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Envestnet acquires FundQuest

Posted on December 14, 2011 by Editor Test -

Envestnet, Inc., a provider of wealth management software and services to financial advisors, has acquired FundQuest Inc., BNP Paribas’ U.S. provider of fee-based managed services and solutions. The Boston-based firm managed about $15 billion as of June 30, 2011.

FundQuest, Inc. has provided managed account programs, overlay portfolio management, mutual funds, institutional asset management and investment consulting to RIAs, independent advisors, broker-dealers, banks and trust organizations since 1993.

Timothy Clift, formerly chief investment officer and chairman of the investment committee at FundQuest, Inc., will join Envestnet|PMC as chief investment strategist, responsible for the development of investment strategies for client portfolios as well as the development of manager and fund strategist selection methods.

Clift joined FundQuest in 1994 and was responsible for its investment management programs for separately managed accounts, mutual funds, alternative investments, exchange-traded funds and annuities.

Before joining FundQuest, Clift worked for Donaldson, Lufkin & Jenrette, where he was responsible for asset management, research and sales.

“Simpson-Bowles” reforms would reduce middle-class Social Security receipts: Urban Institute

Posted on December 14, 2011 by Editor Test -

A new report from the Urban Institute claims that if the Social Security reforms recommended by the National Commission on Fiscal Responsibility and Reform a year ago were adopted, the Social Security benefits received by adults would decline relative to benefits currently scheduled.

In 2070, when all of the proposed provisions would be fully phased in, average benefits would be 14% lower for those in the middle of the earnings distribution, the Urban Institute report said.

While the proposal largely preserves scheduled benefits for those in the bottom earnings quintile, they would experience a projected 3% benefit reduction primarily because of the proposed COLA changes—despite the inclusion of several benefit enhancements for recipients with low lifetime earnings.

For those in top earnings quintile, projected benefits would fall by about a quarter. As a result, their projected first-year replacement rates from Social Security will decline markedly for future generations, along with their return from the payroll taxes they pay over their lifetimes. These declining returns could erode political support for OASDI.

The proposal generally leaves beneficiaries in the bottom four lifetime earnings quintiles with higher benefits than they would receive under a payable baseline (under which Social Security is not changed at all in the near term and beneficiaries faced across-the-board benefit reductions once the Trust Funds are exhausted).

Compared to a feasible baseline (under which action is similarly deferred until Trust Fund exhaustion, but at that point restores balance though an even division between benefit reductions and payroll tax increases), relatively fewer beneficiaries have higher benefits, but the lower two quintiles still do comparably well.

The National Commission on Fiscal Responsibility and Reform (NCFRR), led by Erskine Bowles and Alan Simpson, released a set of recommendations in December 2010 to help place the Social Security program on a sounder long-run financial footing. These recommendations included the following provisions that reduce the long-run fiscal imbalance through increased payroll tax contributions or reduced benefits:

• Increase the earnings subject to the Social Security payroll tax;

• Modify the benefit formula to slow the growth of future benefits;

• When calculating the cost-of-living adjustment (COLA), replace the current version of the consumer price index (CPI), the CPI for urban wage earners and clerical workers, or CPI-W, with the chained consumer price index (C-CPI-U, also known as the superlative CPI);

• Index the Early Eligibility Age (EEA) and the Full Retirement Age (FRA) to life expectancy to maintain a roughly constant ratio of retirement years to work years; and

• Cover newly hired state and local workers under Old-Age, Survivors, and Disability Insurance (OASDI).

Additional provisions aim to shore up benefit adequacy and, in some cases, mitigate effects of the prior provisions. These adjustments include the following:

• A minimum benefit for full-career low-wage workers;

• A benefit enhancement for the long-lived and longtime disabled;

• A hardship exemption from increases in the EEA and FRA for individuals with low lifetime earnings and relatively long careers; and

• An option for beneficiaries subject to increases in EEA and FRA (because the hardship exemption does not apply to them) to start receiving up to one-half of the benefit for which they would be eligible at age 62.

This report presents distributional estimates of the effects of the commission’s proposal on future Social Security beneficiaries. All projections rely on the Urban Institute’s Dynamic Simulation of Income Model (DYNASIM), a model of the retirement resources of the U.S. population based on the 1990–1993 panels of the Survey of Income and Program Participation (SIPP).

Our distributional analysis reveals that the projected effects of NCFRR’s proposal are particularly deep relative to current law scheduled for those reaching retirement age several decades from now, when reductions are phased in. In addition, projected benefit reductions are closely related to lifetime earnings, with those at the bottom of the lifetime earnings distribution largely shielded and those at the top experiencing significant reductions.

Sun Sets on Sun Life’s U.S. Annuity Business

Posted on December 14, 2011 by Editor Test -

A month after announcing a new “Vision” variable annuity with low costs and a tepid lifetime income guarantee, and two weeks after promoting COO Dean Connor to CEO, Sun Life Financial announced Monday that it was getting out of the annuity business in the U.S.

“As a result of [a] strategic review,” the company said in a release, it “will close its domestic U.S. variable annuity and individual life products to new sales effective December 30, 2011.

“The decision to discontinue sales in these two lines of business is based on unfavorable product economics which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value.”

In the third quarter of 2011, Sun Life accepted $681 million in new variable annuity premium, mainly for its Master Choice II and Masters Flex II contracts. Its 2011 year-to-date sales were $2.33 billion. It had 1.77% of the U.S. variable annuity market and was in 13^th place in sales for the current year. With $19.2 billion in variable annuity assets under management in the U.S., it ranked 16^th overall with a 1.35% market share, as of September 30, 2011.

In a statement, Connor said, “To achieve growth in the U.S., we will focus on increasing sales in our employee benefits business, which is already a top ten player, and will expand our presence in the growing voluntary benefits segment.

“We are confident that with the focused investment announced earlier this year we can build leading positions in these two sustainable, less capital-intensive businesses. We will also continue to support growth in MFS, our highly successful investment manager that has a large U.S. presence and over US$250 billion of assets under management globally.”

Along with other insurers operating in the U.S., Sun Life Financial was hurt in the third quarter of this year by stock market declines and low interest rate policies, which reduce the value of the assets backing its variable annuity guarantees and raise the cost of hedging those guarantees, respectively. The company reported a $572 million loss in the third quarter, according to National Underwriter.

Sun Life, as a Canadian company, was subject to Canadian accounting rules, which brought additional pressure on it. The same was true for John Hancock, a unit of Canada’s Manulife. John Hancock reduced distribution of its variable annuities in the U.S. after the third quarter.

Connor said Sun Life would focus its future growth into four “pillars”:

Continuing to build on its leadership position in Canada in insurance, wealth management and employee benefits;
Becoming a leader in group insurance and voluntary benefits in the U.S.;
Supporting continued growth in MFS Investment Management, and broadening Sun Life’s other asset management businesses around the world; and
Strengthening Sun Life’s competitive position in Asia.

Starting in August 2009, Sun Life began a big push to raise its profile in the U.S. It hired The Martin Agency of Richmond, Va., to strengthen its brand. Martin’s other clients included Genworth Financial, NASCAR, BF Goodrich, The JFK Presidential Library, WalMart, Geico and UPS. For Geico, it created the Cockney Gekko, the resentful Cavemen, and the Real People ads that paired ordinary policyholders with Little Richard, Joan Rivers, Peter Frampton, Charo and other celebrities.

Playing off its name, Sun Life also announced a partnership with Cirque du Soleil, the organization whose musical trapeze extravaganzas have become staple entertainment in Las Vegas and DisneyWorld. Sun Life is the Official Insurance Partner of Cirque du Soleil U.S. Big Top Touring Shows, U.S. Arena Touring Shows, and the Presenting Partner of a major new Cirque du Soleil U.S. show to be announced next month. Sun Life also bought the naming rights to the Miami Dolphins football stadium in Miami.

Stephen L. Deschenes, who has been a senior vice president and general manager of Sun Life’s annuity business since June 2009, could not be reached for comment. Before joining Sun Life, he served as senior vice president and chief marketing officer for the Retirement Income Group at MassMutual Financial Group.

Before joining MassMutual, Deschenes served as executive vice president for Fidelity Investments. A founder of the online financial advice site mPower (now part of Morningstar), Deschenes graduated magna cum laude from Harvard University.

Passive Equity Strategies Are Still Valid

Posted on December 13, 2011 by Editor Test -

The great debate goes on… and on and on. “Active management wins!” “No—passive management wins!” The market behavior of the past two decades could support either argument. Or perhaps we need to redefine our terms. 3D Asset Management of East Hartford, Conn., for instance, has created a hybrid strategy that poses an interesting twist on the definitions of both passive and active. (More about 3D in a moment.)

Once upon a time, active equity investing meant trading stocks and passive investing meant buying and holding stocks. Starting in the 1990’s, when S&P 500 Index funds returned 17% or more a year, active and passive management came to mean trading or holding an entire asset class or index. An investment of $100,000 in the S&P 500 Index on January 1, 1990 would have grown to nearly $500,000 by December 31, 1999. Financial publications touted S&P 500 index funds as the only investment anyone could ever need.

Unfortunately, this type of passive strategy failed during the following decade, producing a 1% annual compounded loss. An investment of $100,000 in the S&P 500 Index on January 1, 2000 would have been worth just $90,000 at the end of the decade. Retirees who were drawing income from that type of account were devastated. By early 2010, passive strategies were being called “old school” methods that were obsolete in the “New Normal.”

Did this poor performance invalidate passive equity investing? Not at all. We have been so focused on the rise and fall of the S&P 500 that we have forgotten the true definition of passive investing. A true passive strategy, history shows, was never meant to be limited to the S&P 500 or to any other single asset class.

The roots of today’s investing strategies can be traced to Harry Markowitz’ work. Prior to his development of Modern Portfolio Theory in the 1950s, successful investment strategies were attributed to the ability to select and hold a handful of the “right” individual stocks. Markowitz’ “Theory of Portfolio Choice” showed that diversification could reduce risk without sacrificing yield and that investors could construct optimal portfolios that maximized return for given levels of risk. This work led to a Nobel Prize in economics for Markowitz, William Sharpe and Merton Miller in 1990.

Twenty years later, at the University of Chicago, Eugene Fama and Kenneth French redefined passive investing. In the mid-1970s, Fama’s “Market Efficiency” white paper argued that, because equity markets were priced efficiently and because of the drag of active management fees, picking a few companies out of an asset class would offer no better returns than buying the whole asset class.

Fama/ French modeling recommends taking positions in all equity asset classes worldwide and weighting them according to each investor’s appetite for risk. Instead of holding just a few investments, passive portfolios of this type might hold shares in 8,000 to 10,000 companies. (The two men had the benefit of the Center for Research in Security Prices (CRSP) at the University of Chicago’s Graduate School of Business (now the Booth School). Created in 1960, CRSP remains one of the world’s largest database of historical investment returns.

Such portfolios could control costs and volatility while outperforming actively managed portfolios with similar risk exposure, Fama and French demonstrated. Sure enough, during the so-called “lost decade” of 2000 to 2009, diversified portfolios that followed their model delivered compound annual returns of 6% to 8% (with 8% coming from all-equity passive portfolios) Of the stock pickers and asset class “rotators” who called passive management a lost cause, few outperformed the Fama/French strategy.

Does that mean that active management is dead? No, it simply needs to be redefined. 3D Asset Management follows the Fama/French mathematical weightings and uses exchange traded funds instead of index funds because they cost even less. But Wayne Connors, the 3D Asset Management principal who sets the firm’s allocations, also uses “active overlay”—a hybrid of active and passive strategies that involves actively managing the weights of asset classes in a diversified portfolio.

Based on studies of investment behavior, 3D has observed that the movement of institutional money in and out of equities has short-term (over a period of 18 to 24 months) impact on the returns of certain asset classes and consequently adds to the volatility of a traditional passive portfolio. The firm subsequently demonstrated that yield can be increased and volatility reduced by tracking this behavior and adjusting the “weighting” of the indexes periodically—while remaining fully invested in all of them and adhering to the Fama/French model.

For advisors who design income strategies for retired clients—whether you use a systematic withdrawal plan or a time-segmentation (bucket) strategy—this hybrid strategy is worth considering. As the originator of the time-segmented Income for Life Model (IFLM) strategy now marketed by Wealth2K, I recommend this hybrid approach to my retired clients for the long-term segments of the model.

The volatility of the last few years has led the public to believe that all investment theory is obsolete and that only two options remain: to manage money very actively or to buy indexed annuities with income riders and shift all market risk to an insurer. Too many advisors have allowed themselves to get swept along by this same wave of emotion, when it’s our job to stay on the intellectual side of advice. If Markowitz, Fama and French are right, there is no rationale to “shift” long-term market risk. The lost opportunity-cost is too great. Even in the worst of times, passive diversified portfolio design serves our clients well.

Phil Lubinski, CFP, is owner of the Strategic Distribution Institute, LLC.

Don’t Go Overboard with TIPS

Posted on December 12, 2011 by Wade Pfau -

The Fed’s aggressive monetary easing has many investors considering Treasury inflation-protected securities (TIPS) as a cornerstone of their retirement strategy. While TIPS’ unique ability to protect against CPI-based inflation is undeniable, many investors neglect to consider the risks they pose, particularly for those who have not yet reached retirement.

The U.S. began issuing TIPS in 1997. Backed by the full faith and credit of the U.S. government and assurances that inflation cannot eat away at their value, TIPS seemed to be a truly risk-free asset for U.S.-based investors.

In 2003, Zvi Bodie and Michael J. Clowes published the book, Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals, in which they argued that typical retirement-oriented investors should rely primarily on TIPS for their retirement savings. Other financial assets should be included in the retirement portfolio only once one has enough savings (after accounting for any income expected from Social Security and other defined-benefit pensions) to cover their planned retirement expenditures without these riskier assets.

In an interview in the February 2010 issue of Journal of Financial Planning, Bodie confirmed his continued endorsement of this strategy. He also indicated that his personal retirement portfolio is 100% in TIPS.

Let’s take a critical look at the safety of TIPS. To be clear, I do accept the arguments made by Bodie and others that it is fallacious to believe that stocks are less risky than bonds, even when held over long periods of time. And I don’t believe, as some do, that investing in TIPS is foolishly conservative in light of the historical risk premium provided by stocks. TIPS can play an important role in most retirement portfolios. But Bodie and Clowes’ strategy is not the no-brainer they make it out to be. Like other assets, TIPS have risks and do not eliminate the need for broad diversification.

1. TIPS have greater default risk than nominal government bonds.

The conventional wisdom is that U.S. government debt carries negligible default risk. Because the dollar is the world’s reserve currency, the government can easily issue bonds denominated in dollars. The U.S. can avoid default by “printing money” as the Federal Reserve buys U.S. Treasury bonds from the open markets, paying for their purchases by crediting the sellers with newly created bank reserves. Yes, we learned this summer that Congressional gridlock with regard to raising the debt ceiling could lead to a technical default, and, yes, there is an active credit default market for U.S. government debt – but, for now, let’s set these issues aside.

The default risk for TIPS, however, is actually greater than the default risk for traditional Treasury bonds. This is because, all things considered, issuing TIPS has more in common with issuing foreign-currency bonds than issuing domestic-currency bonds. TIPS owners will not necessarily get a free pass should inflation pick up in the coming years. Printing money to pay interest and principal on government debts will trigger inflation, which in turn raises the nominal value of payments the government must make on TIPS. Just as a country that borrows in a foreign currency cannot print money to pay its debt – printing money will only trigger depreciation of their exchange rate and make their debt obligations harder to meet – the U.S. government will not be able to print money to escape its obligations to TIPS investors.

History is full cases in which countries have defaulted on their foreign currency- denominated debt. To avoid an embarrassing outright default, the federal government could redefine the inflation measure downward in order to reduce its debt obligations, in which case TIPS owners may not receive adjustments appropriate for the actual rising costs of living. This would be a significant source of worry for individuals who primarily rely on TIPS to finance their retirement.

2. Fluctuating yields create reinvestment risk.

Figure 1 shows the yields from the 89 Treasury auctions on newly issued TIPS notes and bonds since January 1997. Until mid-2002, each auction for TIPS of the various maturities provided an initial yield above 3%. Lucky investors in 1998 and 1999 could have purchased 30-year TIPS yielding close to 4%, and yields on 10- and 20-year TIPS exceeded 4% in 1999 and 2000. Since mid-2002, though, yields around 2% have become the norm. Only the auction in October 2008 for the 5-year TIPS notes, held in the aftermath of the Lehman shock and an accompanying deflation scare, provided a real yield above 3%. Yields subsequently fell, and an auction for a five–year note held in October 2010 made headlines as the real yield dipped below zero (to -0.55%) for the first time. Purchasers of those issues locked in yields that will not keep pace with inflation.

Whatever the yield may be, whether you buy TIPS directly from the U.S. Treasury or from the secondary market, you will lock in the currently offered real yield as the real rate of return should you hold the security to its maturity date. Nevertheless, a retirement saver who may be planning a savings strategy over 20 to 40 years, and then planning for a subsequent withdrawal phase that may last another 30 or 40 years, will have no idea what the future real yields on TIPS are going to be. No TIPS have maturity dates sufficiently long to cover the full planning horizon for a young person, and assuming one plans to make multiple contributions to his or her retirement savings portfolio over time, that investor will face significant reinvestment risk that the future real yields on TIPS will be lower. More generally, one cannot know how much to save today for an all-TIPS strategy without also knowing what future real yields will be when future savings are invested or rolled over. The possibility of lower future real yields will require a higher savings rate today as a precaution.

3. TIPS may never offer 4% real yields again.

Figure 1 shows the downward trend in TIPS yields. TIPS yields may be decomposed into three components: a nominal yield consisting of an underlying real interest rate and expected inflation, an illiquidity premium, and an inflation-protection premium. According to Jennifer Roush, William Dudley, and Michelle Steinberg Ezer of the New York Federal Reserve Bank, since the introduction of TIPS, all three of these components have boosted TIPS yields relative to conventional bonds in ways that cannot be expected to continue in the future. In particular, when TIPS were first introduced, they offered a substantial premium to compensate for their illiquid new market. One set of estimates Roush et al discuss suggests that as much as 200 basis points of the yield for early 10-year TIPS derived from this premium.

The illiquidity premium subsequently declined as markets became more established, reducing TIPS yields since the initial years. This premium may never return. The inflation-protection premium is the yield investors are willing to sacrifice for the unique protection against inflation provided by TIPS – an insurance premium that investors pay. Roush et al cite several studies which estimated that inflation-protection premiums have been low since the introduction of TIPS, as investors may not have been too worried about inflation in these years. This would cause TIPS to sell for lower prices, and thus offer higher yields, than otherwise possible.

4. There is also real interest rate risk during retirement

As well, retirees may not always hold their TIPS to maturity if they wish to sell some of the principal during retirement. This subjects them to interest rate risk, which is the risk that an increase in interest rates will leave retirees selling their TIPS at lower prices. In The Simplest, Safest Withdrawal Strategy, Advisor Perspectives’ Robert Huebscher identified this as a potential risk for retirees using only TIPS. He made a strong case for using TIPS in retirement, though I’d emphasize his caveat that an all-TIPS strategy makes sense “if a retiree has sufficient funds to support a 4% withdrawal rate over 30 years.” Next, I will discuss what savings may be required to pull this off when relying on TIPS both before and after retirement.

5. Low real yields make retirement planning costly

Much of the analysis of TIPS in the Bodie and Clowes book is based on TIPS providing a constant 3% yield in the future. The book’s publication in 2003 came right during the dying days of 3% yields for TIPS. Figure 2 shows some potential outcomes for a retirement saver with a constant real salary who saves over 30 years and makes plans for 30 years of retirement. With a planned 50% income replacement rate (with Social Security being added on top), a savings rate of 15% is needed when real yields are a constant 4%. The required savings rate increases to 20% with a 3% yield, to over 25% with a 2% yield, to over 35% with a 1% yield, and to 50% with a yield that matches inflation. Due to precautions for reinvestment risk, someone starting out with this strategy today should consider savings rates in the neighborhood of 35%, and that isn’t even particularly conservative nor would it help anyone living longer than the planned 30 years. The savings rates needed for an 85% replacement rate are accordingly higher.

This is important, as the higher the necessary savings rate, the less attractive or practical a TIPS strategy will appear and the more potential regret one will feel at having sacrificed so much should stocks provide decent returns after all. (I showed in an article on safe savings rates that a 16.6% savings rate was the highest savings rate anyone, even in the worst- case scenario, might have needed since 1871 for this type of 60-year lifecycle for a 60/40 portfolio of stocks and Bills.) Faced with the reality of such a high savings rate, an investor may be much more willing to take his or her chances with riskier assets in the hopes of earning a risk premium over time. A stock market boom could even push TIPS prices down, leaving one exposed to too much regret and the risk that investors will abandon the strategy at the worst possible time. At some point, the savings rate needed to implement the TIPS strategy will be too high to be feasible for even the most cautious retirement savers.

6. TIPS lack historical data

Finally, there is simply not enough historical data on TIPS to properly model their role as a retirement savings vehicle. For example, the period since the introduction of TIPS has been one of moderate inflation, and TIPS have yet to be tested by high inflation. It is reasonable to expect that high inflation will increase the demand for TIPS. At the same time, if inflation increases, it is conceivable that the supply of newly issued TIPS from the U.S. government could decline or even stop. Increased demand and a lower supply would both work to raise prices, which would push the real yields for TIPS lower. We have already witnessed negative TIPS yields, and in the future it is completely plausible that TIPS will consistently provide negative real yields, requiring further increases in savings rates. We just don’t know what to expect.

The Bottom Line

TIPS have many attractive features for a retirement savings portfolio. In particular, they protect against bouts of unexpected inflation. An all-TIPS strategy, however, will require a high saving rate that is only justified if TIPS are truly risk-free, which is not the case. I have a hard time accepting that TIPS will be invulnerable to the types of black swan events that could decimate an otherwise well-balanced portfolio, and that, after all, is the strategy’s main selling point.

Wade Pfau, Ph.D., CFA, is an associate professor of economics at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan. He maintains a blog about retirement planning research at wpfau.blogspot.com

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The Bucket

Posted on December 7, 2011 by Editorial Staff -

Vanguard participants earn an average of 3.76% a year over five years

For the three million or so plan participants in defined contribution plans whose records were kept by Vanguard, the average annual total return over the five-year period ending on December 31, 2010 was 3.76%, net of all investment expenses fees and independent of each participant’s unique contribution or withdrawal pattern.

The average cumulative return for that period, which included the 2008-2009 crash in equity market prices and corporate bond prices, was 20.27%. From the end of 2007 to the end of 2010, the average Vanguard participant broke even, with virtually no total return gain or loss.

The results were reported in a November 2011 research brief, “Participants during the financial crisis: Total Returns, 2005-2010,” written by Stephen P. Utkus and Shantanu Bapat of the Vanguard Center for Retirement Research.

There was some dispersion around the averages. The youngest participants (<25) had the highest five-year annualized returns (4.18%) of any age group; those with the highest account balances (>$250,000) had the highest returns of any account size group by a small margin (3.97%). Those with household incomes between $30,000 and $50,000 had the highest returns of the income segments (3.84%) and men gain slightly more than women (3.84% versus 3.60%).

But those with the highest average annualized five-year returns (4.65%) were the over-65-year-olds who had all their money in a single target date fund. They also had the lowest average equity exposure, at 40%.

Not surprisingly, participants who used single target date funds (3.90%) and people who used Vanguard’s managed account service (3.66%) experienced tightly clustered returns—there was little variation in a random sample of 1,000 participants.

For the self-directed participants in the sample, the performance was scattershot, with annual five-year returns ranging from highs of almost 15% for a handful of people to lows as deep as minus 7.5% for a few. Some of the deviation was attributed to holdings of company stock.

“Some participants’ more extreme portfolio construction strategies resulted in exceptionally positive results over the period and some resulted in very poor results,” the authors commented.

“For many others, investment results were scattered, seemingly unpredictably, across the risk-return space. For plan fiduciaries, an important question to weigh is whether such dispersion of outcomes reasonably reflects individual participants’ desires for portfolio customization—or their lack of skill at portfolio construction.”

MetLife issues earnings forecast for 2012

MetLife, Inc., company expects 2012 operating earnings to be between $5.1 billion and $5.6 billion ($4.80 to $5.20 per share), up 7% over 2011 adjusted results, the largest U.S. life insurer and leading variable annuity issuer said in a release this week. The adjustments reflect several one-time items in 2011 and the estimated impact of an industry-wide change in accounting methodology.

MetLife’s stock price peaked at about $63 in October 2007, fell below $14 in early 2009 and closed at about $32 this week. Its one-year return is a loss of more than 18%, according to Bloomberg.

Shares of other publicly held insurers, such as Lincoln National Corp., Hartford Financial Services Group, and Genworth Financial Inc., have suffered as much or more.

A recent report in Bloomberg said:

The current low interest rates have hurt investment income at companies including MetLife, the largest U.S. life insurer. Treasuries have fluctuated over the past three months as European leaders tried to convince investors that nations in the region will be able to pay their debts. The U.S. 10-year yield rose to 2.42% on Oct. 28, after reaching a record low 1.67% on Sept. 23.

The average yield on MetLife’s more than $350 billion in fixed-income holdings sank to 4.8% in the three months ended Sept. 30 from 5.8 percent a year earlier, according to data on the insurer’s website. In addition to its bond portfolio, the life insurer is using funds to finance hard assets such as locomotives, power plants and real estate.

In addition to operating earnings growth in 2012, MetLife projects it will increase premiums, fees & other revenues by 5% over 2011 to between $47.3 billion and $48.6 billion, the company said in a release.

MetLife estimates its full year 2011 operating earnings will grow 32% to between $5.2 billion and $5.3 billion ($4.83 to $4.93 per share) compared with $3.9 billion ($4.43 per share) in 2010.

For 2011, MetLife expects to grow its premiums, fees and other revenues 32%, to be between $46.3 billion and $46.8 billion, compared with $35.2 billion in 2010.

Book value per share at year-end 2011 is expected to be between $56.15 and $57.25, up 28% from $44.18 at year-end 2010.

MetLife expects fourth quarter 2011 operating earnings of between $1.2 billion and $1.3 billion ($1.16 to $1.26 per share), up 7% from $1.2 billion ($1.19 per share) in the fourth quarter of 2010.

Per share calculations for full year and fourth quarter 2011 are based on 1,068.2 million and 1,066.5 million shares outstanding, respectively. Per share calculations for 2012 are based on 1,070.3 million average shares outstanding.

Plan sponsors give Vanguard top marks: Boston Research Group

Retirement plan sponsors ranked Vanguard tops in 2011 for overall satisfaction, value for cost, and investment performance, according to Boston Research Group’s 2011 Plan Sponsor Satisfaction and Loyalty Study. This marked the third consecutive year that Vanguard has achieved the #1 ranking for overall satisfaction; it has been in the top five in that category since 1999.

Boston Research Group (BRG) is a strategic market research and consulting firm that serves a number of industries, including the financial services industry. BRG conducts an independent annual survey of how plan sponsors perceive full-service retirement plan providers, which provide investment management and administrative services such as plan recordkeeping; accounting, legal, compliance, and trustee services; participant education; websites; customer service phone centers; and loan administration.

This year’s findings resulted from BRG’s nationwide survey between April and July 2011 of 1,454 401(k) plan sponsors with $5 million or more in plan assets. BRG establishes quotas for plan sponsor responses for each recordkeeper to achieve statistically reliable samples. Vanguard has been among the top-tier providers, as ranked by client satisfaction and cost, in every BRG survey since 1999.

The BRG findings follow a Cogent Research “Retirement Planscape 2011” survey this summer that rated Vanguard among the best in several categories, including brand impression, loyalty, and plan sponsor support. Conducted in March and April 2011, the survey cited Vanguard as the top defined contribution (DC) investment manager for favorable brand impression among those familiar with the brand.

In assessing attributes that help drive perception of a DC investment manager’s brand, plan sponsors placed Vanguard first in the categories of “competitive fees/fee structure” and “good value for the money.” In addition, Vanguard was second for “noteworthy organizational stability” and “industry-leading product innovation.” The survey studied the impact of brand and loyalty among a representative cross section of 1,994 401(k) plan sponsors.

Pre-retirees and retirees happy, optimistic

Americans’ trademark optimism is intact, at least in regard to retirement, despite the economic turbulence that is reportedly forcing many people to work longer and make do with less. In fact, many retirees found only one downside: They wish they could have done it sooner. That’s according to a new survey from The Hartford and MIT AgeLab.

The October 2011 Age of Opportunity study, which measured the opinions and concerns of Americans both in and approaching retirement, found that most retirees are pleased with their life, and both pre-retirees and retirees have a positive attitude about retirement overall:

Retirees are more likely to say “I am happier now that I am retired” (77%) than those who have yet to retire are to say “I will be happier after I retire” (64%).
Other than wishing they could retire earlier (35% of pre-retirees), or could have retired earlier (42% of retirees), many recent and soon-to-be retirees see few negatives about retiring.
Twenty-six percent of those nearing retirement said they feel “hopeful” about retirement, while 27% of those who have recently retired say they feel “peaceful.”
Among those who did find something less than positive about the next phase of their lives, dealing with medical or health issues was cited most often (2% for both pre-retirees and retirees).
Among retirees, the more affluent are twice as likely as others to cite giving up a fulfilling career as a negative to retirement.

The study, conducted by GfK Roper for The Hartford and the MIT AgeLab, surveyed people who are within 10 years of retiring versus those who have retired within the last 10 years, and attempted to answer the question, “Does the reality of retirement match expectations?”

Most pre-retirees and retirees cite health or medical issues as the thing they worry most about impacting their retirement. Health is definitely top of mind. Other health-related findings include:

If they could change one aspect of retirement, retirees say they would have saved more money or been better prepared financially (32%), but they also wish they’d paid more attention to the importance of health issues (13%).
When asked how long they would like to live, most said “as long as I am healthy” (80% of pre-retirees, 75% of retirees). In contrast, just 3% of pre-retirees and 4% of retirees said they would prefer to live as long as their money lasts.
Retirement-age Americans see themselves living a very long time. Many expect to make it into their 90s (29% of pre-retirees, 35% of retirees).
Although many retirees (48%) and most pre-retirees (63%) say their spouse is the person most likely to care for them if they become chronically ill, few (11% of pre-retirees and 10% of retirees) say their top concern is caring for a spouse or family member impacting their retirement.

When it comes to planning, both pre-retirees and retirees said a milestone birthday (19% of pre-retirees, 14% of retirees) or the realization that they are within 10 years of retiring (15% of pre-retirees, 11% of retirees) were the two most common triggers for serious financial planning.

It also seems that early planning plays off: More affluent retirees – those with $250,000 or more of investable assets – are twice as likely to say they began serious financial planning when they got their first job.

Both retirees and pre-retirees say they would give up some “extras” to help make ends meet in retirement, including moving to a more modest home (14% of retirees and 21% of pre-retirees), driving a less-expensive car (15% and 18%, respectively), or shopping less (17% for both). They were less willing to give up dining out, entertainment and recreational pursuits. Those who are more affluent are even more likely to “trade down” a home or car to preserve other aspects of their lifestyle.

Americans’ independent-mindedness also showed through as the survey found that retirees say they followed their own path, and pre-retirees hope to do the same. When asked what song they’d use to describe the retirement they have, or the one they hope to have, both groups most often chose (I Did It) “My Way.”

From Oct. 3-16, 2011, GfK Roper conducted a total of 1,964 telephone interviews with adults 45 years and older using RDD (random digit dialing). To qualify, respondents must have retired in the past 2-10 years (“retiree”) or plan to retire in the next 2-10 years (“pre-retiree”). These groups were further divided based on their household’s total investable assets, with quotas for under $250,000 and $250,000 or higher.

Securian finds opportunities for advisors among small business owners

Securian Research has created a research paper to help financial advisors understand and cultivate small business owners as potential clients.

“For many financial advisors small business owners (SBOs) are highly desirable when building an advisory business because of the many financial services they need and use. But SBOs are legendarily difficult to get in front of because they are so busy and not particularly interested in hearing about a service they’re not convinced they need,” Securian said in a release.

The paper, Small but mighty: Growing opportunities for financial advisors and small business owners, summarizes Securian’s analysis of the financial concerns of small business owners.

The online, statistically valid survey of 435 SBOs across the US shows their top financial concerns include cost control, profitability, building wealth, financial security for their families and rising health care costs.

Ironically, the percentages of SBOs who want outside assistance with these concerns is much larger than the percentage who actually seek and use it.

There are circumstances under which SBOs consider seeking a financial advisor’s services. All fall in the typical advisor’s “sweet spot,” including business succession planning, personal finance, asset management and employee benefits.

How does an advisor get on a small business owner’s radar? Recommendations from family members, business acquaintances, and other financial professionals provide the best entrée to an SBO. Clearly, networking with bankers, accountants and attorneys is important.

Securian will use the research to develop a “Small But Mighty” campaign that gives advisors a step-by-step approach to building their small business clientele.

Small business owners surveyed met these requirements:

Private company ownership, sole or shared
At least 50 percent responsibility company financial decisions
At least 50 percent responsibility for household financial decisions
For-profit company not in marketing, market research or financial planning
Three to 250 employees
Minimum of one year as owner.

Nationwide Financial aids in planning for retirement health care expenses

Health care is consistently among the main concerns of retirees and pre-retirees as they consider their post-employment finances. This, along with ongoing uncertainty over the future of Medicare, means that paying for heath care should now be taken into even greater consideration when planning for retirement.

To better assist advisors in helping clients plan for health care-related retirement expenses, Nationwide Financial today launched the Personal Health Care Assessment to help advisors estimate their clients’ health care expenses in retirement.

Today, Medicare provides health coverage to 46 million older or disabled Americans, but there are several common misconceptions about what is covered. In fact, Medicare currently covers only about 51% of the expenses associated with health care services.

Developed by leading physicians and experienced actuaries, The Personal Health Care Assessment program uses proprietary health risk analysis and up-to-date actuarial cost data such as personal health and lifestyle information, health care costs, actuarial data and medical coverage. The data is analyzed by these experts to identify a meaningful, personalized cost estimate that will help clients plan for future medical expenses.

The assessment starts with a questionnaire on the client’s health history, lifestyle and family history of medical conditions. After this, they will receive a report that offers suggestions for decreasing health risks. The report will tell clients about their health profile, health risks, estimated life expectancy based on those risks, and hypothetical out-of-pocket health care costs during their retirement.

The program also utilizes tools that allow for “what-if” scenarios. For example, how will a change in their year of retirement affect a client’s out-of-pocket heath care costs?

Do Motley Fool stock recommendations beat the market?

Posted on December 7, 2011 by Editor Test -

Following the collective stock recommendations made by Motley Fool website readers and posted on the website in a certain way could have yielded substantial returns, according to a paper published this year by the National Bureau of Economic Research.

“A strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over 9 percent per annum over the sample period,” the paper said.

“These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines, while positive picks on the site produce returns that are statistically indistinguishable from the market.”

Written by Judith A. Chevalier of Yale and Richard J. Zeckhauser and Christopher Avery of Harvard, the paper assesses the predictive power of approximately 2.5 million stock predictions submitted by individual users to the ‘CAPS’ website run by the Motley Fool company.

According to a summary of the paper published by NBER:

The data used in the analysis spans the period between November 2006 and December 2008, a period with significant swings in stock market performance. In the past, using different data sets, researchers have found that individuals perform poorly as stock market investors, except when they concentrate their portfolios on stocks for which they have an informational advantage.

And, while internet trading and message boards have facilitated trading, there is no evidence that those boards predict performance of the stocks. But the CAPS data differ from internet trading or online prediction markets in three ways: First, participants make precise predictions about future price, rather than simple buy/sell/hold recommendations. Second, the website provides a rating of participants by scoring their reputation.

And finally, CAPS synthesizes the history of past picks to produce a rating of each stock – on a 5-star scale. The authors analyze the informational content of the CAPS picks by tracking the performance of portfolios formed on the basis of positive and negative picks (that is, predictions of increases and decreases in the prices of individual stocks, respectively).

A preliminary look at the relationship between individual picks in the CAPS system and subsequent stock market returns shows some interesting facts. For example, on average CAPS participants — like most stock market analysts — have been relatively bullish, producing a ratio of about five positive picks per negative pick.

Second, the relationship between returns for positive versus negative picks varies very little by market cap. Third, averaging across the whole time period, 5-star stocks outperformed 1-star stocks by 9 percentage points (although removing the height of the financial crisis increases the difference in returns between 5-star and 1-star to 14.6 percentage points).

Most interestingly, these picks prove to be surprisingly informative about future stock prices. Although the return from investing in the positive-pick portfolio would have been negative over the course of the study period, the Motley Fool participants’ positive picks systematically outperformed the negative picks.

The authors posit that it may not be surprising that social investing websites are more successful at predicting abnormally negative future stock performance than they are at predicting abnormally positive future stock performance, because acting on negative information about the prospects for a stock can be more costly and difficult than acting on positive information about the prospects for a stock.

But the differences in returns between stocks ranked highly and stocks ranked poorly might be attributable to inherent differences in their characteristics, such as differences in risk, in market cap, or in past performance. Controlling for those factors, the authors find that differences in return are mostly due to stock picking.

Portugal to apply pension funds to deficit

Posted on December 7, 2011 by Editor Test -

The Portuguese government has agreed to transfer €6bn ($8.05 bn) from the pension funds of four of country’s largest banks to the state as part of a plan to cut the deficit to 5.9% of GDP. The government will use the assets to meet its budget-deficit target and pay part of the state’s debts currently held by banks, according to a government official.

Maria João Louro, business leader for retirement, risk and finance at Mercer, said the government believes the “exceptional measure” is the only means of avoiding tax hikes while meeting its public deficit target.

The measure aims to transfer the pension funds’ liabilities – specifically, liabilities related with pensions in payment – to the Social Security regime.

Ana Marta Vasa, partner at Towers Watson in Lisbon, told IPE.com that the banks had an interest in transferring liabilities because they wanted to reduce the volatility on their balance sheets stemming from defined benefit plans.

João Louro added: “One of the main consequences for the four banks involved in this process will be the significant reduction of their pension funds’ assets by 50%. But the obligation to guarantee future pension increases, as well as post-retirement benefits and medical post-retirement expenses, will still be incurred by the banks’ pension funds.”

However, because this particular transfer only relates to pensions in payment without future increases, the current funding level of the first-pillar system is unlikely to be affected, according to João Louro.

“To control the current and future resources of the first pillar, it will be necessary to implement an effective governance policy and a continuous monitoring process on cash flows (due to the fact we are on pay-as-you-go system),” she said.

In a related matter, a year ago it was announced that Portugal’s ministry of finance and public administration, after more than a month of negotiations, would take responsibility for €2.8bn worth of pension liabilities for three schemes maintained by Telecom.

The asset transfer is set to help the government address its budget shortfall, which last year was almost 10%.

The treasury will now take responsibility for members of the three schemes – Plano de Pensões de Pessoal da Portugal Telecom/CGA, the Plano de Pensões Regulamentares da Companhia Portuguesa Rádio Marconi and the Plano de Pensões Marconi – and transfer them to the Regime Geral de Segurança Social, the state social security system.

Portugal Telecom’s most recent quarterly statement for the end of September indicated that the company had €2.3bn in assets in its pension plan, €471m in unfunded liabilities for pension obligations and a further €337m stemming from healthcare obligations.

The transfer to the social security system will therefore also cover workers for health-related matters, such as paternity or maternity leave, as well as unemployment, while the unfunded liabilities will be covered by the company.

The treasury, which is currently evaluating the best method for transferring the assets, said the move would reaffirm government commitment to a universal social welfare system for all workers.

While the Portuguese government currently only holds a 2% share in the company following its privatization, it possesses enhanced voting rights due to the 500 A shares it holds and can veto major decisions.

In the past, it was able to veto a takeover by Spain’s Telefónica of Brazilian mobile phone network Viva, in which Portugal Telecom and Telefónica have holdings. Telefónica is currently a majority shareholder in Portugal Telecom, along with Norges Bank, BlackRock and UBS, which hold 5.19%, 2.35% and 2% stakes, respectively.

New Celent report forecasts DC trends

Posted on December 7, 2011 by Editor Test -

After a trillion-dollar decline in valuation in 2008, defined contribution asset levels set new highs in 2010, and DC plans’ share of US retirement assets is growing, according to a new report, from Celent, a Boston-based financial research and consulting firm.

The proprietary report, Developments in the Defined Contribution Market: New Funds and New Investment Vehicles in the US Market, covers 401(k), 403(b), 457 and Keogh plans, and anticipates these trends:

Continued emergence of new investment vehicles other than mutual funds in the DC market. These will include separate accounts, collective investment trusts, variable annuities, and company stock.

Continued growth in the DC market. The DC market’s five-year CAGR of 6.4% from 2005 to 2010 is likely to continue going forward. Reasons for this include continued use of auto-enrollment and auto-escalation, as well as continued stickiness of flows.

Continued dominance of large record-keepers. The top ten record-keeper will continue to win large plan sponsors and maintain their strong market share of the record keeping business. Fidelity, in particular, will remain the largest record-keeper by a large margin.

Growth of CITs as an alternative to mutual funds. Collective investment trusts have cost, performance and regulatory benefits over mutual funds. From 2006 to 2010, CITs have gone from approximately $400 billion to $900 billion in the DC market (CITs are also used in the government’s Thrift Savings Plan). With many DC plans converting to a CIT vehicle, Celent expects them to grow to approximately $2 trillion within the DC market by 2015.

Pressure for regulatory oversight of collective investment trusts. By law collective funds are on the turf of bank regulators. But increasingly, the SEC has argued that it can look at advisors who sell collective investment trusts.

Growth of custom target date funds in DC market. From 2005 to 2010, the target date fund market has a CAGR of over 30%. Target date funds have been beneficiaries of the 2006 Pension Protection Act, and their status as a Qualified Default Investment Alternative.

Going forward, Celent expects growth to continue due to growing adoption of auto-enrollment and auto-escalation; increased plan sponsor demand for innovation, which will lead to growth in custom designs; reduced costs due to passive management for smaller plan sponsors; and increased participation of asset managers, who will be able to enter the market based on their strength in customizing portfolios.

As a result of the increased scrutiny of TDFs’ glide paths after larger-than-expected losses in 2008, many funds revamped their offering to include a more conservative glide path. These conservative paths are likely to limit payouts to plan participants.

Close to 18% of plan sponsors who are not currently using custom-designs indicated that they might consider switching from off-the-shelf to custom-designed funds in the next couple of years.

The Fees Ate My Savings

Posted on December 7, 2011 by Editor Test -

To what extent do mutual fund fees undermine Americans’ attempts to save for retirement?

Cost-conscious investors have long observed that while mutual fund management fees may represent only a tiny fraction of an individual investor’s account balance, they often constitute a sizable portion of the individual’s returns—especially when those returns are low.

It’s also been widely observed that expenses can reduce cumulative returns over an average investor’s lifetime by tens of thousands of dollars—and that the reductions can frustrate even the best-laid plans to amass enough savings for retirement.

With increasing scrutiny of 401(k) plan fees, which tend to be smaller at larger plans and vice versa, and with the Department of Labor deadline for full fee transparency only about five months away, the fee question has rarely been as widely discussed as it is now.

As it happens, Stewart Neufeld, Ph.D., an assistant professor at the Institute of Gerontology at Wayne State University in New York, addresses that question in the current issue of the Journal of Financial Planning. He recommends that plan investment fees be cut to the price of an ETF fund, or no more than 10 bps a year.

In his provocatively titled paper, “The Tyranny of Compounding Fees: Are Mutual Funds Bleeding Retirement Accounts Dry?” he reports his analysis of the way the returns of the S&P 500 have been divided between the financial services industry and the investing public over various 10, 20, 30, 40 and 50-year historical periods.

“The bottom line is, mutual fund cost structures contribute substantially to inadequate accumulations in retirement accounts,” Neufeld writes. He then tries to remedy what he believes has been a general failure “to model the likely gap between market returns and that of the typical mutual fund over time frames relevant to individuals saving and investing for retirement.”

Neufeld considers three hypothetical equity funds whose fees reduce their annual returns relative to the market average (as represented by S&P 500 returns) by either 50 bps, 100 bps or, in a worst-case scenario, 250 bps a year. Then he looks at the performance of the S&P 500 during different periods and calculates the amount of average gains that would go to the client and the amount that would go to the fund company.

He finds that:

“if mutual funds underperform the S&P 500 by 250 bps annually, then after 10 years the financial services industry gets about 46% of the market gains on average, leaving the investor with 54%. Mutual fund investors fare considerably better when the level of mutual fund underperformance is only 50 bps annually—investors receive on average 82 percent of market gains over a 10-year time frame.

“As the investment period lengthens, the proportion of market gains that go to the industry becomes larger. For example, if mutual fund performance lags that of the S&P 500 by 250 bps annually over a 50-year investment period, the financial services industry captures about 74% of the market gains on average. If the performance lag is only 50 bps annually, then the proportion of market gains accruing to the industry after 50 years is about 23%.”

Neufeld goes on to assert that America’s 21^st century retirement savings crisis might go away—or might have been prevented—by lower 401(k) fees:

“The current value of equity mutual fund assets in IRAs and defined-contribution plans is about $2.8 trillion (Investment Company Institute 2011). Assuming historical market returns, this amount would increase to $71 trillion (inflation adjusted) over 50 years. A performance lag relative to the S&P 500 of 250 bps annually would leave investors with about $20 trillion in their retirement accounts, a difference of market versus achieved returns of $51 trillion.

“To put this into perspective, this potential loss to investors is several times larger than the entire U.S. national debt, as it currently stands. An additional $51 trillion in retirement accounts over the next several decades would contribute significantly to solving the problem of inadequate retirement savings.”

Lynne Ford leaves ING

Posted on December 7, 2011 by Editor Test -

Lynne Ford has left ING, effective November 30, an ING spokesperson confirmed today. Ford had been CEO of Individual Retirement, joining ING in December 2009 after spending much of her career at Wachovia. She currently serves as chairman of the board of the Insured Retirement Institute, according to the IRI website.

Ford’s departure was “the result of some consolidation within our broader retirement business. We have a large retirement plan business, and we more closely integrated Individual Retirement within the retirement plan business,” an ING spokesperson told RIJ. “So [Ford] decided to pursue opportunities outside ING.” Ford recently began reporting to the CEO of Retirement, Maliz Beames, based in Windsor, Conn.

ING Groep NV, based in the Netherlands, is in the process of divesting its U.S. businesses in the wake of its bailout by the Dutch government in 2008, the result of the company’s exposure to U.S. mortgage assets.

At Wachovia, which merged with Wells Fargo in late 2008, Ford served in a number of executive capacities within its investment and distribution organizations. In her recent role, Ford was responsible for the annuity and IRA products distributed across the company. This included the sales, marketing and product management for IRAs and annuities, as well as channel management, annuity operations and servicing.

She was also responsible for the company’s overall Retail Retirement strategy and branding as the company aimed to capitalize on the retirement market opportunity. In 2008, the business had annualized IRA sales of more than $30 billion and was the largest distributor of annuities in the U.S. with over $15 billion in total sales.

Prior to that role, Ford also served as senior vice president and director of sales initiatives for Evergreen Investments from 1997-2003, and a variety of sales capacities including national sales manager within Evergreen Investments from 1993-1997.

Ford earned a bachelor’s degree from Davidson College and a master’s degree from the University of North Carolina, Charlotte.

ING is under European Union orders to sell its entire insurance and investment management businesses before the end of 2013 as a condition for approval of state aid received amid the financial crisis. The firm, the Netherlands biggest financial- services company, aims to divest the remaining parts of the unit in two initial public offerings, Bloomberg reported last July.

ING received 10 billion euros of state aid in 2008 and transferred the risk on 21.6 billion euros of U.S. mortgage assets to the Dutch government in 2009. The company has repaid 7 billion euros and plans to repay the rest by May.

In mid-2011, the firm agreed to sell its U.S. online bank to Capital One Financial Corp. for $9 billion to fulfill another EU requirement. In July, ING Groep NV agreed to sell most of its Latin American insurance operations to Grupo de Inversiones Suramericana, the parent company of Colombia’s largest bank, for about 2.7 billion euros ($3.9 billion).

Five Challenges for Life Insurers in 2012: E&Y

Posted on December 7, 2011 by Editor Test -

Finding ways to manage both capital and risk in an uncertain political and economic climate will be the U.S. life insurance and annuity industry’s challenge in 2012, according to Ernst & Young’s new Global Insurance Center US Outlook.

“Pressures such as low interest rates, volatile equities markets, and a political and regulatory environment in flux will continue to impact the industry, making it difficult for insurers to boost earnings,” said Doug French, Financial Services and Insurance and Actuarial Advisory Services Leader at Ernst & Young LLP (US), in a release.

Ernst & Young has identified five challenges for US life insurers and annuity issuers in 2012:

1. The low-interest-rate environment: Low interest rates should persist until at least 2013, increasing the risk of spread compression for existing products. At the same time, efforts to increase sales of fixed annuities and universal life insurance are hampered by low rates. While interest rates are likely to remain low through 2013, they could climb rapidly after the Federal Reserve’s Treasuries buying spree come to an end, French says. In such an event, disintermediation risk could be a concern, as policyholders jettison existing products in favor of investing in new ones with higher rates. Understanding the interaction of the asset and liability cash flows under a variety of scenarios will help prepare insurers to weather these stormy financial times.

2. Accounting and regulatory convergence: Regulatory ambiguity will likely persist through 2012. Although the Dodd-Frank legislation has passed its first anniversary, many key rules have yet to be formalized, several of which will impact insurers. The Federal Insurance Office (FIO), created under Dodd-Frank may contend with the National Association of Insurance Commissioners (NAIC) around the Solvency II issue of “equivalency” for US insurance regulation. In addition to global regulatory developments on a macroeconomic scale, insurers may also want to consider specific regulatory changes at the microeconomic level and use them to their advantage.

3. Predictive modeling: Analytic and predictive modeling techniques continue to improve, creating opportunities for increased sales, improved efficiency and expanded capabilities. Life insurers are looking to use predictive modeling to improve the speed and accuracy of underwriting, which is traditionally time-consuming and expensive. Beyond underwriting, life insurers are increasingly using analytics and predictive modeling to create opportunities for increased sales and improved efficiency, and even mitigate strategic risks. Given the extensive modeling of multiple scenarios required by the developing principles-based regulations, insurers will find that they can improve their risk management processes by gaining insight into the range of outcomes that can occur in the current volatile environment.

4. Life insurance taxation: Insurers may be challenged by future Congressional efforts to reform the federal tax code. Implications exist for both corporate-level taxes and policyholder tax issues. Budget deficits and revenue generation are serious concerns, yet they will remain in flux because of the economic and political changes underway. The health of the economy will be a central political issue in the 2012 general election. That hot button could set in motion changes in the tax code, which may have significant repercussions for the life insurance industry.

5. Internet potential: Insurance companies have historically operated via a very traditional sales model involving agents and face-to-face sales to consumers. At present, the extent of life insurer presence on the Internet largely consists of financial calculators of insurance needs; lead-generating activity like educational materials and product information; and proprietary web applications that support the sales force through online insurance application forms and illustrations. While insurance in its current form does not lend itself well to web sales, life insurers can leverage the technology to develop stronger ties to customers and build a better brand – especially with younger, web-savvy generations of insurance buyers.

Running Lapse around Variable Annuities

Posted on December 7, 2011 by Kerry Pechter -

Judging by their low lapse rates during the financial crisis, variable annuity contract owners knew when their living benefits were “in the money”—that is, when the account value fell below the benefit base—and consequently held onto them even tighter than they normally would.

That’s one finding of a recent study by Ruark Consulting, the Simsbury, Conn.-based actuarial and reinsurance consulting firm. Based on seven million policy years of data from eight VA issuers over the period from 2007 to 2010, the results were presented at the Society of Actuaries’ Equity-Based Insurance Guarantees meeting in Chicago in November.

At a time when some VA issuers are growing ambivalent about that business— especially after a quarter when stock indices and interest rates fell and some issuers posted hundreds of millions of dollars in new reserves against those blocks of business—policy lapse rates are under scrutiny.

The timing of contract lapses is important. When values of the funds underlying the VA guarantee fall, assets under management fall and fee income falls, hurting the recovery of commissions paid to intermediaries (deferred acquisition costs, or DAC).

Low interest rates also hurt the yield that helps support the guarantees. Low lapse rates preserve fee income, but also may keep the insurer on the hook for guarantees that are, at least temporarily, underfunded.

Lapse rates therefore can make a big difference not only in the issuers’ long-term exposure to the risks and rewards of a VA with a guaranteed payout rate, but also in their short-term profits, via reserve requirements. If they are publicly held, the price of their shares may also be affected.

Emerging trends

It’s premature to draw conclusions about lapse behavior, Ruark actuary Peter Gourley told RIJ, because the VA living benefit business is relatively new, with many contracts still in the period when surrenders may be penalized. But he has observed certain trends.

Perhaps the most significant—though not necessarily surprising—observation was that lapse rates for guaranteed lifetime withdrawal benefits (GLWB) sank dramatically at the depth of the financial crisis. Lapse rates for all contracts with living benefits were reduced, but surrenders of GLWB contracts were downright rare.

“Prior to the financial crisis, the surrender rate for contracts with GMIB or GMWB living benefits was 60% of the rate for contracts without a living benefit,” Gourley told RIJ.

“If you look just at the contracts with GLWBs, the lapse rates were only about 30% of those without any living benefits. So it is a 40-70% reduction, depending on the type of living benefit. If the overall lapse rate for Year Five of the surrender period was 10%, for example, then the lapse rate for Year Five of a GLWB contract was only three percent.”

At the nadir of the financial crisis, lapse rates fell even farther, he said. “As the benefits got deep in the money, all else being equal, the lapse rates for GLWBs went down an additional 80%,” Gourley said.

“The mere presence of a living benefit reduces the baseline rate by 40% to 70%. In-the-moneyness can reduce it by as much as another 80%. So, for example, if the baseline rate is 10%, and the GLWB takes you down to 3%, and you drop another 80%, you’re now down to a 0.6% lapse rate” on deep-in-the-money GLWBs.

The Ruark data indicated that other drivers of contract owner behavior were the number of years remaining in the surrender period and whether or not the intermediary who sold the contract was receiving trail commissions from the manufacturer.

“For the typical VA product, we saw low surrender rates in the early years, then a spike in lapse rates right after the end of the surrender period, and then less thereafter,” Gourley said, adding, “This being an intermediated sale, the fact that the advisor gets paid a trail commission for keeping the assets with the insurance company provides some incentive to keep the money there. Higher levels of trail commission are correlated with lower surrender rates, which makes sense.”

Their low lapse behavior notwithstanding, some GLWB owners were taking partial withdrawals from their contracts. They fell into three groups of about equal size: those taking partial withdrawals close to the allowed limit under the terms of the contract, those taking much less than the limit and those taking a lot more than the limit.

“About a third of those who made withdrawals made the full withdrawal amount each year, or within 95 to 105%. But one third was way under, averaging less than 70%. The other third was taking more than double the full withdrawal amount,” Gourley said.

Jury still out

One still-open question is this: Do VA owners intend to rely on their contracts as a source of guaranteed income in retirement? That is, will they exercise their riders or simply pay the rider fee and ignore the rider unless it’s in-the-money. For the moment, the presence of deferral incentives makes it hard to tell.

“We as a company think the jury is still out,” Gourley said. “This is because so many living benefits have deferral incentives. Some of them pay out 10% per year if you delay withdrawals to year 10.

“So if we only look at the first five to seven years of behavior, and see that only 20% of the people are making withdrawals, it’s possible that the rational thing to do is to defer the withdrawals, assuming that the deferral incentives are fairly priced. It depends on the particular product design.”

There were rumors during the financial crisis that some advisors would urge VA/GLWB contract owners to withdraw as much money as possible from their contracts without forfeiting the guarantee and invest the withdrawals in the depressed stock market. Ruark found no evidence of that.

“During the crisis, the behavior didn’t bear out that,” Gourley told RIJ. “As the benefit got more valuable, the withdrawal behavior remained fairly stable. It’s a retirement income product, and contract owners seem to be using it that way.”

So far, Ruark has the most seasoned lapse behavior data on contracts with Guaranteed Minimum Income Benefits, or GMIBs, where the balances are designed to be annuitized after a waiting period. “The overall 60% decline in GMIB spike lapse rates during the financial crisis was driven by GMIB contracts that were deep in the money,” Gourley said. Many of those contracts are approaching the ends of their waiting periods. During the financial crisis, owners hung on to their contracts, but it will remains to be seen whether they will exercise the rider at their earliest opportunity.

Going forward, Ruark will be parsing the data as it becomes available from insurers. “We want to know if these low lapse levels will persist or if they will go back up in the future? Another question is, will the added fee income offset the cost of the guarantees?

“At the moment, there are many of policies with living benefits and death benefits that are in the money,” Gourley said. “If that continues, it is a big exposure for the industry. But these are long-term guarantee features, and the products are fairly new, so it may take decades before the true cost of these guarantees will be known.”

Correction

Posted on December 1, 2011 by Editor Test -

Dollar’s woes could boost global and emerging market debt: BNY Mellon

Posted on November 30, 2011 by Editor Test -

The diminishing role of the U.S. dollar as a reserve currency could create growing opportunities in global and emerging market debt, according to a white paper from Standish Mellon Asset Management Company LLC, the fixed income specialist for BNY Mellon Asset Management.

The U.S. dollar’s influence is likely to diminish over time as foreign central banks diversify their reserves away from the U.S. currency, leading to a multi-polar global reserve regime, according to the recently published report, Perspectives for Global Fixed Income: Losing Faith in the U.S. Dollar?

In the report, Standish expects the dollar will retain its role as the world’s main reserve currency in the short term, as it has no obvious challenger. The report notes all of the most commonly suggested alternatives have their own limitations at the present time.

These include the impact of the European sovereign debt crisis on the euro, the lack of full convertibility for the Chinese renminbi, and the lack of liquidity for gold, the report said. It also notes that the Japanese yen never circulated broadly because Japan is a relatively small country with a shrinking population.

But over time, the dollar’s dominance will continue to erode and a number of other currencies could combine to fill the vacuum, the report predicts. These could include the euro and renminbi, as they overcome their challenges, and a growing role by several emerging markets currencies, according to Standish.

“Fiscal deficits and a reliance on foreign borrowing have combined to drive down the U.S. dollar’s trade-weighted value by one third since 2002,” said Thomas D. Higgins, global macro strategist for Standish and the author of the report. “The recent downgrade of the U.S. sovereign rating has added to the negative sentiment.”

The process of reserve diversification already has begun as foreign central banks, particularly in emerging markets, have begun to lower their allocations to the U.S. currency, the report notes. The dollar’s share of global currency reserves has declined over the last 10 years as emerging markets are relying less on external debt and move from fixed to floating exchange rates, Standish said.

Foreign central banks have held U.S. Treasuries for a number of reasons, including boosting exports to the U.S. by holding down the values of their own currencies against the dollar, the report said. Standish proprietary research estimates that each $100 billion in foreign capital inflows into the U.S. Treasury market shaves roughly 10 basis points from U.S. 10-year Treasury yields. However, low yields of U.S. Treasuries and the declining value of the dollar have resulted in losses by foreign central banks holding Treasuries, providing an impetus for foreign central banks to continue divesting Treasuries, the report said.

The share of U.S. dollars could gradually decline back to its share of world GDP over the coming decades, which could increase U.S. 10-year yields by as much as 50 basis points, according to the report. This would make Treasuries unattractive, while emerging market debt could offer more compelling value over the long term, it said.

“As the international role of emerging market currencies grows, these currencies should appreciate and demand for bonds denominated in those currencies should expand,” said Higgins. “The amount of emerging market local currency bonds has expanded significantly in the last 10 years, and it should continue to increase in emerging markets with solid economic fundamentals.”

What Income Planning Software Do You Use?

Posted on November 30, 2011 by Editor Test -

If you’re a financial advisor, do you use software to help your near-retirement or retired clients create stable lifelong income? If so, please tell us what kind you use and how you like it.

Below is a list of the tools (and the companies that produce them) that we’re aware of.

Retirement Works II (Still River)
Income Strategy Generator (ISG).
Income for Life Model (Wealth2K).
360 Pro (Emoney Advisor).
THRIVE Income Distribution System (Curtis Cloke)
LifeYield ROI (LifeYield)
Retirement Income Asset Manager (RIAM)
Retirement Savings Planner (Torrid Technologies)
Income Max (Cygnus Software)
NaviPlan (Zywave)
goalgamiPro (ASI)
ESPlanner
Otar Retirement Calculator (Jim Otar)

If you’re using something else, let us know. If you don’t mind, we’d even like to chat with you by phone or e-mail about the pros and cons of the software you’ve tried. Send me an email ([email protected]) or call me at 610-965-3103.

At the moment, we’re not focusing on the planning platforms that broker/dealers provide their affiliated advisors, or on the “wizards” that some annuity issuers and asset managers post on their public websites. But if you use one of those tools in your work, tell us what you like or don’t like about it.

Granted, there’s not always a bright line between generic financial planning software and retirement income planning software. No matter. Whatever you happen to use to help your clients create a retirement income strategy—even if it’s just a Magic 8 Ball—we’re all ears.

MetLife Dominates 3Q VA Sales

Posted on November 30, 2011 by Editor Test -

A sales surge by MetLife—whose market share jumped 4.5 points, to over 22%—helped the variable annuity industry to a strong third quarter amid turbulent market conditions. Overall, the industry is on pace to break $150 billion in sales for the first time since 2006, according to Morningstar’s quarterly VA report.

MetLife’s $8.56 billion in sales in the third quarter and its sales of $6.96 billion in the second quarter were the highest and second highest quarterly VA sales ever. The burst in sales of MetLife’s VA began after the company increased the maximum deferral bonus of its Guaranteed Minimum Income Benefit (GMIB) early in 2011. Since then, MetLife has reduced the bonus, so demand for its contract is expected to cool down.

A jump in net cash flow for the industry as a whole was the other big news of the quarter. “A very bright spot in the third quarter data was the significant increase in net cash flow, to $8.9 billion from $5.7 billion in the second quarter and $6.4 billion in the third quarter of 2010, increases of 54.3% and 38.4% respectively,” wrote Frank O’Connor, product manager of the VA database at Morningstar. “In fact, net cash flow of $8.9 billion is the highest reported since the fourth quarter of 2007.”

Top Ten Sellers of Variable Annuities, 3Q 2011 ($mm)
Issuer	3Q 2011	2Q 2011	3Q 2010	Mkt. Share
MetLife	8,560.0	6,966.9	4,660.9	22.22%
Prudential Financial	4,475.4	4,534.3	5,372.6	11.62
Jackson National	4,212.0	4,973.5	3,657.7	10.93
TIAA-CREF	3,268.1	3,460.5	3,458.2	8.48
Lincoln Financial	2,295.1	2,511.1	2,202.1	5.96
Sun America/ VALIC	2,208.0	1,912.7	1,585.9	5.73
Nationwide	1,717.4	1,886.5	1,310.1	4.46
AXA-Equitable	1,636.1	1,846.1	1,551.4	4.25
Ameriprise	1,551.7	1,687.4	2,024.5	4.03
AEGON/Transamerica	1,324.1	1,388.6	942.6	3.44
Source: Morningstar Inc., November 30, 2011.

The VA industry still depends on transfers of existing contracts for the most of its sales. The drop in 1035 transfers should be no surprise. Despite the post-crisis equity market recovery, many contract owners still have valuable “in the money” guarantees that they would forfeit by executing an exchange.

At the same time, in a historical reversal, the newest VA contracts tend to be less generous than older contracts, which means owners have less incentive to seek a change and advisors have less justification for recommending one.

VA buyers continued to favor contracts with living benefits. “Robust sales and rising net cash flow reflect a surge of new money into variable annuity products offering lifetime income benefits enhanced with guaranteed growth features such as MetLife’s GMIB Max II, Prudential’s HD Lifetime Income, Jackson National’s Lifeguard Freedom 6, Lincoln National’s Lifetime Income Advantage and i4Life, and Nationwide’s Lifetime Income Options,” O’Connor wrote.

“The income benefits offered by these five companies, whose combined sales account for 64.8% of all retail variable annuity sales, include features geared not only toward securing income but to increasing income over time on a guaranteed basis through withdrawal deferral bonuses and/or fixed percentage increases.”

The third-quarter stock market correction has taken a big toll on variable annuity assets. VA industry assets under management (AUM) fell by over $145 billion, or almost 10%, to $1.422 trillion from $1.567 trillion. MetLife alone has $128 billion, or 9% of those assets.

Of the top 10 VA sellers, the only major company beside MetLife to report a sales increase in the third quarter was SunAmerica/VALIC, which sold $2.2 billion, up from $1.9 billion in the prior quarter, to finish in sixth place overall. The company’s market share rose one percentage point, to 5.73%.

Thoughts on DoL’s “Re-Proposal”

Posted on November 30, 2011 by Fred Reish -

On September 19th, the Department of Labor announced that, rather than issuing a final regulation on fiduciary investment advice, it would be re-proposing the regulation, which would allow additional comments on the re-proposed version. This is a victory for the private sector, and particularly for insurance companies and broker-dealers, who objected to a number of the provisions in the initial proposal. However, the victory may be limited, in the sense that the DOL will likely provide relief on certain issues, but not on others.

Noticeably absent from the DOL’s September 19th release, and statements by DOL officials, is any suggestion of a broad revision of the regulation. In other words, it appears that the basic structure of the proposal will remain in place, but that there will be “adjustments” to deal with specific issues.

While that may be of welcome relief to the financial services industry, it will probably not be helpful to those who are concerned about fiduciary status for ongoing services and recommendations to qualified retirement plans, such as 401(k) plans. In those cases, specific recommendations are made and the services are ongoing. As a result, it is likely that the changes in the re-proposal will continue to be expansive in terms of broadening the definition of fiduciary advice—particularly for small- and mid-sized plans.

My “best guess” is that the DOL will provide relief in the following areas:

• Individual retirement accounts: It is likely that the DOL will extend the exemptions of Prohibited Transaction Class Exemption 86-128 to virtually all advice given to the owners of IRAs. In other words, it is likely that both broker-dealers and RIAs will be able to give individualized advice to IRA owners and receive compensation that is not level, that is, the compensation may vary based on the recommendations, which would be more consistent with a broker-dealer business model than with an RIA business model. It will be interesting to see if the DOL imposes any limitations on that exemption, for example, disclosures concerning any variable compensation.

• Commissions: Many of the people who criticized the proposed regulation asserted that it precluded commissions as compensation. That is because, where advice is given and compensation is variable, it can result in prohibited transactions. On the other hand, level compensation, regardless of whether it is a fee or a commission, would not result in a prohibited transaction. It seems likely that, in response to the criticism, the DOL will clarify that, commissions are not per se precluded as a form of compensation for fiduciary advice, so long as they are level.

• Insurance: In certain cases (for example, insurance agents), the agent represents the provider (i.e., the insurance company) and not the customer (e.g., the plan). The proposed regulation created an exemption for those cases, so long as, among other things, the agent made it clear to the customer that the agent’s interests were “adverse” to the customer’s. Needless to say, there were strong objections to the use of the word “adverse,” with the argument being that the agent could be looking out for the best interests of the customer and at the same time recommending a product offered by an affiliate. It is likely that the DOL will offer a “softer” version of that exemption that will be more acceptable to the private sector and more consistent with common understandings.

• Appraisals: The proposed regulations would have classified appraisers as fiduciaries in a variety of cases. It is likely that the range of cases will be limited, because of objections to the general nature of the rule—and since the primary focus of the change was for appraisers of closely held stock in ESOPs. It is also possible that there will be some clarification of the responsibilities of the appraiser. For example, the preamble or the regulation should specify that the appraiser is a fiduciary for purposes of determining the most accurate valuation and not for the purposes of determining a valuation most favorable to the participants.

• Commercial transactions: A number of commercial transactions, such as swaps, could have been covered by the literal wording of the proposed regulation. The DOL has stated that it will clarify those issues and permit the continuation of transactions that are clearly commercial in nature and that are arm’s-length.

• Exemptions and opinions: The DOL has also stated that the re-proposed guidance will provide for the continuation of existing exemptions, advisory opinions and other guidance related to fiduciary transactions.

• “Individualized” advice: Under the proposed regulation, in a number of circumstances the provision of investment recommendations, whether individualized or not, would have resulted in fiduciary status. The DOL has suggested that it will limit the regulation to circumstances in which individualized advice is provided and is directed to specific parties.

Rolls-Royce agrees to £3bn longevity swap with Deutsche Bank

Posted on November 30, 2011 by Editor Test -

UK – The Rolls-Royce Pension Fund is the latest scheme in the UK to have entered into a longevity swap – one of the largest to date, reducing its liabilities by approximately £3bn (€3.5bn), IPE.com reported.

Under the agreement, Deutsche Bank will hedge the longevity exposures of the scheme, passing on the risk to a syndicate of reinsurers.

The cost of this transaction will be borne by the pension fund and will have no material effect on the funding arrangements, according to the Rolls-Royce pension scheme.

Andrew Shilston, Rolls-Royce finance director, said: “We have made sure that as our pensioners live longer in retirement we have made proper provision for them.

“This is the latest in a series of measures we have taken to achieve greater certainty for our future funding requirements.”

According to Rolls-Royce’s latest annual report, the total value of its defined benefit scheme assets stood at £7.8bn in December, resulting in a surplus of around £700m. Over 80% of assets were invested in a liability driven portfolio, with a further 15% directly invested in equity.

Actuarial assumptions estimated that the company’s current pensioners would live for an additional 22.4 years after turning 65, while employees currently 45 would live to an average age of 89.2.

Aon Hewitt was lead adviser of the trustees on the deal, with Linklaters offering legal advice and Mercer advised the fund on the investment implications of the transaction, including the interaction with the existing liability hedging arrangements and the overall impact on the plan’s risk position.

Martin Bird, managing principal at Aon Hewitt, said: “The Rolls-Royce Trustees entered into the swap to further enhance the security of all the members’ benefits.

“We worked closely with the Trustees to decide that this was the right approach for them to take and also that the swap was structured in a way that offered the best possible terms on price, security and other key longevity hedge features.”

The longevity swap agreed by the trustees of the Rolls-Royce pension scheme follows a series of similar agreements signed by UK pension plans over the last twelve months.

In August this year, the pension plan for broadcaster ITV committed to one of the UK’s largest longevity swaps, with the deal worth approximately £1.7bn (€1.9bn).

The third quarter of 2011 saw over £2bn of risk transfer deals completed, comprising buy-ins, buyouts and longevity swaps, according to a report by the consultancy Hymans Robertson.

The research suggests that 2011 will be a record year for pension scheme risk transfer activity with deals potentially topping £9bn of UK pension scheme liabilities during 2011 alone, as a series of significant pension scheme risk transfer deals are expected to close during the current quarter.

James Mullins, partner and head of buyout solutions at Hymans Robertson, said pension schemes were increasingly viewing buy-in deals simply as an investment strategy decision, and one that looks particularly attractive in the current market.

“Many pension schemes are reviewing their government gilt holdings, which provide quite a good match for pensioner liabilities, given the option to exchange some of their government gilts for a buy-in policy, providing a near perfect match for pensioner liabilities at a potentially lower cost”, he said. “This pricing dynamic is one of the few positives for UK pension schemes following the market turmoil since the summer of 2011.”

According to Mullins, 2012 will be as buoyant as 2011 for the pensions risk transfer market and providers will continue to ramp up their efforts to meet this demand which is likely to see insurance companies as well as banks take on up to £50bn of pension scheme liabilities before the end of 2012.

The reinsurance of longevity risk is also increasingly becoming an issue, with US company Prudential Retirement earlier this month agreeing a £450m reinsurance deal with Rothesay Life, marking the second such transaction by the Goldman Sachs subsidiary this year.

Big Danish pension plan switches to DC from DB

Posted on November 30, 2011 by Editor Test -

Industriens Pension intends transform its entire pension scheme into a life-cycle (a defined contribution plan with declining equity exposure as participant ages, but no individual control over investments) product in June, in the final stage of a move away from a traditional guaranteed pension, IPE.com reported.

On December 1, the DKK90bn (€12bn) labor-market fund will alter the basis of all member accounts to “unit-linked” from “guaranteed with-profits”. The latter type of plan offers a defined benefit pension with opportunity for bonuses in retirement based on investment performance.

This change was announced in August and will be accompanied by windfall payments to members equaling around 20% of their savings as the fund shares out the DKK13bn collective savings pool, which will no longer be needed.

Jan Østergaard, chief investment officer, said: “On the first of June, we will change the scheme to a life-cycle product.”

The new product will be quite simple, with no choice of risk profiles offered to members, he said.

“There will only be one level of risk, but the younger the members they are, the more risk they will have,” he said. “Typically, they will have higher proportions of credit bonds and equity.”

The board of trustees – made up of employee representatives – took a positive decision that the new regime would be one with no investment choices for scheme members to make.

“The board believes members wouldn’t wish to have that choice,” Østergaard said.

“The main argument is the profile of our members. They are blue-collar workers in the industrial sector and typically don’t want to make investment decisions themselves.”

Østergaard explained that, while many pension funds in Denmark running the traditional with-profits pension system – which includes a minimum yield guarantee – have run into difficulties, this has not been the case for Industriens Pension.

Such guaranteed pensions will require a high level of reserves under the upcoming Solvency II legislation, and some pension funds are unable to provide this.

“We had no problem meeting the Solvency II requirement,” Østergaard said. “The main argument for moving away from guarantees was mobility in the labor market and fairness with respect to returns.”

Because the industrial sector in Denmark has suffered from heavy job losses over the last few years, Industriens Pension has lost more than 35,000 of the 195,000 active members it had three years ago.

Most of the pension funds that Industriens’ members are likely to move to have already changed their pension product to pure defined contribution for new members.

“If we stayed with the old system, anyone leaving us would have to leave their share of the reserves here and not gain any reserves in their new pension scheme,” Østergaard said.

He said Industriens Pension had managed its guaranteed with-profits product successfully in comparison with its peers for two reasons.

“There has been a policy since the 1990s of building up reserves, and we have also opted to pursue an active investment strategy,” he said.

“The other key to our success is deciding early on to hedge the guarantees 100%. You face a high level of risk from the guarantee because the liabilities fluctuate widely – due to the fact they are so long lasting.”

The recent phase of very low interest rates did not dent Industriens’ resources because of the hedges, he said. “It also meant we had a huge gain on the hedges, and gain corresponded to the increase in liabilities due to the guarantees.”

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