers, I sought him out.

A wiry, reddish-haired man of medium height, Wray was at the wine and hors d’oeuvres reception after the conference adjourned. He and an MMT ally, Yeva Nersisyan of Franklin & Marshall College, were talking to Robert Kuttner, the longtime Businessweek columnist who now co-edits The American Prospect magazine.

Kuttner had remarked that Americans, in addition to participating in Social Security, should be able to save over their lifetimes in a government-sponsored, professionally managed, globally diversified retirement fund that pays out a consistent income in retirement.

Wray, who seems accustomed to being one of the most radical people in the room, disagreed. The government should get stop collecting a payroll tax entirely, he said, and just provide every retiree with a livable income. The risk-free interest rate, he suggested, should be zero. (He also believes—and this won’t endear him to the retirement industry—in ending tax advantages for 401(k) savings.)

Without warning, a slightly flustered, determined-looking woman approached Wray and said that she had worked in government and at one of the big investment banks and that she disagreed with his ideas. Wray politely, but firmly, responded to her objections. She turned and left. He returned to his conversation.       

I’m still trying to get my head around MMT, and I don’t pretend to grasp all the details. I can tell you what its practitioners don’t believe, however. For instance, they definitely don’t agree with the idea, as Speaker of the House John Boehner once phrased it, that when households have to “tighten their belts” the government also has a duty to tighten its belt—by spending less.

To MMT believers, that makes as little sense as saying that a reservoir should release less water during a drought than it does when there’s plenty of rain. The purpose of a sovereign currency and a central bank, they argue, is to provide liquidity—and investment and employment—when the private sector can’t. But to call them Keynesians wouldn’t give you the whole picture.

In contrast to those who’ve announced that the United States is “broke,” the MMT crowd claims that our government can’t go broke or run out of dollars any more than Caesar’s Palace can run out of plastic chips. As for the danger of leaving a massive tax bill for our grandchildren, MMT-ers hold that the federal government doesn’t need taxes to pay for its activities; it relies on taxes mainly to remove excess money from the economy and to prevent inflation. Supply-side economics, which seems to suggest that we’d collectively pay more in taxes if we each paid less in taxes, doesn’t add up for them. 

MMT-ers believe that, like Galileo, the Italian astronomer who demonstrated that the Earth orbits the Sun, or like Columbus, who proved that you can’t sail off the edge of the Earth, they’re simply rendering a more accurate portrait of reality than the one most of us carry around in our heads.

Most of us, in their view, still believe that the financial world is flat, not round. We persist in that belief, they might say, because, on the micro level, in our household or municipal or state economies (e.g., Greece or California), the financial landscape is flat. But at the sovereign level, at the U.S. or Canadian or British central banking level, the world is spherical.

But don’t take my word for it. I recommend “Understanding The Modern Monetary System,” a 2011 paper by Cullen O. Roche, “The 7 Deadly Innocent Frauds of Economic Policy,” a short book by Warren Mosler, and “Global Financial Crisis: A Minskyan Interpretation of the Causes, the Fed’s Bailout, and the Future,” a recent monograph by Wray.

MMT might strike you as sacrilegious, or quixotic, or even crazy. If so, you’ll have company—at lofty places like the Bank of England and the University of Chicago. I don’t necessarily agree with all the policy recommendations of MMTers. But, for me, MMT helps explain practically everything that was previously mystifying about our financial system. This much seems clear: the issues addressed by MMT are more than academic. The outcome of the next presidential election, and the health of our economy, may depend on how we feel about them. 

© 2012 RIJ Publishing LLC. All rights reserved.

Mary Fay joins ING U.S. Insurance

Well-known insurance executive Mary Fay joined ING U.S. Insurance at the beginning of 2012 as senior vice president and head of annuity product development. She will run a team based in West Chester, Pa., and will report to Michael Smith, CEO of annuity manufacturing. Most recently, she was an consultant with Actuarial Strategies.

From August 2004 to October 2009, Fay was a senior vice president and general manager of Sun Life’s multi-line annuity business. She has also held senior positions at Genworth, GE Capital, Travelers Life, Citigroup, CIGNA and Hartford Life. She holds a BA from Skidmore College and an MBA from Rensselaer Polytechnic Institute.

Advisors expect to use more VAs: Curian survey

Just-released results of a survey of more than 1,000 financial advisors appointed to sell Curian Capital managed account products reveal rising interest in tactical asset allocation strategies and alternative investment options and a concern about increased government spending.

Curian Capital, LLC, a unit of Jackson National Life, conducted the survey last December “to gauge how market volatility and the economic climate continues to impact [advisors’] investment strategies and future outlook,” the company said in a release. The respondents work at more than 150 broker-dealers and manage an average of $36 million each.

Highlights of the survey were:

• Similar to respondents’ answers in 2010, the survey found that advisors’ outlook on the global economy is split nearly evenly – 34% of respondents believe the economic crisis will get better in the near future, 32% believe the economic crisis will be long term and 34% were unsure. This striking disparity among advisors is likely to cause a significantly fractured approach to portfolio management strategies in the year ahead.

• Government spending topped the list of advisors’ perceived threats to their clients’ retirement accounts, at 35%, followed closely by market volatility at 31%. In 2010, advisors said that not generating enough income to last through retirement was the biggest threat to their clients’ retirement plans; however, this year, 82% of respondents reported that they have the adequate income-generating investment products to meet their clients’ retirement needs.

• Nearly two-thirds of the advisors say that they have begun using more tactical asset allocation strategies to mitigate economic volatility, and more than half of respondents report they are using more alternative investing strategies.

• As a result of market volatility, nearly 4 out of 5 advisors report an increase in their clients’ demands for more conservative investments; in addition, 72% say their clients have an increased demand for guaranteed income features, 55% report an increase in demand for more tactical asset allocation, and 47% report an increase in demand for alternative investments.

• Nearly 80% of advisors using alternative asset classes report that their primary goal for including them is to diversify and further stabilize portfolio returns.

• 61% of advisors report that they plan to increase their use of alternative asset classes this year. Currently, 63% of advisors say their existing allocation to alternative asset classes (as a percentage of AUM) is 10% or less, while only 3% of advisors have 25% or more allocated to alternatives.

• The majority of respondents (38%) said that their main concern about using alternatives is that they are illiquid or less liquid in nature.

• 67% of advisors expect to increase their usage of variable annuities in 2012, and 63% expect to increase their usage of separately managed accounts (SMAs). Conversely, advisors who say they expect to increase their usage of mutual fund wraps (27%) and commissionable mutual funds (9%) decreased 10% from 2010.

• 77% of respondents cite acquiring more affluent clients as their major goal for 2012, and 56% said improving efficiency and overall time management continues to be a goal.

• More than three-fourths of the advisors surveyed say that the quality of an advisory solutions provider’s online capabilities impact their use of their products, and they are more likely to use the products if the online resources are of high quality.

• The majority of advisors (69%) say they rely on financial services companies for information on investing strategies, while only 5% of advisors go to social media.

Peng Chen joins advisory board for RMA designation

The president of Morningstar’s Investment Management division, Peng Chen, Ph.D., CFA, has joined the curriculum advisory board for the Retirement Management Analyst designation, said Francois Gadenne, executive director and chairman of the Retirement Income Industry Association (RIIA).

As a member of the RMA Advisory Board, Chen will assist the director of curriculum Wade Pfau, Ph.D., CFA, associate professor at the National Graduate Institute for Policy Studies in Tokyo, Japan.

As president of Morningstar’s Investment Management division, Chen is responsible for overseeing the company’s investment consulting, retirement advice, and investment management operations in North America, Europe, Asia, and Australia.  

The RMA designation, and the coursework that leads up to it, was created by RIIA as a way for financial advisors to learn about RIIA’s “build a floor, then reach for upside” approach to retirement income generation and to distinguish themselves from advisors who don’t have specialist training in decumulation strategies. 

“RIIA and the RMA program are dedicated to serving the financial services industry, including defined contribution and retail distribution organizations, investment managers, financial advisors, broker dealers, banks and insurance companies,” RIIA said in a release. “Individuals earning the RMA designation are uniquely prepared to deliver retirement income solutions and services to clients who want a secure income stream and ongoing professional management throughout their retirement years.”

Market rally, uptick in rates reduce corporate pension deficit: Milliman 

In March, the nation’s 100 largest defined benefit pension plans experienced a $58 billion improvement in pension funding thanks to a $4 billion improvement in asset value and a $54 billion reduction in the pension benefit obligation (PBO), according to the annual update of the Milliman 100 companies and their actual 2011 financial disclosures included in the Milliman 2012 Pension Funding Study.  

“For the first time in months, interest rates moved in a positive direction for these 100 corporate pensions,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “While the positive market performance was consistent with the first two months of 2012, the pairing of asset improvement and a significant reduction in liabilities makes March the first good news/good news month we’ve seen this year.” 

In March, the PBO for these pensions reached $1.526 trillion as interest rates rose from 4.69% to 4.88%. The overall asset value for these 100 pensions grew from $1.295 trillion to $1.299 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.88% were to be maintained throughout 2012 and 2013, these pensions would narrow the pension funding gap from 85.1% to 88.3% by the end of 2012 and to 93.5% by the end of 2013.

New York Life earns record $1.44 billion in 2011

New York Life, America’s largest mutual life insurance company, announced record 2011 operating earnings of $1.44 billion and added $1 billion to surplus and asset valuation reserve for the year, increasing it to a record $17.9 billion, an all time high. The company also set new records in sales of insurance and investment products, assets under management and individual life insurance in force.

The 2011 result exceeds the record $1.41 billion in operating earnings posted in 2010 and marks the fourth year in the last five years that operating earnings have achieved new record highs.

On the annuity side, New York Life continued to lead the industry in providing guaranteed lifetime income, with a 29.7% market share in fixed immediate annuities. The Group also sells fixed deferred annuities and variable annuities.

Insurance sales increased 3.8% in 2011, to $1.3 billion, propelled primarily by strong sales of life insurance through the company’s career agents (up 5%). Investment sales increased 35% to $51 billion in 2011, driven by growth in sales of institutional separate managed accounts, retail mutual funds, and stable value products in our retirement planning providers. Assets under management increased $30 billion in 2011 to a new high of $337.8 billion, up 9.8%.

Insurance Group

The newly formed Insurance Group features the company’s industry-leading life insurance business. 2011 highlights include:

• The U.S. life insurance segment once again led the industry with a 10.7% market share.
• The long-term care insurance operation generated a 17% increase in sales over the prior year.
• In 2011, $4.8 billion in benefits and dividends was paid out to life insurance policyholders.

Investments Group

The newly formed Investments Group includes New York Life Investments, which ranks among the largest asset management firms in the United States, and the businesses of the former Retirement Income Security operation, which provide solutions to the retirement income challenge facing Americans, both in the accumulation and income phases of retirement planning.

With $313 billion in assets under management as of December 31, 2011, New York Life Investments and its affiliates provide investment management services to institutional and retail clients, offer retirement plans for corporations, multi-employer trusts and individuals, and deliver guaranteed products to qualified and non-qualified markets. New York Life Investments also manages the majority of New York Life’s $175 billion in cash and invested assets. In 2011, New York Life Investments also achieved company records in both gross and net sales. In 2011, the Investments Group set new sales records for its MainStay mutual funds.

Earnings highlights included:

• Surplus and asset valuation reserve increased by $1 billion, or 6.4%, to a record $17.9 billion.
• Operating earnings of $1.44 billion increased 2.1% from 2010, a new record high.
• Total insurance sales reached $1.3 billion, an increase of 3.8% over 2010, setting a new record.
• Total investment sales exceeded $51 billion, a rise of 35% over 2010 and a new record.
• Policyholder benefits and dividends rose to $7.6 billion, a 5.6% increase over $7.2 billion in 2010.
• Assets under management increased $30 billion to a new record of $338 billion, a 9.8% increase from 2010.
• Individual life insurance in force rose to a new record of $790 billion, a 4.2% increase from 2010.

Investors need personalized reports: Albridge Solutions

A new white paper suggests that financial professionals are not providing investors with a comprehensive picture of their financial well-being.

The paper, entitled “Democratizing the Rate of Return: Real-time Portfolio Performance and Risk Reports for all Investors,” was published by Albridge Solutions Inc., an affiliate of Pershing LLC, a BNY Mellon company.

According to the paper, when formulating a financial plan, an investor’s current position is assessed, goals are set, an action plan is put into place and a quarterly report is produced providing investment performance against historical values, benchmarks and peers.

But these reports don’t tell investors how their investments and their personal inflows and outflows are performing in the face of market fluctuations and economic volatility. Investors lack an accurate and complete picture as to how, or even if, they are achieving their financial goals. 

One primary goal of an investment professional is to manage as much of an investor’s wealth as possible. According to the paper, by providing a personalized, comprehensive view of an investor’s entire portfolio, investment professionals can make more informed and tailored decisions for each investor based on timely data. The data shows that as trust between the investor and advisor increases, an investor may allow management of a greater amount of household wealth.

The paper offers insights and strategies for investment professionals to gain and retain clients in this growing on-demand investing environment. Other key insights include the following:

• Investors are demanding more sophisticated, transparent, personalized performance data, regardless of portfolio size.
• Providing money-weighted return reports provides investors with a more accurate and complete investing tool, building a deeper level of confidence and trust.
• According to the 2010-2011 PNC Wealth and Values Survey, 74% of wealthy individuals want “greater transparency” from their financial institutions. Similarly, 77% of respondents said information and technology integration allows them to better manage their investments.

To obtain a copy of the white paper, Democratizing the Rate of Return: Real-time Portfolio Performance and Risk Reports for all Investors, visit www.albridge.com.

Federal Reserve Bank of St. Louis President James Bullard discussed “The U.S. Monetary Policy Outlook” last week during the 13th Annual InvestMidwest Venture Capital Forum. 

Bullard said that brighter prospects for the U.S. economy provide the Federal Open Market Committee (FOMC) with the opportunity to pause in its aggressive easing campaign. “An appropriate approach at this juncture may be to continue to pause to assess developments in the economy,” he stated. Concerning the FOMC’s communications tool, the “late 2014” language describing the length of the near-zero rate policy may be counterproductive, he said. “The Committee’s practice of including distant dates in the statement sends an unwarranted pessimistic signal concerning the future of the U.S. economy.”

Regarding the output gap and housing markets, “the U.S. output gap may be smaller than typical estimates suggest,” Bullard said, adding that typical estimates count the “housing bubble” as part of the normal level of output. However, he said, “It is neither feasible nor desirable to attempt to re-inflate the U.S. housing bubble of the mid-2000s.” 

Monetary Policy on Pause

At the March 2012 meeting, the FOMC updated its assessment of the economy, but otherwise left the policy statement largely unchanged, Bullard noted.  Given that incoming data have generally indicated somewhat better-than-expected macroeconomic performance so far in 2012, “past behavior of the Committee suggests a ‘wait-and-see’ strategy at this juncture,” he said.

Bullard discussed some of the policy actions that the FOMC has taken in recent years to ease financial conditions. “The ultra-easy policy has been appropriate until now, but it will not always be appropriate,” he said. Many of the further policy actions the FOMC might consider at this juncture would have effects that extend out for several years, Bullard stated. “As the U.S. economy continues to rebound and repair, additional policy actions may create an over-commitment to ultra-easy monetary policy.”

Bullard noted that labor market policies (e.g., unemployment insurance, worker retraining) have direct effects on the unemployed.  In contrast, he said, “monetary policy is a blunt instrument which affects the decision-making of everyone in the economy.” In particular, low interest rates hurt savers, he stated. “It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy.”

Brighter Prospects for the U.S.

Bullard noted that last August, forecasters marked up the probability of a U.S. recession occurring in the second half of 2011.  He attributed much of this to the July 29 gross domestic product (GDP) report, which included downward revisions to GDP data. In addition, he noted that the European sovereign debt crisis worsened then. However, he said, “Since last fall, the outlook has improved.”  

Regarding Europe, Bullard noted that the European Central Bank (ECB) offered three-year refinancing at low rates on broadened collateral in December and offered a second tranche in February. “At least for now, this has calmed European markets relative to last fall,” he stated, adding that the ECB policy does not address longer-term problems.

Output Gaps and U.S. Housing Markets

In discussing the collapsed housing bubble, Bullard noted that most components of U.S. GDP – except for the components of investment related to real estate – have recovered to their levels in the fourth quarter of 2007. “It may not be reasonable to claim that the ‘output gap’ is exceptionally large,” he said.    

Bullard also stated that it is not feasible or desirable to attempt to re-inflate the bubble.  “The crisis has likely scared off a cohort of potential homeowners, who now see home ownership as a much riskier proposition than renting,” he said. The crisis has also left U.S. households with more debt than they had intended, he said, adding that “this is the first U.S. recession in which deleveraging has played a key role.” 

On the topic of too much debt, he noted that U.S. homeowners have about $9.9 trillion in mortgage debt outstanding against $712 billion of equity. According to Bullard, households would have to pay down this debt by about $3.7 trillion to return to a normal loan-to-value ratio of 58.4 percent, assuming a normal ratio based on the average LTV ratio from 1970-2005. The amount is roughly equal to one-quarter of one year’s GDP.  “This will take a long time,” he said.  “It is not a matter of business cycle frequency adjustment.”

Recent Monetary Policy

While the FOMC could use the promised date of the first interest rate increase – the communications tool – as a policy tool should further monetary accommodation be necessary, Bullard said this tool has an important downside. Although the 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor, “neither the Fed nor any other forecaster has a clear idea of what macroeconomic conditions will be like at that time,” he said. “This is an unwarranted pessimistic signal for the FOMC to send,” he added.  

Headquartered in St. Louis, with branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the states that comprise the Federal Reserve’s Eighth District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi.  The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System.   

© Federal Reserve Bank of St. Louis

“Unsustainable” was how the president of the UK Society of Pension Consultants (SPC) recently described the trend for replacing defined benefit (DB) occupational pensions schemes with defined contribution (DC) arrangements, according to an IPE.com report. Kevin LeGrand warned that “a growing elderly workforce unable to retire will exert a financial cost on employers” and will eventually trigger a “pullback” from pure DC provision.

The remarks came after a number of DB plans in the U.K., including the Shell Contributory Pension Fund and the UK Department for Work and Pensions, were closed to new members. Around six million UK pensioners benefit from some form of DB plan, but only 10% of firms have final salary plans that are still open, according to the DWP.

LeGrand,whose organization represents a broad range of services providers to the pensions industry, including consultants, accountancy firms, law firms, insurers, administrators, independent trustees and asset managers, said: “Over the years, corporate sponsors have gradually come to see pensions purely as a liability.”

Today, pension benefits are not considered an important incentive for potential employees –partly because of the recession, but also because of a misperception among the younger workforce whose parents are enjoying retirements funded by DB provision and other sources of significant accumulated wealth.

Roger Mattingly, head of client relationship management at JLT Benefit Solutions and a member of the SPC board, said: “They may even have built a pot worth tens of thousands of pounds that looks very healthy to them because they aren’t thinking about annuitization and conversion rates, and don’t understand it.

“The risk of future pensioner poverty isn’t obvious to younger employees at the moment. But once that generation starts to approach retirement and realizes its income will be substantially smaller that the previous generation’s, that will probably start to exert and influence on pension provision for the next generation.”

Current DC arrangements are so inadequate, LeGrand argued, that employers would find their workforce increasingly dominated by septuagenarian and even octogenarian employees who are simply unable to retire, and whom employers cannot force to retire or take redundancy.

“Those employees probably don’t really want still to be there in the office or on the shop floor, either,” he said. “Who is going to be the object of their resentment? The employer – because they didn’t ensure everyone had a proper pension arrangement.”

Employers looking for ways to move these people on will essentially have to “bribe” them, said LeGrand.

Having spent years contributing to a DC pension scheme, they will still have to find more money to provide their employees with the real means to retire – effectively bowing to the inevitability of a DB, or at least a ‘cash-balance’, provision.

“Ultimately, we will see a pullback from pure DC,” LeGrand said. “Some forward-thinking employers are realizing this already, but we will see more and more coming to the same conclusion.”

UK supermarket chain Morrisons recently launched a cash-balance pension fund, which it said would mark a “significant” improvement over its existing DC scheme. LeGrand suggested that this could be a model for future provision. Under the plan, the company and employees would contribute to an investment fund managed by the company and aimed at producing an adequate pension for participants.

DST Retirement Solutions, a provider of retirement plan outsourcing solutions, and LIMRA, the life insurance research organization, have created an alliance to offer retirement income solutions to LIMRA’s member firms.  

DST recently introduced its Retirement Income Clearing Calculator platform, or RICC, a “middleware” solution designed specifically to support guaranteed retirement income products through traditional recordkeeping platforms.

The RICC platform acts as a hub, connecting plan sponsors, recordkeepers and insurance companies. By reducing technology barriers and making it easier to replace insurance providers, the platform can facilitate the incorporation of annuities into retirement plans—the so-called “in-plan annuity” option.

LIMRA’s endorsement is significant because its membership represents a Who’s Who of the financial services industry worldwide. In the U.S. alone, the organization’s members include all of the major U.S. life insurers as well as major plan providers like Fidelity, Vanguard, the Hartford Insurance Group, Principal Financial Group and others. Members also include major distributors such as Wells Fargo, Merrill Lynch and LPL Financial. 

“LIMRA provides research and consulting services to life insurance and financial services companies, and pursues select alliances that support its membership by delivering and developing products and services that help solve marketing and distribution issues,” the organization said in a release.

“This selection is a positive endorsement of our mission and technology and services,” said Ian Sheridan, division vice president for DST Retirement Solutions. “DST is focused on removing the technological barriers currently effecting plan adoption. LIMRA provides the best opportunity for this to happen.”

“As our member firms develop the next generation of product solutions for the retirement market, they will need to rely on trusted allies to provide the right mix of technology and consultative services,” said James Kerley, president of LIMRA Services, Inc. “We believe that DST Retirement Solutions will be just that kind of ally to LIMRA members worldwide.”

DST Retirement Solutions offers front- and back-office technology and servicing solutions for financial service organizations offering retirement plan recordkeeping.

© 2012 RIJ Publishing LLC. All rights reserved.

For five years or more, financial analysts at Russell Investments have been publishing papers and articles on what you might call the “parachute” approach to lifetime income planning.

Just as skydivers eventually fall to an altitude where they have to pull the parachute ripcord to land safely, Russell recommends a systematic withdrawal program for the first 10 years of retirement (the freefall period), to be followed at age 75, if necessary, by the decision to purchase of a SPIA (pulling the ripcord).

The big difference is that a skydiver has to pull the ripcord at some point but the investor doesn’t have to buy an annuity. With the Russell strategy, clients can choose to buy the SPIA or not. It depends on whether they’ve spent their portfolios down to the point where only a SPIA can guarantee an adequate income for the rest of their lives.

The strategy is built on two major assumptions: that a) most people don’t want to relinquish a big chunk of their liquidity by buying a SPIA at age 65 and b) that the “mortality credit” from risk pooling isn’t big enough to justify the purchase of a SPIA until the client reaches age 75 or so. 

Russell’s patent-pending methodology, officially called “Adaptive Investing,” is much more sophisticated than the skydiving metaphor suggests. The details of this dynamic “multi-period portfolio optimization approach” are described in a new research paper, Adaptive Investing: A responsive approach to managing retirement assets.

“Planning for your client to live 10 years and then have enough wealth to buy an annuity at the end of those 10 years is a useful way to address longevity concerns without significantly overstating the spending liability,” says the paper.

The paper’s authors, Sam Pittman, Ph.D. and Rod Greenshields, CFA, write that the main financial risk for pre-retirees is performance volatility. After retirement, the main risk becomes income shortfall, and retirement portfolios should be—but often isn’t—managed with that in mind.

“Advisors should look beyond investment strategies based on mean variance optimization because it solves a different problem than what most retirees have. The real risk retirees are trying to manage is running out of money, not volatility which is central to mean variance optimization,” they write.

 “Retirees want consistent income from their portfolios and to avoid running out of money before they die,” said Pittman, a senior research analyst at Russell, in a release. “They also want to maintain control of their assets for as long as possible. In fact, many would like to be able to bequeath any remaining assets to heirs or charitable organizations.

“The Russell Adaptive Investing framework supports these aspirations by simultaneously helping investors retain control of their assets for as long as possible, while working to address the real risk of outliving assets by preserving the option to annuitize if it is needed.”

The framework starts with a calculation of the client’s “funding ratio,” which is the ratio of assets (investments and future savings) to liabilities (debt and future spending needs). The investor’s wealth, spending needs and anticipated lifespan determines the asset allocation.

 “Many planning approaches try to mitigate longevity risk by planning to a fixed age that is either at or beyond the life expectancy, but using a pre-determined ending age can lead to an overly restrictive spending plan if the age is set too high and an overly risky plan if the age is set too low,” said Greenshields in the release. “Under this framework, investors can preserve flexibility and keep their options open.”

© 2012 RIJ Publishing LLC. All rights reserved.