Archives: Articles

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.

While effective hedging of investment risks has rightly been the focus of variable annuity companies for the last few years, the enormous longevity risk implicit in living benefit guarantees has gone largely unnoticed and unmanaged.

This longevity risk is due to the fact that if and when living benefit guarantee claims are triggered, they typically take the simple form of a life annuity. While this helps retirees mitigate the risk of outliving their assets, variable annuity companies risk that long-term increases in human longevity will outpace the level of longevity priced into the living benefit guarantee. Three facts exacerbate this risk:

§ There is no industry experience for living benefit guarantees in the payout phase;

§ Industry mortality experience in the accumulation phase does not follow standard mortality tables; and

§ Demographers have a long history of severely underestimating mortality improvements, by as much as 5 years life expectancy at birth.¹

Let’s quantify with a simple example. With the illustrative assumptions of a male age 60 buyer and a very low likelihood of triggering life annuity claims in the first 10 years of the contract, the corresponding underestimation of life expectancy in the payout phase is 2.1 years².

For a $10 billion premium block of 5% living benefit guarantees, we would expect perhaps 67% still inforce after 10 years. So the additional 2.1 years of payments would cost the variable annuity company $700 million ($10 billion x 5% x 67% x 2.1 years)! This is equivalent to a cost of 1.40% annually on the declining asset balance, in addition to the customary policyholder charge of 1.00%. We do not think that this level of longevity risk is within the risk appetite of many variable annuity companies.

How can it be managed? Longevity reinsurance.

Similar to longevity swap products in the pension market, the variable annuity company and reinsurer would essentially swap the contingent living benefit guarantee payments modified for longevity deviations relative to a negotiated benchmark. However, some modifications would be necessary for the variable annuity living benefit guarantee market:

§ For variable annuities, we would expect the benchmark to reflect a customized blend between industry mortality experience in the accumulation phase and standard mortality tables in the payout phase, such as the Ruark Mortality Table and 2012 Immediate Annuity Table.

§ The reinsurance volume and coverage period would be set at the start of the transaction in order to mitigate policyholder behavior risk. For example, the variable annuity company might expect that a $10 billion premium block of 5% living benefit guarantees would likely have 55-67% still inforce when the earliest claims are triggered after 10-15 years, so they might seek longevity reinsurance for $275 million ($10 billion x 5% x 55%) of annual lifetime payments triggered in that period.

§ Longer deferrals of the coverage period would naturally result in more conservative pricing, and reinsurers would likely require a modest premium stream as compensation for the risk that the payout phase is never triggered.

This type of longevity reinsurance is a creative extension of Ruark’s expertise in the development, placement, and administration of mortality reinsurance. We believe that as variable annuity companies recognize the enormous longevity risk embedded in living benefit guarantees, longevity reinsurance will join hedging programs and mortality reinsurance as indispensable modern tools for the management of their investment and insurance risks. 

For more information, contact Timothy Paris at (860) 866-7786 or at [email protected].

¹ Brian C. O’Neill, Deborah Balk, Melanie Brickman, and Markos Ezra, “A Guide to Global Population Projections”, Demographic Research, 4, p. 203-288, 2001. Chris Shaw, “Fifty Years of United Kingdom National Population Projections: How Accurate Have They Been?”, Population Trends, 128, Office for National Statistics, 2007.

² Timothy Paris, “Modern Variable Annuity Risk Management”, p. 6, 2012.

The adoption of Solvency II-based accounting rules in a revised IORP (Institutions for Occupational Retirement Provision) Directive could significantly increase the pension liabilities of FTSE 100 companies, according to Deloitte. (This report first appeared in IPE.com.)

Three-quarters of respondents to Deloitte’s recent survey of pension executives showed that 75% of respondents believe that using the risk-free discount rate to estimate funding sufficiency, as required under Solvency II, would effectively increase gross liabilities by 20-50%, or £1bn-2.5bn for the average FTSE 100 company.

In a speech at the House of Commons in London, Matti Leppälä, secretary general at the European Federation for Retirement Provision (EFRP), said that the risk-free mandate would have a disastrous impact on pension plans in Europe.

“Currently, this kind of discount rate is used in only five member states. In other member states, IORPs are currently obliged to value their liabilities according to a fixed discount rate or a discount rate that is based on the expected return on assets,” he said.

“For an IORP that currently has to discount its liabilities according to a fixed-interest rate of 4%, a transition to a risk-free interest rate (currently around 2.6%) would imply an increase in the value of the liabilities of more than 20%.”  

© 2012 RIJ Publishing LLC.

Rising yields on 10-year U.S. Treasury bonds “should not be viewed as a sign of the beginning of a bear market in the bonds,” according to Standish Mellon Asset Management Co., the fixed income specialist for BNY Mellon Asset Management.

Instead, the Standish paper predicts that 10-year Treasury yields may settle into a new higher trading range between 2.25% and 3% by the end of 2012.  Fair value for the bonds is approximately 3.30%, according to Standish’s bond model.  

The observation was made in Standish’s April outlook, written by global macro strategist Thomas D. Higgins and issued after 10-year U.S. rates rose from less than 1.9% on January 1, 2012 to 2.4% in late March—the result of a combination of encouraging U.S. economic data and a reversal in the flight-to-safety bid as the risk of a European banking crisis has appeared to subside, according to the report.

“While speculation is rising that the long-awaited bear market in bonds has arrived, we believe that such thinking is premature,” Higgins said.  “There are a number of factors that could limit how far interest rates can rise in the short term, including the Federal Reserve’s intervention in the Treasury market to keep long-term interest rates low.”

Other rate-suppressing factors cited by the report include:

• Americans continue to deleverage from the housing boom of 2002 to 2007; households continue to allocate a portion of income to debt repayment. This could mean below-trend economic growth, modest inflation and lower long-term interest rates.
• Demand for Treasuries from banks and other financial institutions has increased as they become more conservative in their lending and investing.
• Geopolitical risks and potential policy mistakes could push interest rates back down toward their recent lows.

“U.S. investment grade and high-yield corporate bonds continue to offer an attractive yield versus Treasuries in the current low-rate environment,” said Desmond MacIntyre, chairman and chief executive officer of Standish. “We expect these sectors to perform well given positive economic growth and muted corporate defaults.” 

Standish Mellon Asset Management Company LLC manages some $86 billion of assets across multiple fixed income asset classes, including corporate credit (investment-grade and high-yield), emerging markets debt (dollar-denominated and local currency), and others.

© 2012 RIJ Publishing LLC.

In the post-financial crisis world, defined contribution retirement plans are the “haves” and public sector defined benefit plans are the “have-nots,” a new study by the Spectrem Group shows.

Both corporate and government assets climbed for the second year past the previous 2007 high watermark, according to Spectrem’s 2012 Retirement Market Insights report. But government DB plans, which account for 80% of total public-sector retirement assets, still trail 2007 levels.

Employee contributions and favorable markets raised assets of 401(k) and other corporate DC plans to $3.738 billion in 2011 (from $3.685 trillion in 2010), or 5.8% above 2007’s $3.533 trillion in assets. Public-sector DC plans reached $367 billion in 2011 (from $354 billion in 2010), or 4% above 2007’s $353 billion.

But assets in government defined benefit retirement plans totaled just $2.737 trillion in 2011. That was up slightly from $2.733 trillion in 2010 but down 8.1% from 2007’s high of $2.961 trillion.

“Defined benefit plans, especially those in the public sector, are suffering from negative cash flow,” said George H. Walper Jr., president of Spectrem Group. “Even strong market returns on investments won’t be enough to relieve pressure on these plans.”  

According to Spectrem Group, the U.S. retirement market has:

• Total assets in 2011 of $15.374 trillion, including:
  • $10.4 trillion in total assets of employer-sponsored retirement plans, up 1.9% from 2010’s $10.2 trillion.
  • Individual retirement accounts (IRAs) hold another $5.016 trillion in retirement savings.
• Of the $10.4 trillion in employer-sponsored plans:
  • $6.263 trillion is in the private sector, including corporate and union plans.
  • $3.265 trillion is in the public sector, including government and 457 plans.
  • $829.3 billion is in 403(b) plans—for education, healthcare, and other non-profits.

Spectrem Group’s 2012 Retirement Market Insights report is based on periodic surveys with retirement plan sponsors and participants as well as publicly available data. 

© 2012 RIJ Publishing LLC. All rights reserved.

What about that prediction that Boomers would “never” retire? On the contrary.

Baby Boomers born in 1946 are retiring “in droves,” according to Transitioning into Retirement: The MetLife Study of Baby Boomers at 65, a study by the MetLife Mature Market Institute.

A sequel to the 2008 survey, Boomer Bookends: Insights into the Oldest and Youngest Boomers, Transitioning looks at the same segment of Boomers and includes interviews with 450 of the same subjects as the earlier study.

The new survey revealed that 45% of the first Boomers are completely retired and 14% are retired but working part-time. Of those still working, 37% intend to retire by age 68.

Of the 45% who are retired, about half say they retired earlier than they had expected, often for health reasons. Most (85%) consider themselves healthy, however, and 70% say they like retirement “a lot.”

Defying the advice of financial experts, most chose to take Social Security as early as they could rather than wait for higher payments. Almost two-thirds (63%) of respondents are already collecting Social Security benefits, and on average began doing so at age 63. Just over 60% of those surveyed were confident that Social Security will last for their lifetime.

Regarding mental outlook, 43% of those polled were optimistic about the future. Of the 19% who are pessimistic, 49% blamed the government and 21% blamed the economy. Boomers who are currently 65 do not expect to consider themselves “old” until they reach age 79, a year older than was reported in 2007.

“Many of the Boomers weathered the recession well,” said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute. “We found that more are homeowners today than in 2008, that the value of their homes decreased by only about 5.2% on average, that the majority feel they’re in good health and that 83% have grandchildren. Overall, it’s a pretty confident group of Americans.”

Additional findings:

• The average retirement age for the 1946 Boomers is 59.7 for men and 57.2 for women.
• 24% have a living parent.
• 84% are parents; 83% are grandparents, up from 77% in 2008.
• Of those not retired, 61% plan to retire at the same age as they planned one year ago.
• 31% of 65-year-old Boomers think they were at their sharpest mentally in their 40s; only 20% say they’re at their sharpest today.
• Home ownership increased significantly among the studied cohort since 2008, from 85% to 93%.
• 71% are married or in a domestic partnership; 12% are divorced or separated; 10% are widowed and 7% are single.

The survey was conducted by GfK Custom Research North America on behalf of the MetLife Mature Market Institute in November 2011. A total of 1,012 respondents born in 1946 were surveyed by random digit-dial telephone contact. The sample consisted of 942 respondents from the previous survey who agreed to be re-contacted. A total of 450 respondents completed the follow-up survey. The sample was supplemented by 562 respondents from Dunhill. Data were demographically weighted to be representative of the total U.S. Baby Boomer population.

© 2012 RIJ Publishing LLC. All rights reserved.

Funding of U.S. pensions up over three points in March: BNY Mellon

The best quarter for U.S. equity markets in a decade helped to drive the funded status of the typical U.S. corporate pension plan  3.6 percentage points higher in March to 79.8%, according to BNY Mellon Asset Management.  U.S. stocks have now risen for six consecutive months. 

The pension plans also benefited from an increase in the Aa corporate discount rate, which resulted in lower liabilities, according to the BNY Mellon Pension Summary Report for March 2012.  The funded status of the typical corporate plan has now increased 7.4 percentage points this year.

Assets for the typical corporate pension plan in March rose 1.3%, and liabilities fell 3.2%, BNY Mellon said.  The decrease in liabilities was due to the Aa corporate discount rate rising 25 basis points to 4.58 percent, according to the report.

Plan liabilities are calculated using the yields of long-term investment grade corporate bonds.  Higher yields on these bonds result in lower liabilities.

“Both the equity markets and interest rates moved in the right direction in March, helping moderate risk corporate pension plans approach a funding level of 80%,” said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the BNY Mellon Investment Strategy & Solutions Group (a division of The Bank of New York Mellon).  “Further improvements in the funded status could encourage plans to increase their hedge against interest rate moves.”

LPL Financial launches ‘WomenInvest’ platform  

WomenInvest, a suite of free tools and resources to help financial advisors market more effectively to women investors, has been launched by independent broker/dealer LPL Financial.

The new web-based platform, exclusive to LPL advisors, includes “customizable and compliance-approved marketing materials, best practices materials for working with women investors, [and] original research on behavioral psychology,” LPL said in a release. 

According to LPL, the tools and resources are aligned around four educational tracks, each corresponding to a stage or segment of a woman’s life:   

• In Relationships, where advisors learn to engage with both partners in a marriage or domestic union.
• In Transition, where advisors learn to support to women investors during a career transition, divorce or death of a spouse.
• In Business, where advisors learn to advise professional women, women business owners, or women who have inherited large sums.  
• In Retirement, where advisors learn to counsel women investors on financial strategies that support the goals of living “longer and better.

MassMutual Retirement Services adds to South/Central Region

Ann Kutrow and Garrett Carlough have joined MassMutual Retirement Services Divison’s sales and client management organization, which is led by Hugh O’Toole.   

Kutrow rejoined the division as senior relationship manager, after four years at The Meltzer Group. Based in Washington D.C., she serves on the south/central region client management team and works with mid-market plan advisors. She reports to Brian Barrett, assistant vice president.  

Carlough was been promoted to managing director, with responsibility for business development and sales support of MassMutual’s third-party and dedicated distribution channels in Washington D.C., Maryland and Virginia. He came to MassMutual as sales director in 2011 from Principal Financial Group. He will be based in Washington D.C. and reports to Michael Reilly, divisional sales manager.   

Natixis Global unveils risk-driven portfolio platform

To help financial advisors and investors worldwide manage volatility and enhance diversificiation as they build portfolios, Natixis Global Asset Management has introduced a platform called Durable Portfolio Construction.  

 “Faced with a prolonged period of volatility and uncertainty, it’s time to start building more durable portfolios,” said John T. Hailer, Natixis president and CEO, in a release.   The new platform “makes risk the primary consideration for asset allocation and is intended to help investors minimize the impact of extreme market movements, make smarter use of traditional asset classes, add exposure to alternative investments, and employ non-correlated investment techniques such as hedging and long/short strategies,” the release said.

Key elements of the new platform include:

• Expansion of the NGAM Portfolio Research and Consulting (PRC) Group, led by Matthew Coldren, executive vice president, Client Solutions Group, and Marina Gross, senior vice president, Portfolio Research and Consulting. The program is agnostic with regard to products offered by NGAM and its investment affiliates.
• Launch of the NGAM Durable Portfolio Construction Research Center, which generates research on asset allocation, risk management and other issues.
• Global Durable Portfolio Construction Symposiums, to be held in Rome (May 16, 2012), Madrid (June 19, 2012), London and several U.S. locations.  

Jumbo employer plan adopts Prudential’s in-plan annuity option

Adventist Healthcare Retirement Plan, Roseville, Calif., intends to offer Prudential Retirement’s IncomeFlex Target in-plan guaranteed lifetime income product to its plan participants, Prudential Financial said in a release. Aon Hewitt will continue to recordkeep the $2.6 billion plan.  

With $229.5 billion in retirement account values as of December 31, 2011, Prudential Retirement serves more than 3.6 million participants and annuitants. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates.

Morningstar launches “Ultimate Stock-Pickers” indices

Morningstar, Inc. has launched three Morningstar Ultimate Stock-Pickers Indexes, including the Ultimate Stock-Pickers, Ultimate Stock-Pickers Target Volatility 7, and Ultimate Stock-Pickers Target Volatility 10. BNP Paribas has licensed these indexes to serve as benchmarks for three new structured bank notes expected to launch April 2.

In April 2009, Morningstar equity analysts began to research the quarterly holdings, purchases, and sales of 26 top investment managers, or what Morningstar calls the “Ultimate Stock-Pickers.”

Morningstar combined the picks of these managers with its own equity research to produce the Ultimate Stock-Pickers Index. The Morningstar Index team first compiles a list of fund holdings from the managers selected by Morningstar’s research team and then excludes securities that analysts believe are overvalued or difficult to predict. Next, the index team examines how many of the well-regarded managers hold the security, how much of it they hold, and whether or not managers have been adding to the position to determine a fund manager conviction score. Securities with the highest manager conviction scores comprise the Morningstar Ultimate Stock-Pickers Index.

The Morningstar Ultimate Stock-Pickers Target Volatility 7 and 10 Indexes are similar in construction to the Ultimate Stock-Pickers Index, but seek to control volatility by moving assets in and out of cash positions to maintain standard deviations of seven and 10, respectively. Morningstar reconstitutes the indexes monthly.

Introduced in 2002, the Morningstar Indexes include a broad range of global equity, fixed income, and commodity indexes that are also combined to form an asset allocation index series. Currently, 32 ETFs and one ETN track Morningstar Indexes.

Edward Jones proud to hire veterans as advisors

Americans today view the traits of military veterans positively when selecting to work with a financial advisor, underscoring a demand in the market for veterans in the financial field.  When asked why they would choose to work with a financial advisor with military experience, Americans mentioned their discipline (77%), goal-orientation (73%) and integrity (72%), according to a new survey by Edward Jones.  

Edward Jones employs 1,300 financial advisors with military experience, or 11% of the total, said Jim Weddle, managing partner at the firm.

The survey of 1,006 respondents by ORC International revealed that nine in 10 people think that skills gained in the military are transferable to post-military careers.  Fifty-seven percent believe those skills are specifically applicable to a career as a financial advisor.  Seventy-five percent of Americans said they would be likely to work with a financial advisor who was formerly a military serviceman or woman.

Edward Jones was recently recognized by CivilianJobs.com as a finalist for the 2012 Most Valuable Employers (MVE) for Military.   

IRI, AllianceBernstein survey suggests that it’s smart to sell VAs

“After the Crisis,” a new whitepaper/survey published by asset manager AllianceBernstein and the Insured Retirement Institute, aims to demonstrate that financial advisors who sell variable annuities are more successful than financial advisors who don’t sell variable annuities. 

The online survey, conducted for the two firms by InsightExpress, posed 34 questions to 500 advisers, of whom 26% sell more than 10 VAs per year, 55% sell between one and 10 VAs per year, and 19% who don’t sell any. AllianceBernstein’s funds are used in variable annuities and, since 2008, the IRI (formerly the National Association for Variable Annuities) has lobbied on behalf of VAs.    

Among the findings of the survey:

• 50% of respondents said they started recommending VAs more because their clients are demanding “guaranteed investments.”
• 57% of respondents said they increased their use of VAs because the “designs have become more attractive.”
• 49% of dabblers have increased their recommendations for VAs since the credit crisis.
• 60% of sellers have increased their recommendations for VAs since the credit crisis.
• 42% bring up VAs in “every conversation” with clients and see them as an important part of financial planning solutions.
• Roughly 45% have a combined fee- and commission-based compensation structure, most of which is commission-based.
• More than seven out of 10 sellers have more than a decade of experience in selling VAs, compared with roughly half of non-sellers and dabblers.
• The average allocation for new clients is 29% VAs, 14% mutual funds, 14% IRAs, 8% life insurance, 6% unified managed accounts/mutual fund wrap accounts and 29% other.
• Approximately a quarter of sellers had assets under management in excess of $100 million.
• Nearly a third of sellers had annual revenues (fees plus gross commission) in excess of $500,000.
• Sellers have double the number of high-net-worth clients (with investable assets between $1 million and $29 million) of dabblers and one-third more than non-sellers.
• More than 70% of dabblers and sellers say that a colleague or wholesaler influenced them to begin recommending VAs.

BMO Global Asset Management rebrands retirement group  

BMO Global Asset Management today announced that its defined contribution recordkeeping and educational services business, now known as BMO Retirement Services, would no longer operate under the Institutional Trust Services umbrella.

 “By bringing our retirement research and investment management expertise to bear on our retirement plan solutions we can put the full power of our resources toward improving the retirement security of the people we serve, our retirement plan participants,” said Barry McInerney, Co-CEO of BMO Global Asset Management, in a release.

The Milwaukee-based BMO Retirement Services will continue to feature an open architecture platform, which will be augmented by BMO Global Asset Management’s expanding investment management capabilities.  

Phil Enochs, CFA, Managing Director, Head of Relationship Management for BMO Global Asset Management, said BMO Retirement Services seeks to be counted among the major players in the U.S. retirement market. BMO also intends to grow its specialty teams that serve not-for-profit and Taft-Hartley clients.

Surprise: There’s no free lunch in the CDA world.

Last week, Mark Cortazzo of MACRO Consulting Group in Parsippany, NJ, called RIJ after reading our March 21 story, “Will RIAs Sing This ARIA?” Cortazzo, whose internal research team spends more hours dissecting living benefit riders than the cast of “Bones” spends on skeletons, said he had a bone to pick with the ARIA product.

Indeed, Cortazzo had just spoken with David Stone, the former Schwab counsel who is CEO of ARIA Retirement Solutions platform, which enables RIAs to attach a stand alone living benefit—also known as a CDA or contingent deferred annuity—to a managed account. So far, Transamerica Advisors Life is the sole provider of the ARIA income guarantee, but other insurers are expected to join the platform.

Cortazzo said he likes the product’s ability to bring an income guarantee to a managed account. But he questioned the ARIA product’s technique for assessing the advisor’s asset-based fees. To illustrate, he compared the ARIA CDA’s fee mechanism with that of a variable annuity with a GLWB (guaranteed lifetime withdrawal benefit).    

With an advisor sells a B-share GLWB, he or she receives a commission from the insurer, who recovers it over several years by deducting fees from the underlying assets, which reside in a separate account at the insurer. The assessment of fees does not affect the guaranteed income stream, which is a percentage of the benefit base.   

The ARIA CDA works a bit differently, in part because the protected assets are in custody at a firm like Schwab or Fidelity rather than in the insurer’s separate account. In the CDA, the RIA’s annual asset-based fee (say, 1.5%) is not drawn from the protected assets. Instead, it comes from one of the client’s other accounts.    

Cortazzo concedes that under the CDA, the client’s guaranteed income (4% of $500,000 or $20,000, say) stays level. But he notes that if another client account ($500,000, for instance) were to drop by $7,500 (.015 x $500,000) because of fees, then the net income from owning the CDA would be just $12,500, or 2.5%. 

Stone said he spoke with Cortazzo and he doesn’t dispute the advisor’s math. But, in Stone’s view, there’s an upside to ARIA’s method. The protected assets are more likely to grow during the accumulation phase, and to achieve new high water marks, precisely because the protected account doesn’t feel the drag of a 1.5% asset-based fee.

“When we built our product, we wanted consumers to maximize their guaranteed benefit or ‘high water’ amount,” Stone told RIJ in an email. “If the RIA fee comes out of the covered account, the client will have less for retirement. What RIAs like Mark are saying is that it’s easier to sell to clients the idea that they walk away with 4% . . . net of all fees.”

Either way, the fees still come from one of the client’s pockets. With the CDA, they come out a side fund. With the VA/GLWB, the fees aren’t as noticeable because, in a sense, they come off the back end. The contract owner’s beneficiaries, if any, will simply get a smaller legacy payment. 

Stone said that ARIA recognizes this issue and is responding to it. “We are actually working with Transamerica on this and we hope to be able to shortly provide RIA’s with a choice: Maximize payments or put the fees in the account for a seamless experience,” he said. For his part, Cortazzo told RIJ that he “loves the concept” of CDAs and would embrace them if this particular wrinkle were ironed out.  

*                                    *                                    *

Are you old enough to imagine the uneasiness you might feel if a three-year-old started toying with the micrometrically balanced, diamond stylus-tipped tone arm of your beloved Acoustic Research turntable, the one with the solid maple base and the Plexiglas dust cover?

Yes? Then you can appreciate my anxiety while reading about the recent Supreme Court hearings on the Patient Protection and Affordable Care Act of 2010 (whose critics call “Obamacare”) last week.

A lot of questions came to mind. Like, why are insurance-challenged justices and lawyers deciding the future of the U.S. health insurance system? Why is the matter being decided as a constitutional issue? If actuaries and medical economists were discussing the matter, would they, like Justice Scalia, compare health insurance to a dark-green cruciferous vegetable?

Instead of exploring relevant issues—moral hazard and adverse selection, the difference between social and indemnity insurance, the “free rider” problem, the externalities of not providing basic care to 30 or 40 million people, the incentives to over-prescribe and over-treat, the power of publicly-held hospital chains and drug companies, malpractice issues, etc.—we’re parsing the Commerce Clause and rekindling the kind of antagonisms that sparked the Civil War.

© 2012 RIJ Publishing LLC. All rights reserved.