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Derivatives lift MetLife in Q4 2011

Posted on February 15, 2012 by Editor Test -

MetLife’s fourth-quarter 2011 profit surged on earnings from derivatives. Net income for the quarter was $1.16 billion, up from just $82 million a year earlier.

In an earnings statement released Tuesday, MetLife reported derivative net gains of $351 million, after tax, which were largely due to declines in interest rates and gains in the company’s variable annuity hedging program. In the fourth quarter of 2010, MetLife reported $1.1 billion, after tax, in derivative net losses.

“Operating earnings for Retirement Products, which includes the company’s U.S. annuity products, were $216 million, down 5% due to the negative impact of deferred acquistion costs (DAC) and other adjustments as well as lower variable investment income, offset by growth from strong positive net flows and higher core spreads.

Compared with the fourth quarter of 2010 and the third quarter of 2011, total annuity sales increased 41% and declined 15%, respectively, primarily due to a change in the level of variable annuity sales. Premiums, fees & other revenues for Retirement Products were $1 billion, up 35% due to increased sales of immediate annuities and higher fee income.

MetLife, which had more than $270 billion of derivative contracts at the end of September, guards against interest rate declines because the company depends on bond coupons to help finance customer obligations and earn profits. MetLife held more than $350 billion of fixed-maturity securities as of Sept. 30, Bloomberg News reported.

Net income advanced to $1.16 billion from $82 million a year earlier, the company said Tuesday. Excluding some investment results, profit was $1.31 a share, beating the $1.24 average estimate of 19 analysts surveyed by Bloomberg.

MetLife is leaving banking to reduce federal oversight and scaling back variable-annuity sales to ease liabilities on the equity-based products. MetLife agreed in December to sell about $7.5 billion of bank deposits to the General Electric Company after the insurer’s plan for a dividend increase was rejected by the Federal Reserve. MetLife is shutting a mortgage origination business and eliminating most of that unit’s 4,300 jobs.

MetLife expanded in Asia, Europe and South America with the $16 billion acquisition of the American Life Insurance Company in November 2010. The company’s derivatives, used to generate income and guard against interest-rate declines, produce losses when bond yields rise, as they did in the last quarter of 2010.

MetLife is integrating Alico and spending on advertising. The company put the name MetLife Stadium on the home of the National Football League’s New York Jets and Giants last year. The company’s blimps, with depictions of the cartoon dog Snoopy, fly over sporting events in the United States and Japan.

The company posted its results after the close of trading.

Science, Business, or Something In-Between?

Posted on February 13, 2012 by David Lindorff -

Research in the physical sciences is fairly straightforward. When physicists plot the trajectory of a planetary probe, for instance, they might bicker among themselves about methods, but their results are empirical, quantifiable, and either reproducible or not.

Retirement research—which involves the social sciences—is a different animal. Its subject is people, in all their complexity. It has political overtones, as debates over Social Security show. Its results may be used, ignored or abused by the trillion-dollar retirement industry.

Certainly, retirement research itself is a large and growing business. An informal tally of spending on it at universities, at firms like Towers Watson and Mercer, by groups like the Employee Benefit Research Institute, and on countless industry-sponsored surveys, whitepapers and thought-leadership projects, quickly produces a conservative estimate well north of $100 million.

Given that effort, it seems appropriate to reverse roles for once and ask the researchers a few questions. RIJ talked to several retirement researchers—who were either inside industry, outside industry, or had a foot in both worlds—about the conflicts of interest they face and their assessment of the value of what they do. We found a world of grayscale rather than black and white.

The view from Palo Alto

Financial Engines sits astride the academic/industry fault line. Founded by Nobelist William Sharpe, an emeritus professor from Stanford University, the Palo Alto firm provides managed account and advisory services for retirement plan participants. Not surprisingly, its in-house Retirement Research Center focuses on the drawdown phase of retirement planning for 401(k) participants.

Jason Scott, the center’s managing director, says his research is intended to help develop products, but also to be published and even peer-reviewed. “That allows us to collaborate with academics. They can ’kick the tires’ on it. If they like it, that gives us a lift.”

By publishing its research on deferred income annuities, for instance, Financial Engines discovered something it didn’t know. “We published in Financial Analyst Journal, a publication for practitioners, and in the Journal of Risk and Insurance, an academic journal. The study asked: Where do annuities deliver the most bang for the buck? It turned out to be longevity. You buy the annuity at age 65 but don’t start payments until you reach your life expectancy [at ages 83 to 85].

“By publishing, we learned that there’s a regulatory barrier. The IRS requires minimum distributions from retirement accounts starting at age 70½. People who bought a longevity annuity and delayed income to age 85 would have no way to comply.” Just last week, regulators announced that they had addressed that problem. [Interestingly, Financial Engines, as a business, doesn’t recommend the solution that its own researchers found to be optimal for retirees.]

“Academics are good at developing tools for evaluating a problem. Industry research is good at evaluating what individuals want. So the ideal is to put the two types of research together. That’s what I try to do here,” Scott told RIJ. As an example of useful academic research, he cited the work of Harvard’s Brigitte C. Madrian and others in establishing the effectiveness of automatic enrollment in boosting 401(k) plan participation rates. “That kind of research has mushroomed,” he said.

Trade group research, Scott said, Echoing the thoughts of many in both industry and academy, Scott said that trade group research is great for providing data that academics can use. “Organizations like EBRI are able to identify trends,” he said.

The biggest problem, he said, is that “the two groups—academics and industry researchers—don’t talk to each other enough. Academics will solve elegant problems that don’t really help anyone. Practitioners will keep reinventing the wheel rather than learn from the insights and tools developed by academics. The situation is improving, in part because of the growing respect for behavioral economics and finance. That group of academics, at least, is being pulled closer to the practitioners.”

Potential conflicts

John Payne is a professor of psychology and of management and marketing at Duke University as well as a consultant on behavioral finance to Allianz Global Investors. He’s in a position to appraise the value of retirement research—and to consider the potential conflict that arises when academics do paid work for the industry or a particular company.

As long as industry-supported retirement research meets scientific standards—such as being open to testing by other researchers—Payne believes, it is perfectly valid as science.

“I think you have to judge retirement research in terms of the science,” he said. “Are you seeing results that you can imagine replicating? Whoever is producing the research—companies, academics, trade groups or whatever—if they reach that standard, then it is probably worthwhile. I tend to be a little less concerned about the source than the standards. That said, I think academic research, because of the norms of academia, tends to be clearer as to what people did and why they did it.”

He added: “I’m not naive. When academic research is funded by industry, there will certainly be some self-selection [of the researcher]. I think all academics who write for the journals should do full disclosure. For example, I always disclose that I am part of a behavioral advisor group for Allianz.”

Other retirement researchers consider it essential to remain at least arm’s-length from corporate funding. “When I do retirement or health research, it’s funded by a center run by the university,” said Olivia Mitchell, a professor of business and public policy at the University of Pennsylvania’s Wharton School, and director of its Pension Research Council and Boettner Center for Pensions and Retirement Research.

The Boettner Center receives corporate funding, Mitchell said, “but there are no specific funding ties” between its research and any company or product. “I feel very strongly that I do not want to lose my independence. I don’t do much private consulting.

If you do consulting for one group, you get identified with them, and I like to retain my independence. Typically I sign an agreement retaining my right to publish my research. That’s important. And every paper I publish acknowledges the support I received on the front page.”

Mitchell worries, though, that professors will increasingly rely on private support for research as government grants and other public support for pure academic research decline. “How do we set up agreements in the relationship between the academy and industry, so we can help each other, while we researchers retain the ability to publish freely?” she asked.

Theresa Ghilarducci, a professor of economics who specializes in retirement research at the New School of Social Research, says, “The whole question of research on retirement is an important issue.”

Last year, she noted, the American Economics Association established a conflict of interest standard for the first time. It did so after revelations that several prominent economists who testified at hearing on the Dodd Frank Financial Reform Act didn’t disclose that they received payments from some of the major banks.

“And there are still conflicts,” she said. “I can tell when people are funded by the industry, because they focus on financial literacy. They always end up saying, ‘Buyer beware.’ That kind of ‘research’ doesn’t add any value. It’s like looking under the lamppost, because that’s where the light is.”

‘Quasi-academic’

Paul Yakoboski, principal research fellow at the TIAA-CREF Institute, one of the oldest corporate research institutes on retirement issues, asked if the work his institute does is different from academic research.

“Yes and no,” he said. “We view our research as quasi-academic. Some of it is actually done through grants we give to academics. We want our work to be out there, published, so it has impact beyond our own organization. For example, we do a lot of research, understandably, on annuitization, and that research has implications for public policy makers. At the same time, if the research produces information that, at some level, has business relevance to us, we’ll tap it and make use of it.”

Firms that offer retirement products should separate their research work from their marketing work, Yakoboski suggested. “Obviously we each know what the other is doing. It would be foolish to have a wall with no communication going on, but we have distinct missions, and they shouldn’t be confused,” he said.

Leslie Prescott, the chief marketing officer at Thrive Income Distribution System, which sells retirement income planning technology, says that most financial advisors don’t pay much attention to or even read the work of academic researchers.

“They tend to read the trade magazines and the lower end research journals, not the peer-reviewed ones,” she said. “They’re reading Financial Planning, not things published by the Pension Research Council. That’s both good and bad. It’s not peer-reviewed, but it’s more understandable.”

The line between corporate research and academic research can get blurry at times, she said. For example, insurance companies and mutual fund companies consume and fund huge amounts of research, but they’re selective.

“Certain academics, based upon their research, focus on certain product areas, or highlight certain products. Naturally, companies that offer these products are anxious to support those researchers. It’s fairly widely known within the industry which researcher in academia supports which products,” said Prescott, who has a BA from Duke and an MBA from the Wharton School.

As for company research, she says, “There’s a lot of thinking that goes into their products’ design, and in terms of marketing to advisors. But when it comes to the internal research done by firms like Putnam or Vanguard, I’d assume they use that to support their own product lines and their own point of view.”

Regarding academic retirement research, Prescott said, “I don’t think there’s a lot of disclosure in this field. It’s just generally known in the industry who’s got what bias, so in a sense the lack of disclosure here is as serious as it is in medical research.”

Retirement research is tougher to evaluate than, say, pharmaceutical research. “In pharmaceutical research, there’s a clear standard: do people get better or do they die of the side effects? But it’s not so clear with retirement. And unless you have pretty clear standards for measuring success, it’s hard to judge the research,” she said. “You have research that’s very influential and very low quality, and research that’s very high quality but not very influential.”

Would Europe’s pension cure be worse than the disease?

Posted on February 13, 2012 by Editor Test -

Higher capital requirement measures could ruin all remaining UK defined benefit plans and push plan sponsors into insolvency, a recent letter from UK employee and employer representatives to the European Commission warns. (This report comes via IPE.com.)

The National Association of Pension Funds (NAPF), the Confederation of British Industry (CBI) and the union umbrella organization TUC, told EC president José Manuel Barroso that the EC’s recent revised directive on occupational pensions would undermine the retirement prospects of millions of Europeans.

According to the three organizations, plan sponsors would see the cost of pensions increase significantly due to the capital requirements imposed, forcing them “to divert money away from investment in growth, job creation and research and development.”

In addition, the NAPF, CBI and TUC contended that pension investment managers will shift from equities to risk‐free bonds and gilts if they have to calculate liabilities using a risk‐free discount rate.

“Less equity investment would restrict capital flows to businesses, at a time when they are being asked to put even more cash into [plans],” the letter said. “With European pension funds holding over €3trn (($3.97 trillion) in assets, a major switch in asset allocation would have an immediate catastrophic impact on the stability of European financial markets.”

The letter was sent as the EC prepares to receive draft advice on the IORP directive from the European Insurance and Occupational Pensions Authority (EIOPA) this week.

Up to $4.7 trillion may be “in motion”: Cerulli

Posted on February 13, 2012 by Editor Test -

There are approximately $11.5 trillion of investable asset dollars in “retirement income” households and this number is expected to reach $13.7 trillion by 2015, according to Cerulli Associates. Of the $11.5 trillion, 41% ($4.715 trillion) is in retirement accounts, which defines the addressable opportunity for asset managers.

Cerulli defines retirement income households as those that are on the cusp of retirement or newly retired, with occupants between ages 55 and 69. Cerulli estimates that there were 26 million households in this group in 2010. (That works out to an average of $181,346 per household.)

These findings are from The State of the Rollover and Retirement Income Markets: Sizing, Segmentation, and Addressability 2011, currently available for purchase from Cerulli.

Why ages 55 to 69? A window of opportunity opens at 55 and closes at 70. Before age 55, savings isn’t an acute focus, according to Cerulli. Once consumers reach their 70s, they have generally established a retirement income plan and will stick with it. Those assets are relatively locked up and are not entirely addressable by financial services firms.

“However, the ages between 55 and less than 70 appear particularly ripe for the advice, guidance, and products that support retirement income strategies,” said Tom Modestino, head of Cerulli’s retirement practice.

Also, 55 to 59-year-olds are the “most populated” in terms of households and maintain the highest percentage of retirement accounts at 46% of investable assets. Just over a third of this group’s investable assets are in direct-held mutual funds, stocks, and bonds, Cerulli has found.

“Knowing the size and location of investor assets does not necessarily translate into money in motion toward retirement income solutions, but it’s a strong gauge,” said Alessandra Hobler, analyst in Cerulli’s retirement practice.

To pay for highways, legislator eyes inherited IRA taxes

Posted on February 13, 2012 by Editor Test -

Some of the funds for The Highway Investment, Job Creation and Economic Growth Act of 2012 (now in the Senate Finance Committee) may come from requiring certain beneficiaries of IRA distributions to pay their taxes sooner, according to a recent blogpost by the Employee Benefit Research Institute’s Nevil Adams.

“The Senate provision demonstrates how the current budgetary and economic pressures in Congress—particularly in an election year—make the tax treatment of retirement savings a major target for any number of legislative initiatives, including those that have little or nothing to do with retirement,” Adams wrote.

The blogpost references a press release last week from Senate Finance Committee Chairman Max Baucus (D-Mont.). The release describes several proposed sources of the revenue for the job-stimulating Highway bill, including $4.648 billion over 10 years from a change in the rules for IRA distributions after the death of the IRA account holder.

Under the proposal, any beneficiary of an IRA account who is not the account holder’s spouse, isn’t chronically ill or disabled, isn’t a minor or someone within 10 years of the account holder’s age, would be required pay taxes on the inheritance within five years of the account holder’s death.

Currently, stretching the taxable distributions over many years, such as the lifetime of a very young person, is a possible strategy for softening the tax on inherited tax-deferred retirement funds. According to a Wall Street Journal article cited by the EBRI, a House version of the highway bill did not draw funds from changing the taxation of IRA distributions.

Other proposed funding sources for the highway bill were:

Additional Transfer to the Highway Trust Fund of Proceeds on Certain Imported Tariffs. The Chairman’s Modification would transfer additional tariff revenue to the Highway Trust Fund for such a period as necessary to fully fund the Highway Trust Fund. This provision would transfer $2.618 billion to the Highway Trust Fund.

Reverse Morris Trust Transactions. Under current law, taxes are generally imposed on parent corporations where they extract value in excess of basis from their subsidiaries prior to engaging in a tax-free spin-off transaction. The Chairman’s Modification would treat distributions of debt securities in a tax-free spin-off transaction in the same manner as distributions of cash or other property. Subject to a transition rule, the provision would apply to exchanges after the date of enactment. This provision is estimated to raise $244 million over ten years.

Modification to Provision to Close Black Liquor Loophole (portion of Crapo #1). The Chairman’s Modification would allow taxpayers to claim and carry forward the Section 6426 50-cent per gallon credit but not the Section 40 $1.01 per gallon cellulosic tax credit for black liquor produced prior to January 1, 2010. This provision is estimated to raise approximately $1.588 billion over ten years.

Clarify IRS Levy Authority for Funds in a Thrift Savings Plan Account (Hatch #2). The Chairman’s Modification would provide that funds in Thrift Savings Plan accounts of federal employees would be subject to legal process by the Internal Revenue Service for payments of delinquent taxes. This provision is estimated to raise $25 million over ten years.

Parity for Exclusion from Income for Employer-Provided Mass Transit and Parking Benefits (Schumer, Menendez, Carper, Cardin #1). The Chairman’s Modification would extend through 2012 the increase in the monthly exclusion for employer-provided transit and vanpool benefits to that of the exclusion for employer-provided parking benefits. This provision is estimated to cost $139 million over ten years.

Bank Qualified Bonds (portion of Bingaman #2). The Chairman’s Modification includes a modified version of an amendment that would expand the ability of small issuers to sell bank-qualified bonds from $10 million to $30 million for bonds issued after the date of enactment and before January 1, 2013. This provision is estimated to cost $356 million over ten years.

AMT Relief on Private Activity Bonds (Kerry, Menendez #2). The Chairman’s Modification would provide alternative minimum tax (AMT) relief to investors in private activity bonds that are issued after the date of enactment and before January 1, 2013. This provision is estimated to cost $215 million over ten years.

Transportation and Regional Infrastructure Bonds (TRIPs) (Wyden #1). The Chairman’s Modification would create placeholder language that would amend Title 23 of the United States Code to allow state infrastructure banks to issue TRIP bonds, 100 percent of the proceeds of which must be spent on qualifying transportation projects and the term of the bond cannot exceed thirty years. The provision would also allow state infrastructure banks to create TRIP bond accounts, which is where proceeds from TRIPs would be deposited. The provision does not have a revenue effect.

Markets Yet to Discount the Discounts

Posted on February 13, 2012 by Editor Test -

The issues I’ve been discussing over the last year or two, while now crystallizing, remain highly problematic.

The idea of Greek default transformed from being a Greek punishment to a gift, with the pending question, ‘If Greece doesn’t have to pay, why do I?’ threatening a far more disruptive outcome that is yet to be fully discounted.

That is, should Greek bonds be formally discounted, the consequences of merely the political discussion of that question will be all it takes to trigger a financial crisis rivaling anything yet seen.

And note, also as previously discussed, that there has yet to be an actual Greek default, and that all Greek bonds have continued to mature at par, as there has yet to be an acceptable alternative.

So what are the alternatives?

1. Continue to fund Greece with terms and conditions.
2. Don’t fund Greece, which forces:
a. Greece to limit spending to actual tax revenues, or
b. Greece to move back to the drachma.

And what are the ‘terms and conditions’?

Austerity is always the lead demand, which slows both the Greek economy and to some extent the euro zone in general.

Additional demands currently include discounting Greek bonds to bring down their debt to GDP ratio to ‘sustainable’ levels. However, after eight months of negotiations, this has proven highly problematic, probably for reasons yet to be fully disclosed.

And, as just discussed, there may be a growing awareness that discounting opens Pandora’s box with the politically attractive question ‘if Greece doesn’t have to pay, why do we?’

So what actually happens?

My best guess, and not with a lot of conviction, is that nothing is concluded before the coming maturity dates, and the ECB winds up writing the check to support short term Greek funding to buy more time for more inconclusive discussion. So, again as previously discussed, seems like this is the solution- death by 1,000 cuts and reluctant ECB bond buying when push comes to shove to keep it all going.

And, currently, the catastrophic risk I’d highly recommend immediately hedging is the risk that Greek bonds are formally discounted, rapidly followed by a global discussion of ‘So why should we have to pay?’

Possible immediate consequences of that discussion include a sharp spike in gold, silver, and other commodities in a flight from currency, falling equity and debt valuations, a banking crisis, and a tightening of ‘financial conditions’ in general from portfolio shifting, even as it’s fundamentally highly deflationary. And while it probably won’t last all that long, it will be long enough to seriously shake things up.

The Bucket

Posted on February 13, 2012 by Editorial Staff -

What’s in Capital One’s Wallet? ING Direct

After eight months of hearings and debate, regulators on Tuesday approved Capital One’s $9 billion acquisition of ING Direct USA was approved this week by regulators who discounted criticism that the deal would create another too-big-too-fail bank.

In June, Capital One agreed to pay $6.2 billion in cash for ING Direct USA. Under the terms of the deal, Capital One would also issue $2.8 billion worth of new shares to ING, giving the Dutch firm a 9.9 percent stake.

The Federal Reserve’s consent, which held public hearings on the matter and twice postponed plans to announce a decision on the deal, came with the condition that Capital One revamp its internal controls, specifically around its lending and debt-collection practices.

The bank, according to a Capital One spokesperson, plans to close the deal in the next few days. It will have 90 days to outline its plan to strengthen its compliance and other risk-management controls.

The deal presented the first major test case for the post-financial crisis regulatory regime. As part of the Dodd-Frank financial regulatory overhaul, the Fed must now weigh the potential hazards of big bank mergers and kill any deal in which the systemic risks outweigh the rewards.

The addition of ING’s online banking unit in the United States will make Capital One—previously not among the top ten—the fifth largest U.S. bank by deposits. With more than $200 billion in deposits, it will be larger than PNC and TD Bank.

Community bankers and consumer advocates, such as the National Community Reinvestment Coalition, had characterized the deal as a risk to taxpayers and Capital One as an aggressive subprime lender. Capital One argued that the deal would bring a broader range of loan products to ING Direct customers.

It is the latest move by Capital One to build a national banking franchise, in an effort to expand beyond credit cards.

In the wake of the financial crisis, Capital One has also bought Chevy Chase Bank in Maryland and the mortgage business of North Fork Bank in California. Last August, Capital One announced plans to buy HSBC’s American credit card business for $2.6 billion. Capital One expects the HSBC acquisition will gain regulatory approval in the second quarter of 2012.

New York Life to keep hiring in 2012

New York Life aims to hire 3,700 financial professionals in 2012, recruiting 3,600 new agents in 2011, the company said in a release.

Women and individuals who serve ethnic markets will be actively sought, the release said. In 2011, 57% of those hired were women or individuals who represent the cultural markets. An additional recruitment focus for 2012 is men and women transitioning to the workforce from the military.

Also, Eagle Strategies LLC, the registered investment advisory and subsidiary of New York Life, plans a 50% increase in the number of advisors in the network by 2015, or 500 new advisors, to a total of 1,500.

Guardian amps up its small-plan sales campaign

The Guardian Insurance & Annuity Company, a unit of Guardian Life, has added three new hires to its 401(k) sales force. The new hires follow a year of expansion by Guardian in the small plan market (under $5 million).

Jason Frain was appointed vice president, 401(k) Product Management and Development, Guardian Retirement Solutions. Frain joined Guardian with more than 13 years experience in the retirement industry.

Guardian announced that the services of SWBC Investment Advisory Services LLC, an independent registered investment adviser, would be available to plan sponsors who utilize The Guardian Advantage or The Guardian Choice as the funding vehicle for their participant directed qualified retirement plan. The services of SWBC can help mitigate a plan sponsors’ risk for selecting, monitoring and diversifying the investment options that are available under the plan.

Guardian also introduced a new presentation, “Are You F² Prepared: Navigating the Fiduciary and Fee Disclosure Regulatory Landscape” that can help financial professionals understand the differences between advice and education and the implications these two different approaches may have on fiduciary liability under ERISA.

In addition, the Guardian Advantagefund line-up was expanded by 23 new investment options for a total of 79 and The Guardian Choicefund line-up added 28 options for a total of 84.

LPL Financial and AXA Advisors extend clearing agreement

LPL Investment Holdings Inc., parent of independent broker-dealer LPL Financial LLC, and AXA Advisors, LLC announced the extension of their custody and clearing agreement, effective immediately.

LPL Financial will continue providing advisory, brokerage, clearing and custody services to AXA Advisors and its financial professionals.

“AXA Advisors’ broker-dealer platform is a critical component of our retail distribution business,” said Christine Nigro, president of AXA Advisors. “This renewal is a natural extension of our ongoing efforts to provide clients with an innovative and robust investment platform.”

Envestnet to acquire Prima Capital for $13.75 million

Envestnet, Inc., a provider of integrated wealth management solutions for financial advisors, has agreed to acquire Prima Capital Holding, Inc., a provider of investment manager due diligence, research applications, asset allocation modeling and multi-manager portfolios to the wealth management and retirement industries.

The $13.75 million cash acquisition is subject to post-closing adjustments and to customary closing conditions, including third-party consents. It is expected to be completed by April 15, 2012.

Prima’s clientele includes regional broker-dealers, trust companies, independent RIAs, family offices and seven of the top 20 banks in the U.S. by total assets.

The acquisition of Prima extends Envestnet’s range of offerings to financial advisors. Envestnet plans to enhance its wealth management solutions with Prima’s web-based advice, analytics and data on managed account strategies (UMA and SMA), mutual funds, ETFs and alternative investments.

As part of Envestnet, Prima can leverage its innovative wealth management technology platform and investment product solutions. The Envestnet due diligence process will also be enhanced by Prima’s research process and tools, the companies said in a release.

J. Gibson Watson III will become group president of Envestnet • Prima, a unit within Envestment. Watson founded Prima in 1999. Broadridge Financial Solutions, Inc. acquired majority ownership of Prima as part of Broadridge’s acquisition of Matrix Financial Solutions, Inc. in January 2011.

Sterne, Agee & Leach, Inc. acted as the exclusive financial advisor to Broadridge and the shareholders of Prima in connection with the sale of Prima to Envestnet. Mayer Brown LLP acted as counsel to Envestnet. Squire Sanders (US) LLP acted as legal counsel to Broadridge and Fairfield & Woods P.C. acted as counsel to the management shareholders of Prima.

Younger investors add little to IRAs: T. Rowe Price

Less than half (45%) of younger investors plan to contribute to an Individual Retirement Account (IRA) for the 2011 tax year, according to a survey by T. Rowe Price, the no-load mutual fund and retirement company.

Most of those surveyed (55%) said they do not plan to fund an IRA or are unsure whether they will do so this during tax filing season, which ends April 17. For 2010, 71% of these investors made an IRA contribution.

The decline in commitment to IRAs among Generations X and Y (defined as ages 35-50 and 21-34, respectively) appears to be being driven by several factors:

A belief that current participation in a 401(k) plan is adequate for now (42%).
A feeling that they can’t afford it (32%).
Economic uncertainty (23%).
Market volatility (14%).
Job uncertainty (12%).

When asked what they would do with an extra $5,000, most investors (56%) said they would pay off existing debt or add to a “rainy day” fund; only 16% said they would contribute to an IRA.

Many younger investors, having experienced the subpar returns of equity markets over the past decade, may have lost some faith in stocks. T. Rowe Price’s new study found that only 22% of Generation X and Generation Y investors feel confident about the financial markets heading into 2012. Among investors who plan to fund an IRA this tax season, 28% said they will direct their contributions to relatively stable investments such as money market funds, despite the historically low current yields offered by these vehicles.

T. Rowe Price’s research into IRAs and the investing practices of Generation X and Generation Y investors was conducted online from December 1 to 12, 2011, by Harris Interactive among a national sample of 860 adults aged 21-50 who currently have one or more investment accounts.

Pension funding down in all major global markets in 2011: Towers Watson

Despite some improvements in the fourth quarter, pension funding levels in major global markets dropped in 2011 due to declining discount rates and weak asset returns, according to Towers Watson’s latest Pension Index.

Generally positive asset returns in the fourth quarter of 2011 were largely offset by declines in discount rates. As a result, overall movements in the Pension Index for the quarter were relatively small and mixed, ranging from a fall of 2.7% in the U.K. to a 4.4% increase in the U.S.

The Towers Watson Pension Index is a measure of funded ratio based on the projected benefit obligation (PBO) for a benchmark pension plan. The Pension Index is tracked across seven markets: Brazil, Canada, the Euro-zone, Japan, Switzerland, the United Kingdom and the United States.

Of the seven markets, the Canadian Index had the largest decrease (16%), followed by the U.S. (12%). The U.K. Index also dropped significantly, by almost 9%.

Asset returns were positive over the year; however, discount rates, which had been close to flat for the first three quarters, declined significantly in the fourth quarter.

The Bucket

Posted on February 8, 2012 by Editorial Staff -

RIIA and DCIIA create joint initiative to foster in-plan income options

The Retirement Income Industry Association (RIIA) and the Defined Contribution Institutional Investment Association (DCIIA) have agreed to jointly manage a new working group of financial services and retirement industry firms seeking to spread the inclusion of life income options in defined contribution plans.

“Qualified retirement plans contain the largest pool of financial assets that many retirees will be able to accumulate in their lifetimes,” said Francois Gadenne, executive director of RIIA.

“Few income programs have been offered inside of defined contribution plans, [largely] because of the uncertainty surrounding the tax and fiduciary considerations,” said Lew Minsky, executive director of DCIIA. “We now have a clear indication of executive branch support that will help plan sponsors that would like to offer these programs to their employee participants.”

The Defined Contribution Lifetime Income Working Group hopes to “create a framework that helps participants to effectively use the assets they’ve accumulated inside their qualified plans to pay themselves during their retirements,” the two organizations said in a release. RIIA is also sponsoring advanced training and education through its Retirement Management Analyst (RMA) certification which better prepares financial advisors to help plan participants properly construct their retirement income programs.

RIIA and DCIIA are urging interested firms and organizations to join the working group and become members of RIIA and/or DCIIA. Elvin Turner at RIIA [email protected] and Brenda O’Connor at DCIIA [email protected] have additional information.

Lincoln Financial reports 2011 results

Lincoln Financial Group reported $1.3 billion in income from operations for 2011, up 27% from 2010, but net income fell to $290 million for the year from $812 million in 2010, the company said in a release. Share repurchases totaled $575 million in 2011.

Due mainly to non-cash goodwill impairment, Lincoln reported a fourth quarter 2011 net loss of $514 million, or $1.73 per share. For the same period in 2010, Lincoln reported net income of $196 million, or $0.60 per diluted share available to common stockholders.

But the company also reported fourth quarter 2011 income from operations of $303 million, or $1.00 per diluted share, compared to $266 million, or $0.82 per diluted share available to common stockholders in the fourth quarter of 2010.

The primary difference between net income and income from operations resulted from a $747 million non-cash goodwill impairment charge related to the life insurance and media businesses, the company said in a release.

“Lincoln’s 2011 operating results reflect continued strength in flows and deposits across our businesses, ongoing product re-pricing to achieve targeted returns, and significant capital management activities,” said President & CEO Dennis R. Glass. “We continue to give priority to relative returns in our capital allocation and business decisions, balancing reinvestment in our core businesses with the opportunity to create value through increased share repurchases.”

Prudential Retirement awarded $28 million from State Street

Prudential Retirement Insurance and Annuity is entitled to $28 million under a ruling by a federal court judge who found that State Street Bank and Trust breached its fiduciary duty in managing two fixed-income funds in which Prudential’s 401(k) clients had invested. State Street intends to appeal, its attorney said.

Prudential filed the lawsuit in October 2007 after nearly 200 retirement plan clients with investments in two bond funds managed by State Street Global Advisors — the Government Credit Bond Fund and the Intermediate Bond Fund — suffered losses over July and August 2007 of 23.9% and 16.9%, respectively, even as the funds’ benchmark indexes were gaining 2.1% and 2.2%.

Much of the 78-page judgment focused on whether Prudential was justified in believing those funds were “enhanced” bond funds taking incremental risks or fully active funds taking greater risks, with the judge concluding in Prudential’s favor.

U.S. District Court Judge Richard J. Holwell in New York, in his written ruling, said State Street had not managed those bond funds prudently and did not diversify them “so as to minimize the risk of large losses.”

However, Mr. Holwell said Prudential failed to prove that State Street had “breached its duty of loyalty to the plans.”

The judgment noted that State Street employees were aware of the deteriorating situation in the subprime market for asset-backed securities in 2007 but that the company “largely ignored the results of its own investigation,” allowing the bond funds to continue increasing their exposure to that segment of the market.

An Interview with David Wray

Posted on February 8, 2012 by Editor Test -

As the president of the Profit Sharing Council of America, an association of retirement plan sponsors of all sizes, David Wray is in a good position to evaluate the potential impact of the Obama administration’s efforts to change the way Americans save for retirement.

We spoke recently with Wray and asked for his views on the February 2 announcement by the Departments of Labor and Treasury regarding the creation of new requirements for fee disclosure in retirement plans and the removal of certain technical roadblocks to turning qualified savings into retirement income.

RIJ: What are your takeaways from last week’s announcement?

Wray: They’ve clarified that you can take partial annuitization, they clarified the spousal consent issue, and they clarified that if you buy longevity insurance, it will be coordinated with required minimum distributions. All of those things are intended to expand the choices for participants. We’ll have to see what the next step is.

RIJ: On fee disclosure, this doesn’t necessarily mean that a plan can have only the least expensive index funds, right?

Wray: This isn’t about being cheaper. It’s about ensuring value. If someone has a high-service plan, it will cost more. But it is clear that employers will have to rigorously review the fee structure in light of the benefits provided. There is no single right answer to questions about ‘reasonableness’ of fees. The largest fees are for investment management, and people wonder if fee disclosure will impact the philosophic approach to investing, in terms of active versus passive. One the one hand, fiduciaries in large foundations use active management. On the other hand, obviously there are arguments for passive management. The question is, will this [action by Treasury and Labor] change that? I don’t know.

RIJ: How do you think participants might react to fee disclosure?

Wray: You’ll have a period of time when people are surprised, because they didn’t realize the fees are paid out of their assets. There will be a lot of questions, but once the questions are answered, it will go back to normal. The 401(k) plan participants aren’t retail investors. They’re in plans because employers entice them into them. So once you explain the fees they will go back to normal behavior. No one’s going to be storming the corner offices.

RIJ: How do you think plan sponsors are reacting?

Wray: For the large companies this is just another typical government regulation. They have lawyers. They’ll convert this to a routine. The real challenge is how is this delivered to small plans, and how they will digest this.

In the past, plan sponsors knew they had to supervise the investments, but this is a new and highly specific directive. The government is saying, ‘You must get this information in this way at this time.’ It’s the sponsor’s obligation to ensure that providers deliver it. If the data arrives in the form of 5,000 pages in a box, the small plan sponsor won’t have a clue. So they hire consultants, and hand them the box. But the Department of Labor recognizes this and has provided a roadmap for plan sponsors for dealing with it.

RIJ: How will fee disclosure change the way business has been done?

Wray: The big change in all of this will be for small plans sponsors whose plans have been subject to ‘fee bracket creep.’ Small plan sponsors are typically very busy people. They forget that when they signed the original contract the fee structure was based on very few assets in the plan. The fees were naturally very high at that time, because you had to pay to get it running.

The plan is like an individual account in the sense that, as the account balance grows, you should get lower fees, especially as you walk through thresholds—and there are definite thresholds. But if the plan sponsor hasn’t looked at the fee structure for 10 or 20 years, there’s likely to be a problem with bracket creep. The fees may still be at the same high level as when there were no assets. That’s where you’ll see an adjustment. With appropriate supervision, there should be a discussion every four or five years about the fees.

RIJ: How will plan advisors be affected?

Wray: There’s another place where there will be an adjustment. The fee issue is all about getting value for the fees, so what will be exposed is that if people are getting paid and not providing service to plan, there will be pressure to end that relationship. If the broker [who sold the plan] is still getting a trail fee, and that broker hasn’t shown up for six years and isn’t providing services, that arrangement is going to be addressed.

RIJ: What about revenue sharing? Will 12b-1 fees disappear?

Wray: This won’t eliminate 12b-1 fees from plans. Consider the 12b-1 fee as a kind of wrap fee. If they went away they’d come back as a wrap fee. For instance, Form 5500 is a bear to fill out. Somebody has to pay for completing it. If the plan pays for it you have to assess the account holders. The 12b-1 can be used to pay for that; it fits a certain kind of model for advisors. Some people say we’ll go all to passive investments and there will be no 12b-1 fees. In that case, you’ll have a wrap fee. The 12b-1 fee was originally used to help pay for marketing for individual mutual funds. In the 401(k) world it became a sort-of wrap fee replacement.

RIJ: Realistically, fee disclosure isn’t going to solve the really big retirement issues, like the overall lack of saving, right?

Wray: Fee disclosure is not about getting people to save more. Yes, we want the system to be as efficient as possible. But getting people to save in their plans is a whole different issue. As I said before, participants aren’t retail investors. You coax them into the plans through techniques and alternatives, but the problem is still about saving enough.

The reality is, Americans don’t save a lot. We don’t think of saving first. Overcoming that is difficult. People can always find excuses not to save, especially if they haven’t gotten a raise. Reducing fees merely addresses the question, ‘How do we accumulate more faster?’ But the challenge to get people to save remains. We’ve been making progress, but when you read that ‘the economy will go well in 2012 if people spend more and save less,’ you realize how we talk about spending and saving. It’s almost a cultural issue.

Vocal reactions to the New 401(k) Rules

Posted on February 8, 2012 by Editor Test -

Was the Groundhog Day announcement by the Department of Labor (about 401(k) fee disclosure) and by the Treasury Department (about new rules for buying annuities with qualified money):

A. Motivated by Democratic election-year politics?

B. A big step toward a higher fiduciary standard for plan sponsors and advisors?

C. A potential source of new business for your company?

D. The trigger for a participant-led rebellion against high plan fees?

E. A modest step forward in the long campaign to get Americans to prepare better for retirement?

Whichever answer you chose, you would definitely find at least a few like-minded thinkers within the retirement income industry. Each of these ideas was expressed by one or more of the interested parties who spoke to RIJ about the long-delayed government announcement last week. Here are excerpts from a wide range of lively conversations:

“It’s political”: Phil Chiricotti, president, CFDD.

“[Department of Labor Hilda] Solis’ statement on fee disclosure clarifies and confirms what many in the industry had already assumed: that the delay in releasing the final fee disclosure regulation was politically motivated,” said Chiricotti, who runs the Center for Due Diligence, a Chicago-based organization that serves plan sponsor advisors.

“The release was delayed until after Obama’s State of the Union address. This allowed the Administration an opportunity to follow up with a real world example of how the Administration was implementing the populist, pro-middle class (and anti-Wall Street) themes of the President’s speech.

“According to the top advisors in the CFDD network, the proposed guidance is unlikely to be finalized ahead of the Presidential election. Whether it moves forward or not will depend on whether the Democrats retain the White House.

“If Obama is re-elected, there is reasonable probability that the guidance will be formalized, perhaps as a regulation. If not, there might be a last minute push to get something released during the lame duck period prior to the inaugural. But it’s more likely that Republican appointees to Treasury/EBSA would simply allow the proposal to die on the vine.”

“Silent tax on the system”: Charles D. Epstein, the “401k Coach”.

Epstein, author of Paychecks for Life: How to Turn Your 401(k) into a Paycheck Manufacturing Company (2012) and a consultant to plan sponsor advisors, told RIJ that the government’s action are changing the plan advisors’ roles but that fees will always be necessary. He also had strong political views.

“I was at a conference in Florida recently and a panel of experts was asked, What keeps you up at night? They said, ‘The fear that the government will take over the retirement business if we’re not careful.’ There are people in government, and in the Department of Labor, who want to do a land grab of the 401(k) system,” said Epstein. “They think government can run things better. But, no, I don’t think the majority in the Treasury and the Department of Labor want to take over the 401(k) system.”

In the future, the advisor’s role will be not just to sell the plan, but also to foster the participants’ success, Epstein said.

“The advisors need to help get people into the plan, help them figure out how much to save, help them maximize their savings with asset allocation and rebalancing, and show them whether they need a Roth 401(k) account or not. In short, to get in the trenches and help participants understand the plan. The advisor has to say to the sponsor, ‘I’ll be your 401(k) success consultant.’

“Now, does the advisor charge an additional fee or extra basis points to do that job? The advisor now has to re-do all his service agreements. He has to go to an ERISA attorney. The fees will be going down but the advisor’s expenses will be going up.

“Who will pay for that? The advisors can add an additional asset-based fee to the plan. Or they can charge the employees individually [for education]. Or they can get money from employees outside the plan [during the rollover stage]. But anytime there’s a new regulation it’s a silent tax on the system.”

“It’s net new business”: Tim Slavin, senior vice president, Broadridge.

“Nobody knows how participants will react, frankly. I don’t see wholesale changes. For the vast majority of people who don’t even open their statements, nothing will change,” said Slavin, senior vice president of Broadridge, a printing and data firm that many third-party administrators (TPAs) use to mail or e-deliver statements, including the new fee disclosures, to plan participants.

“Some people may open their annual disclosure statement and begin to understand. If you’re in a large plan, you’ll already have a low price. On the small plan side, the people with insurance products [such as group variable annuities] might say, ‘I didn’t know this was costing me 200 basis points!’ So I do think you’ll see some movement from older expensive insurance plans to open architecture plans. A fiduciary will say, ‘Maybe we’re overpaying.’ And you might see pressure from participants.

“When I myself was a fiduciary in the small plan space, the fees weren’t something we thought a lot about. Some plans were considered free. We went the provider that charged the firm the lowest cost. That may not have been the firm that charged the participant the lowest fees. The participants thought the plan was free.”

“But no matter what your politics are, transparency is a good thing. This was a long time coming, and it will become an ongoing thing. Younger folks will know what things are costing them. The younger generation will be able to track things better than ours did. An, for [Broadridge], it’s net new business.”

“This will act like a safe harbor”: Blaine Aikin, CEO, fi360.

“The new rules will have several potential impacts,” said Aikin, CEO of fi360, a Pittsburgh-based association that trains and certifies plan fiduciaries. “Part of the problem [for plan sponsor and vendors who have been sued for not monitoring plan fees] was that they weren’t able to make a full disclosure. But full disclosure also accentuates the burden that plan sponsors have to do due diligence. That’s how they will get the liability protection.

“This will act like a safe harbor. Plan sponsors have always had responsibility to enter into ‘reasonable’ agreements. But there was never a consensus on what data they had to consider. This reinforces the idea that due diligence needs to be done. It also gives fiduciaries a better roadmap to what the elements of due diligence are.

“When the new disclosures take hold, and when they see the compensation that they were paying but were unaware of, there will be some shocked plan sponsors. Some of these services were marketed as free but they are not. The most typical instance would be in a bundled platform, where investments are wrapped up with the administration costs.

“If a plan sponsor asked about the administration cost, it would be billed as ‘free.’ But it would be paid for by through revenue sharing.

“Now every direct and indirect cost needs to be clearly identified. That will allow for a comparison between bundled and unbundled products and will enable fiduciaries and non-fiduciaries to see who is getting paid how much and for what.”

“It’s a very positive development”: David John, the Heritage Foundation

“This is a very, very positive development,” said John, a senior research fellow in Retirement Security and Financial Institutions at The Heritage Foundation, a Washington think-tank associated with conservative views. “The changes announced today eliminate unintentional barriers to differing approaches that use lifetime income products without dictating how individuals should use them. They open up new options to future retirees, and should encourage even more market innovations.”

“Income is the next story”: Jody Strakosch, MetLife.

“We’re so excited for the people at Treasury. They’ve been working on this a long time,” said Strakosch, national director, Retirement Products at MetLife, which partners with Barclays Capital on the LifePath Retirement Income program, which allows plan participants to purchase increments of future income through their target date funds.

“They did great work on a couple of specific issues. Savings is critical, but income is the next story. We need to focus participants on income and this is a way to do it.

“Nowhere in the [previous] regulations was there a clear message that said it’s OK to offer partial annuitization from DB plans. Now you have that. You can have monthly income coming in from a portion of your retirement savings. It’s another way to allow people to create an income stream if they want one.”

“Problems will still persist”: Robert Hiltonsmith, Demos.

“These fees parallel the high and in fact excessive fees that characterize the private retirement market in general—fees caused by both lack of financial education and lack of true investment choice,” said Hiltonsmith, a policy analyst in the Economic Opportunity Program at Demos, a New York-based advocacy group.

“Both problems will still persist after the Treasury’s rule changes, which is why more retirement reform is desperately needed to provide all Americans with a safe, low-cost way to supplement their income from Social Security in retirement.”

“No magic”: Teresa Ghilarducci, professor of economics, the New School for Social Research.

“Disclosing fees is a crucial step for savers to know what their true rate of return is on their accounts,” said Ghilarducci, a critic of the current approach to retirement saving in the U.S. “But the disclosure does nothing to help savers get low-fee, high- performance investment managers. There is no magic link between knowing the fees and getting better and more efficient performance.”

“There will be sticker shock”: David B. Loeper, author, Stop the 401(k) Rip-Off.

Loeper, a writer and Registered Investment Advisor who works with individuals and retirement plans up to $30 million in assets, said plan participants should agitate peacefully for fee reductions at their plans.

“There are a lot of small plans that pay huge fees, and when the regulations go into effect and vendors are forced to do that they should have been doing all along, there will be a big retirement plan ‘sticker shock.’ Absolutely. It’s hard to imagine that they wouldn’t. Most people don’t think they’re paying anything for their 401(k)s. If they have $100,000 in their account and they think they’re paying nothing, and then realize that they’re paying fees, they’ll respond.”

“In my book, Stop the Retirement Rip-Off, I explained how to figure out what you’re paying [in plan fees] and, if you’re paying too much, how to organize your peers in a proactive positive manner, not as a complainer, to get your employer to shop for a better plan.

“Protest in a proactive manner, not in a way that’s destructive to your career. If you’re the only who asks, Why do we have this 100 bps fund, your opinion will be dismissed. If you can get others to ask the same question, it can change the perspective of management.

“GMWBs will to be addressed in the ‘next wave”: Unidentified federal official.

Issues regarding the offering of GMWBs in 401(k) plans weren’t addressed by the rules announced last week. But a governmental official familiar with the development of the regulations explained that omission.

“We wanted to pursue [GMWB issues] after we addressed a few plain vanilla issues regarding the simpler products, such as regular fixed immediate or deferred annuities. The issues presented by the GMWB weren’t on the first wave, and most of the people who have asked for guidance on those products are aware that they wouldn’t be. But there’s no question that [the GMWB] is on our radar screen. We’re not approaching the retirement income challenge with a bias [toward any particular product].”

Answers to the eternal question: What do women want?

Posted on February 7, 2012 by Editor Test -

Women investors expect more from financial services providers than men, according to the results of a new survey of some 4,500 U.S. households by Hearts & Wallets, the Boston-area retirement and savings trends research firm.

The study revealed that women investors, who are now the sole heads of one in three U.S. households, are “much pickier” than men regarding financial firms and advisors.

“Women find several key financial tasks more difficult than men, notably retirement planning, and are getting less help with this task. More women than men also describe themselves as very inexperienced about investing and anxious about their financial future,” said Chris Brown, Hearts & Wallets principal.

Key findings of Hearts & Wallets Quantitative Panel 2011 Insight Module “Understanding Women Investors” include:

45% of women (versus 31% of men) are concerned about “making assets last throughout retirement/outliving my money.”
56% of women find retirement planning difficult (versus 51% of men).
12% of women seek help for retirement planning (versus 56% of men).
35% of women (versus 26% of men) feel moderate to high anxiety about their financial future.
41% of women (versus 27% of men) say they are very inexperienced with investing.
15% of women understand how their primary financial services provider makes money—a key trust driver—versus 25% of men.

“Low fees,” “clear and understandable fees,” and “explains things in understandable terms” are what women value most in a financial services firm. Women ranked these attributes at least 10 percentage points higher than men.

“Women want to know what they’re paying for, and how to evaluate providers,” said Laura Varas, Hearts & Wallets principal. “Our study points to the importance of educating women on fees.”

From advisors, “Does not pressure me to buy products,” “is open/honest about fees and compensation,” and “is responsive” were the attributes women expected most, by at least nine percentage points more than men.

The study found women tend to own fewer types of investment products than men, and have higher allocations to bank products, because of lower risk tolerance and lack of financial experience.

“Asset managers, broker-dealers, employer-sponsored plans and others can help women become more comfortable with asset categories that can lead to long-term wealth creation,” said Brown.

Supply-demand imbalance to weigh on US yields: BlackRock

Posted on February 7, 2012 by Editor Test -

U.S. Treasury yields will stay depressed for “a very long time,” BlackRock’s fixed income fundamental portfolios Chief Investment Officers, Rick Rieder, told IPE.com this week.

As the Fed begins to remove the liquidity it has injected into the economy [by selling mortgage-backed assets it purchased during the crisis], he said, it could trigger a flight to quality, possibly leading to lower Treasury yields.

But Rieder also warned against expectations for curve steepening, saying that even long-dated yields are unlikely to move very far.

“The biggest dynamic is simply the lack of supply in fixed income,” he said. “We are seeing something we have not seen for at least 25 years.”

A generation’s worth of leveraging, which peaked at the height of the credit boom, created a huge supply of fixed income securities, he said. Between 2002 and 2007, there was $1.5 trillion (€1.1trillion) of net fixed income supply and approximately another $1 trillion of structured supply.

But, thanks to deleveraging, net debt issuance is set to turn negative in 2012, according Rieder, who cited estimates from Credit Suisse. “At the same time, demand will be growing, because populations are aging and longevity is extending at a faster rate than ever before,” he told IPE.

“Every single developed country has a declining working-age ratio combined with credit-to-GDP levels of 100% or more. As the Japan situation has shown, that means less productivity, growth staying low, more dependence on fixed income and more need for yield.”

BlackRock expects corporate DB plans to buy $1.2 trillion in long U.S. Treasury bonds over the next decade. Insurance companies will need $592 billion worth of high-quality bonds in 2012, even if they write no new business.

With net US Treasury supply reducing significantly in 2012 and supply from financial corporations, mortgage agencies and other sources of securitized debt turning negative, the only source of stable supply of bonds will be non-financial corporations.

“The only sector that isn’t de-leveraging is business – so the only source of supply will be in the form of corporate credit,” Rieder said.

To build diversified portfolios of fixed income in the face of low supply, he added, investors may have to relax their credit-quality restraints and purchase high-yield and emerging market debt.

‘Toxic’ annuity market exists in UK: Report

Posted on February 7, 2012 by Editor Test -

In Britain, the National Association of Pension Funds said the U.K. government must reform the annuity market or see retirement savers “short-changed by a toxic system,” IPE.com reported.

Under the current system, many new retirees from employer-sponsored plans fail to shop around for the best income annuity and are at risk of losing significant amounts of potential income over their lifetimes.

A report by NAPF and the Pensions Institute (PI) of London’s Cass Business School predicted that the loss in annuity income could triple to £3bn ($4.75bn) over the next decade if changes were not introduced.

The report charged that plan sponsors and service providers don’t offer enough information to participants. “Often they get nothing more than a leaflet pointing them to a website with a postcode-based search engine,” it said. The report recommended that pension funds should have an in-built open-market option.

If this did not achieve certain goals set out by the government, the report said, then a national annuity support and brokerage system should be introduced.

The report pointed to a “severe lack” of transparency in the U.K. annuity market. Advisors were quoted as claiming that “insurers pushed rates down when they saw a group of retirees approaching, as they expected the incoming pensioners would not shop around.”

The director of PI, David Blake, called the report a “wake-up call” to the pensions industry. NAPF chief executive Joanne Segars said “People are saving throughout their working lives only to end up short-changed by a toxic system. Every year, a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market.” Lower and middle-income earners are affected most, she added.

Referring to the imminent introduction of auto-enrollment in the U.K., she said: “There is no point in encouraging people to save if we do not help them get the most out of their savings.” She also called for more transparency in pricing and structure.

“If the annuity system is not radically overhauled, employees in defined contribution schemes in the private sector will continue to suffer massive detriment, and the government’s new auto enrolment regime will fail the very people it aims to help secure financial independence in retirement,” David Blake added.

Sales mount for New York Life’s deferred income annuity

Posted on February 7, 2012 by Editor Test -

Since last July, New York Life has collected $230 million in premiums on sales of its Guaranteed Future Income Annuity, a deferred income annuity that allows individuals to create their own pensions in advance of retirement, with one or more payments and with flexible income start date. In a release, the mutual insurer said GFI is the “fastest growing annuity product solution in the company’s history.”

The product is aimed at pre-retirees between ages 55 and 65 who plan to retire in five to 10 years. It is available from New York Life career agents and select investment firms nationwide. Sales of New York Life’s Guaranteed Future Income Annuity, which initially began through agents, now make up 35% of guaranteed income annuity sales through New York Life’s field force of 12,250 agents across the country.

The remaining 65% of sales come from New York Life’s traditional guaranteed income annuities, where income starts immediately.

New York Life is the largest mutual life insurance company in the U.S. It has the highest possible financial strength ratings from four of the major credit rating agencies: A.M. Best (A++), Fitch (AAA), Moody’s Investors Service (Aaa), Standard & Poor’s (AA+).

Capital One’s bid for ING Direct could be approved this week—or not

Posted on February 7, 2012 by Editor Test -

The Federal Reserve’s Governors are expected to decide at a closed meeting on Wednesday whether or not to approve Capital One’s $9 billion bid to buy ING Direct USA, according to Bloomberg News.

Consumer groups such as the National Community Reinvestment Coalition have opposed the acquisition, claiming that it “would make Capital One so risky it could put the U.S. financial system in danger.

Since August, the Fed has held public meetings on the matter in Washington, D.C., Chicago and San Francisco.

Capital One said it would remain a “traditional bank” and hold just 1.5% of total U.S. deposits after the deal is made. It also has argued that the plan would give ING Bank USA customers access to more services, including fixed-rate home mortgage loans and a broad network of ATM machines. Capital One also said it would continue to offer ING Bank’s savings accounts with no minimum balance and no monthly fees–features.

Capital One has promised to invest $180 billion over 10 years in low-and moderate-income communities if the ING deal is approved, and to hire people in Delaware, where ING Direct USA is based, and in Sioux Falls, S.D., where HSBC has a domestic card facility.

The Best Retirement Research of 2011

Posted on February 7, 2012 by Kerry Pechter -

The recent convergence of the global aging crisis and the global financial crisis has sparked the publication of hundreds if not thousands of significant academic studies related to retirement income financing.

As basic research, this work won’t necessarily have immediate business or public policy applications. But it will undoubtedly provide the intellectual foundation from which new financial products and new policies eventually spring.

We asked academics in the field to identify significant work that they read in 2011, and these were some of the studies they recommended. Some of these pieces appeared earlier in different form—as they evolved from briefs to working papers to journal articles.

Two dominant themes run through these papers. The first involves the optimal use of annuities in personal retirement income strategies. The second involves the role of behavioral finance in personal financial decision-making. There’s also an article on the size of public pension debt and one that questions the social payoff from investment in financial education.

The output of some of the most prominent thinkers in the retirement income field is represented here. We could name a dozen other men and women who published significant articles or books in this area last year. We’ll try to report on their work in the future.

With that disclaimer, here are ten noteworthy retirement research studies from 2011:

Optimal Portfolio Choice over the Life-Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts, Review of Finance, Jingjing Chai, Wolfram Horneff, Raimond Maurer, and Olivia S. Mitchell, May 2011.

In this paper, the director of the Boettner Center on Pensions and Retirement Research at Penn (Mitchell) and collaborators from Goethe University in Germany demonstrate a new mathematical model designed to help public policymakers predict how people of different ages and economic circumstances will react to employment disruptions and financial market crashes.

“Some will be able to hedge adverse capital market developments they face in the crisis, not only by altering their asset allocations, but also by altering their work hours and retirement ages,” they write.

Near-retirees, in general, will save more, work harder and retire later. “In particular, we find that when hit by a financial and economic crisis, households near-retirement must cut their consumption both in the short-term and also over the long-term. Moreover, they will have to increase their work effort and postpone retirement.”

Younger people will adapt differently. “During the first five years after the onset of the crisis, young households will reduce work hours, savings, and equity exposure and suffer from a drop in consumption. In the long run, however, they will work more, retire later, invest more in stocks, consume less, save more, and spend less on private annuities.”

The authors speculate that variable payout income annuities, which are currently rarely used, could play a bigger role. “Though fixed payout annuities have been prevalent in the marketplace to date,” they write, “we anticipate that investment-linked payout annuities will become more popular as Baby Boomers age and Social Security benefits will fail to grow.”

When to Commence Income Annuities, Jeffrey K. Dellinger, Retirement Income Solutions Enterprise, Inc., 2011.

The author of this paper wrote The Handbook of Variable Income Annuities (Wiley, 2006), and was a key product developer at Lincoln Financial Group. Here he argues in favor variable income annuities and against the practice of delaying their purchase, except as a way to offset the higher costs of a buying an annuity relative to other decumulation strategies.

“A variable income annuity will produce more income than a fixed income annuity, because (1) the insurance company does not bear the investment risk in the former and thus does not have to introduce a margin for asset depreciation risk, (2) the insurance company does not bear interest rate risk in the former and thus does not have to introduce a margin for interest rate risk, and (3) the contract owner can choose to have his annuity income benefits based on a collection of assets with a higher mean return than that associated with the collection of typically high-quality, fixed-income securities held by the insurer to back fixed immediate annuity obligations.”

Regarding the best time to buy an immediate annuity, Dellinger argues that it depends on when the mortality credit (which increases with the age of the purchaser) offsets the added costs of the annuity. Otherwise, “the income annuity should commence immediately—assuming one needs incremental income at that point in life,” he writes.

“This paper… quashes the misconceptions that one should take withdrawals from mutual funds or deferred annuities for a number of years and then purchase an income annuity later or purchase income annuities on a staggered basis merely because a given amount of premium translates into higher periodic income with advancing age.”

Good Strategies for Wealth Management and Income Production in Retirement, Mark Warshawsky and Gaobo Pang, published in Retirement Income: Risks and Strategies (MIT Press, 2012) pp 163-178.

In this chapter from a just-published book, two Towers Watson consultants suggest that retirees can best balance their need for liquidity and their need for protection from longevity risk and create a secure retirement through the gradual annuitization of their savings over a period of 20 to 25 years following retirement.

“A phased annuitization scheme over a number of years should be a sensible pillar for retirement wealth management,” they write. “This gradual process works to smooth over fluctuations in annuity purchase prices and captures the benefits of risk pooling (i.e., mortality credit) and thus longevity insurance for advanced ages. The annuity payouts establish a consumption floor to cover basic living needs throughout an individual’s life.”

“The results also reveal the merits of a fixed percentage systematic withdrawal scheme from the remaining portfolios… Risk can never be eliminated entirely, and these strategies are good overall to achieve desirable outcomes and avoid bad ones.” As more and more savings gets annuitized, up to 100% at age 80, for instance, the equity allocation of the liquid assets also goes up, eventually to 100% in late life—by which time the liquid assets are small. The exact pace of annuitization, how many years it is spread over, the amount annuitized each year, depends on age of retirement, equity/bond portfolio mix at time of retirement, whether the annuity is a single or joint-and-survivor contract.

What Makes a Better Annuity?, Jason Scott, Wei-Yin Hu, and John G. Watson. Journal of Risk and Insurance, 2011, Vol. 78, No. 1, 213-244.

Life annuities are expensive, thanks to adverse selection, marketing, and distribution costs, which hurts sales, this study explains. One way to make them cheaper and more attractive would be to delay the payouts until an age when the survivorship credit—the dividend from mortality pooling—offsets the costs.

In the views of these authors, all of whom work at Financial Engines, annuity product designers should create products where income doesn’t begin until later ages, or products where longevity insurance is added to existing portfolios, or even ultra-cheap products where the payouts are contingent on both advanced age and financial ruin.

“We find that participation gains are most likely with new annuity products that concentrate on late-life payouts,” they write. “Annuity innovation should focus on adding survival contingencies to assets commonly held by individuals…

“We find demand only for those annuity contracts with a significant time gap between purchase and payouts… [and envision] a robust financial market where individuals can purchase payouts contingent on any future market state, and a more limited insurance market where individuals can purchase payouts contingent on both the market state and a personal state—their survival.”

Portfolios for Investors Who Want to Reach their Goals While Staying on the Mean-Variance Efficient Frontier, Sanjiv Das, Harry Markowitz, Meir Statman, and Jonathan Scheid. The Journal of Wealth Management, Fall 2011.

This paper reconciles the world of the efficient frontier (EF), where time horizons and goals other than investment returns are secondary or irrelevant, and the principles of behavioral finance. The writers include the Nobel laureate who co-fathered the EF (Markowitz) and the author (Statman) of What Investors Really Want: Know What Drives Investor Behavior and Make Better Financial Decisions (McGraw-Hill, 2010).

“Investors want to reach their goals, not have portfolios only on the mean–variance efficient frontier,” and allocate different amounts of money to separate “mental accounts” devoted to their major goals, the authors write. “Mean–variance investors have a single attitude toward risk, not a set of attitudes mental account by mental account. In contrast, behavioral investors have many attitudes toward risk, one for each mental account, so they might be willing to take a lot more risk with some of their money.”

Practitioners of goal-based or time-segmented “bucketing” strategies may find this research reassuring. “The number of investors who were willing to take a lot more risk with some of their money exceeded the number of investors who were willing to take a little more risk with all their money by a ratio of approximately 10 to one,” the authors write. “Yet taking a lot more risk with some of our money adds to our overall portfolio risk about the same as taking a little more risk with all our money.”

Framing Effects and Expected Social Security Claiming Behavior, Jeffrey R. Brown, Arie Kapteyn, Olivia S. Mitchell. NBER Working Paper 17018, May 2011.

Deciding when to receive Social Security benefits is one of the most important retirement planning decisions that most Americans will make. Yet this decision is less often determined by careful reflection than by the way it is “framed.” That leads many people to take benefits too early, the authors of this paper write.

In fact, the Social Security Administration’s way of presenting the question in “break even” terms—by asking long someone needs to live to recoup the income lost by claiming at age 66 or 70 instead of at 62—encourages many people to take benefits too early.

“Individuals are more likely to report they will delay claiming when later claiming is framed as a gain, and when the information provides an anchoring point at older, rather than younger, ages,” the authors write. “Females, individuals with credit card debt, and workers with lower expected benefits are more strongly influenced by framing. We conclude that some individuals may not make fully rational optimizing choices when it comes to choosing a claiming date.”

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds, James J. Choi, David Laibson, Brigitte C. Madrian.

This paper, which won the 2011 TIAA-CREF Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security, is especially timely, given the advent of mandatory fee disclosure in 401(k) plans.

Originally published in 2006 as an NBER working paper, it claims that participants select high-fee index mutual funds over lower-cost options that can produce the same returns because they place greater emphasis on annualized returns since a fund’s inception.

The paper concluded:

Many people do not realize that mutual fund fees are important for making an index fund investment decision.
Even investors who realize fees are important do not minimize index fund fees.
Making fee information transparent and salient reduces allocations to high-cost funds.
Even when fee information is transparent and salient, investors do not come close to minimizing index fund fees.
Investors are strongly swayed by historical return information.
Investors do not understand that without non-portfolio services, S&P 500 index funds are commodities.
Investors in high-cost index funds have some sense that they are making a mistake.

Annuitization Puzzles, by Shlomo Benartzi, Alessandro Previtero, Richard H. Thaler, Journal of Economic Perspectives, (Published by Allianz Global Investors Center for Behavioral Finance, October 2011).

“Our central point is simply that drawing down assets is a hard problem, a problem with which some households appear to be struggling, and one that could be made easier with full or partial annuitization,” write the well-known authors of this article, which non-academic annuity marketers should find useful.

Yet, as the paper points out, there are some significant obstacles to wider annuity ownership. Annuities are often presented as gambles (“Will I live long enough for this to pay off?”) rather than as longevity risk reduction strategies. Nor is there a clear roadmap for former qualified plan participants who want to shop for annuities.

“We believe that many participants in defined contribution retirement plans would prefer to annuitize as well, but not if they have to do all the work of finding an annuity to buy, as well as bear the risk and responsibility for having picked the annuity supplier,” the authors write.

“It is now time to consider making automatic decumulation features available in defined contribution plans. Such features could range from full annuitization to options that include a mix of investments and annuities—for example, perhaps including a deferred annuity component to handle the problem of tail risk in longevity and even long-term care coverage…”

Public Pension Promises: How Big Are They and What Are They Worth?, Robert Novy-Marx and Joshua Rauh. Journal of Finance, Vol. 66, Issue 4, August 2011.

Ten years ago, the discount rates used by public pension actuaries to calculate future liabilities and current contribution requirements weren’t yet political hot potatoes. Now they are. This paper suggests using “the state’s own zero-coupon bond yield corrected for the tax preference on municipal debt (which we call the ‘taxable muni rate’)” rather than the risk-free Treasury rate or the average historical returns of a balanced portfolio.

“We calculate the present value of state employee pension liabilities as of June 2009 using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion,” the authors write.

“If pensions have higher priority than state debt, the present value of liabilities is much larger. Using zero-coupon Treasury yields, which are default-free but contain other priced risks, promised liabilities are $4.43 trillion,” they added. By contrast, “assets in state pension funds were worth approximately $1.94 trillion as of June 2009… total state non-pension debt was $1.00 trillion and total state tax revenues were $0.78 trillion in 2008.”

The Financial Education Fallacy, Lauren E. Willis, American Economic Review: Papers and Proceedings 2011, 101:3, 429–434.

Millions of Americans, studies show, are too financially illiterate to navigate the investment world or plan effectively for their own retirement. In this paper, a Loyola Law School professor advises against assuming that more financial education is the answer. Regulation is cheaper and more effective than education, she argues.

“Effective financial education would need to be extensive, intensive, frequent, mandatory, and provided at the point of decision-making, in a one-on-one setting, with the content personalized for each consumer,” writes Willis.

“The government money and time required would outstrip any ordinary public education campaign. A new highly skilled professional class of affordable, competent, independent financial educator-counselor-therapists would need to be created, regulated, and maintained.

“The price to individuals in time spent on education—rather than, for example, earning more income—would be enormous, such that financial education might decrease wealth. The psychological analyses needed to individualize de-biasing measures would be personally invasive. Are these costs we are willing to bear?”

The World of Retirement Research

Posted on February 2, 2012 by Editor Test -

Lots of time, money, intellectual effort and server space are devoted to research into the annuity puzzle and other mysteries of retirement income each year, and examples of it or press releases about it pour into RIJ’s gmail account almost hourly.

In fact, there’s not enough time in the day to read all the abstracts and executive summaries, let alone the full text of the briefs, working papers, and journal articles themselves.

To acknowledge the people behind all this work, we’re making retirement income research RIJ’s main topic for February. You can expect articles about some of the best research of the past year, about the business of retirement income research, and about the surge in the creation of retirement research centers at major insurers and asset managers.

The research that we see comes from many sources. Academia of course generates reams. The Center for Retirement Research at Boston College is a big producer, and the National Bureau of Economic Research broadcasts a constant flow of work from university economics departments and research centers, including the Pension Research Council at the Wharton School and the Center for Retirement Research at the University of Michigan. The Journal of Financial Planning also prints a lot of academic work.

Think tanks are also players in the retirement research game. We see work from the Retirement Security Project at the Brookings Institution, the Urban Institute’s Program on Retirement Policy, and the Rand Center for the Study of Aging.

From the consulting realm, we get a lot of thought-leadership pieces, free reports, or research reports that cost thousands of dollars each. It comes from household-name outfits like Aon Hewitt, Deloitte, Ernst & Young, Mercer, Milliman, Towers Watson, and the Big Cs: Celent, Cerulli Associates, Cogent Research and Conning.

Not-for-profit associations put out a lot of useful data. EBRI, the Employee Benefit Research Institute, is a fountain of statistics on qualified plans. The Society of Actuaries and LIMRA are valuable sources of data and new thinking. Then there’s the alphabet soup of Washington-based trade groups: DCIIA, ICI, the IRI, IRIC. RIIA-USA, based in Boston, now generates research papers through its Retirement Management Journal. In the Philadelphia area, Diversified Services Group, with its Retirement Management Executive Forum, also puts out regular reports.

Several professional firms are in the business of conducting research or gathering and selling data. Members of this group might be Beacon Research, Financial Research Corp., GDC Research, Hearts&Wallets, Mathew Greenwald Associates, Strategic Insight, and TrimTabs. (Morningstar-Ibbotson might belong in this category too—or among the consulting firms. Excuse me if I mixed a few apples and oranges.)

Finally, perhaps as many as ten financial services firms, including Allianz Global Investors, ING, Prudential Financial, Putnam, TIAA-CREF, Transamerica, Vanguard and others maintain their own retirement research or behavioral finance research centers that regularly generate thought-leadership whitepapers or sponsor nationwide surveys.

Other companies have hired academics for specific research (New York Life has hired David Babbel of Wharton for research on income annuities and York University’s Moshe Milevsky has made videos for ManuLife’s website) or formed ongoing relationships with them (Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA work with Allianz Global Investors).

In short, retirement research is all around us. It’s a surprisingly big business. And, in the weeks ahead, we hope to tell you more about it and examine some of the fruit it bears.

Keynes vs. Hayek: The Rap Video

Posted on February 2, 2012 by John Papola and Russ Roberts -

Halfway Back to Prosperity?

Posted on February 1, 2012 by Kerry Pechter -

“If you study the history of financial crises,” the economist and best-selling author Carmen Reinhart told 800 investment consultants in the ballroom of a Times Square hotel this week, you discover that “they cast a long shadow.”

Reinhart’s 500-page tome, This Time Is Different: Eight Centuries of Financial Folly (Princeton, 2009), makes dry reading. But she spoke with almost operatic passion this week as she warned the members of the Investment Management Consultants Association that the nation is only about five years into what, historically, is a decade-long deleveraging process.

“I’m talking about a muddling-through scenario where growth recovery is weaker than what we are used to since World War II,” she said mordantly. Her (voluminous) research shows that median GDP growth and unemployment have been 3.1% and 2.7%, respectively, in the 10 years before credit crises. During the decade after the feverish borrowing hits its peak, median GDP drops to 2.1% and unemployment rises to 7.9%.

“In the post-crisis decade,” she said, “housing prices are lower, unemployment is higher and GDP is lower, because of private sector deleveraging. That is true whether government debt is low or high, and whether it follows a policy of austerity or expansive. There’s about seven years of deleveraging, and that puts a damper on economic activity.”

In her talk, Reinhart, since 2010 a senior fellow at the Peterson Institute for International Economics, espoused no particular economic ideology. She said she embraced the Obama stimulus as a way to stop the Panic of 2008 from fissioning into a full-blown depression, but now worries about paying down the debt.

Reinhart, whose family fled Cuba when she was a child, acknowledged that much of today’s public debt is private debt that governments were forced to cover. Without sounding like a deficit dove, she seemed to favor a policy of mild inflation and debt relief through negative real interest rates—i.e., “financial repression”—over a deflation that flattens debtors or a slash-and-burn austerity. She blamed no one and offered no easy exits from our current fiscal and monetary dilemmas.

Her main point was that, not unlike Joseph’s dream of seven fat years followed by seven famine years, credit booms and busts have historically follow a regular cycle of winding up and winding down.

“The buildup in leverage typically takes seven to 10 years, and same amount of time is spent in deleveraging,” Reinhart told the investment consultants. “Deleveraging doesn’t start big-time until about three years into the crisis. The crisis in the US began in the summer of 2007, so this summer we’ll be five years into the crisis.”

The current recovery probably won’t be quick and easy. “I was in Bear Stearns in the early 80s, during the severe recession of 1982 and the spectacular recovery that followed. What were the factors in the spectacular recovery? Household debt in 1982 was 45% of GDP. Today, even after deleveraging, household debt is still 90% of GDP. So the capacity of households to respond is more difficult,” she said.

“The risk of a ‘double-dip’ is alive and well,” she added. “In the 15 severe crisis episodes we studied, double-dips occurred in the seven of them. Economies went from a subpar recovery to a renewed patch of softness. And if you look at the causes of double-dips, we’re prime candidates.”

For the record, Reinhart explained how we got where we are.

“The pattern that we’re seeing play out in Europe and, with less drama, in the U.S., is a common pattern in history. The process begins with financial innovation, liberalization, and globalization. That facilitates credit and leverage booms. During the boom phase of the cycle, asset prices soar. We feel wealthier and borrow more,” she said.

“Eventually the boom in private debts ends up as a severe financial crisis, which morphs as the financial industry goes into crisis. Eventually the economy implodes and goes into recession. The fiscal side is hit by lower revenues, which, absent stimulus, worsens the deficit. The private debts become public debts. The debts of Fannie Mae and Freddie Mac went from the private-sector to public-sector balance sheets, and added 25 percentage points to government debt.”

After the crises, the responses have also followed a pattern, as central banks and governments try to steer a middle path between inflating away the debt (helping debtors) and maintaining the value of their currencies (helping savers).

“At the end of WWII, all of the winners were mired in public debt. What was the most conducive policy for recovery? Low interest rates with a little bit of inflation. That combination of low stable nominal rates and inflation produces negative real interest rates. It’s a tax on the bondholder. It’s a transfer from savers to borrowers. In periods of high debt, it’s a form of debt relief,” she said.

“Given this environment, of deleveraging, of public and private credit events, it’s not surprising that central banks, both in the U.S. and the other advanced economies, will go to great lengths to keep rates as low as possible for as long as possible. If the problems are both public and private indebtedness, and excess capacity, then the inflation concerns traditionally voiced by central banks will be placed on the back burner for some time to come,” she added.

“Countries go to great lengths to avoid restructuring, i.e., default. The usual alternative is inflation to liquidate debt. We’ve done it. Germany did it after World War I and Brazil did it in the 1980s. Financial repression is a subtle type of debt restructuring.”

Reinhart predicted no quick resolution of the current financial crisis in Europe. “The Greek default at first looked unprecedented for an advanced economy,” she said. “But, since independence, Greece has been in default 48% of the time, with the last default in 1964.

“In Davos, I heard optimism as spreads have come down on Irish and Italian debt. People said, ‘The worst is behind us. We’ve endured crisis.’ I disagree. There will be more restructurings. Portugal is probably next on the list. Ireland has massive external debt sitting there unresolved. Italy and Spain are in the too-big-to-fail category. More defaults and restructurings will be with us for awhile.”

At the same time, she warned about the downsides of a surge of capital into emerging markets. “Low rates in the advanced economies make yields on emerging market bonds very attractive, and emerging markets have been attracting a lot of capital flows. Many have attracted higher flows than they would welcome. Over past two years, there’s been some optimism that emerging markets are the right engine of growth and the right destination for money,” she said.

“But large capital inflows can be destabilizing. They can be too much of a good thing. Banking crises are more likely when a country sees large capital inflows. The US had record inflows. So did Spain, Greece, Ireland, and the UK. All had huge capital inflows, but it didn’t end any better than it has in the emerging markets.

“During the last two years, we’ve seen Brazil, Korea and others attract a lot of flows, with internal leverage growing in those countries, and appreciated currencies. Vulnerabilities are there that weren’t there two years ago. Emerging markets have weathered the storm because they had reduced their external debts extensively.”

Here in the U.S., Reinhart said she is trying to see into the future, without much success. “During the height of the crisis, I for one received the stimulus with open arms, she said. “It made the key distinction of stabilizing the panic, a preventing a bad recession from becoming a collapse like the 1930s.

“But now, five years since the crisis, [it’s clear] that that debt will have to be repaid through some form of restructuring. Services and entitlements will be reduced or they will be reneged on. I don’t know of any instance where the magnitude of debt accumulation is like it is today. I’ve been working on an analysis for planning on how to deal with the surging debt problem but it hasn’t gone very far.”

Deloitte Consumer Spending Index ends 2011 on “low note”; contraction predicted in 2012

Posted on February 1, 2012 by Editor Test -

Despite small improvements in three out of four components, the Deloitte Consumer Spending Index (Index) dipped slightly in December due to a decline in housing prices.

The Index tracks consumer cash flow as an indicator of future consumer spending.

“Initial unemployment claims continued to decline in December, while real wages benefited from a decrease in energy prices,” said Carl Steidtmann, Deloitte’s chief economist. “This positive movement was not substantial enough to offset the continued pressure from the housing market.”

The Index, which comprises tax burden, initial unemployment claims, real wages, and real home prices, fell to 1.86 in December from 1.93 the previous month.

Highlights of the Index include:

Tax Burden: The tax burden rose slightly to 11.09% as state and local governments increased taxes to cover budgetary shortfalls.

Initial Unemployment Claims: Claims moved lower in the most recent month to 396,250, falling below the 400,000 mark for the first time in seven months.

Real Wages: While down 2.1% from a year ago, real wages posted a small gain to $8.75 on falling energy prices.

Real Home Prices: Prices fell 5.72% from a year ago. Real home prices are back to 2000 levels.

Consumer spending in 2011: The year in review

Three factors significantly boosted consumer spending in 2011, according to Deloitte interpretation of U.S. Commerce Department data:

Gasoline prices are down 60 cents a gallon since May peak, adding $80 billion to household purchasing power.
A sharp drop in the savings rate from 5% to 3.5% has added $150 billion to consumer purchases.
The 2% cut in Social Security tax withholding last January added another $90 billion.

Together these developments represent a gain of $320 billion, yet real consumer spending during that period increased just half that amount, by $160 billion.

Additionally, real disposable incomes have declined on a year-over-year basis for the past four months. Job growth has been in lower-income industries, while the job loss has been in higher-income industries like government and financial services, adding to the weakness in household earnings.

Outlook for 2012

The ability for consumers to continue to spend at the rates seen in 2011 may be in question.

“Going forward, it is unlikely there will be another tax cut, and Social Security tax withholding may rise back to its previous level by March,” said Steidtmann. “Another 150 basis point drop in savings is not likely, and while gas prices can always fall, the rising tensions in the Middle East would argue against such a drop.”

What’s in Capital One’s Wallet? ING Direct

New York Life to keep hiring in 2012

Guardian amps up its small-plan sales campaign

LPL Financial and AXA Advisors extend clearing agreement

Envestnet to acquire Prima Capital for $13.75 million

Younger investors add little to IRAs: T. Rowe Price

Pension funding down in all major global markets in 2011: Towers Watson

RIIA and DCIIA create joint initiative to foster in-plan income options

Lincoln Financial reports 2011 results

Prudential Retirement awarded $28 million from State Street

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