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A Modest Proposal

Posted on August 2, 2011 by Editor Test -

As the debate over the debt ceiling raged last week, I thought of a simple way to solve our nation’s financial problems. With one grand gesture, we could cut the national debt in half and remove a huge burden from our children and grandchildren.

I’m talking about debt forgiveness. Everyone who holds Treasury securities of any kind should simply rip them up or burn them. In World Wars I and II, Americans helped their country out of a fiscal jam by buying government bonds. Now we can help our country and progeny out of a tough spot by tearing up our government bonds.

To be sure, debt forgiveness will require sacrifice. The individuals, corporations, local governments, banks, insurance companies, pension funds and mutual funds that hold $3.6 trillion in U.S. Treasury debt might feel some pain.

But, frankly, is that debt worth the space that it takes up on government servers? The returns are negligible, if not negative. And redeeming it for dollars—i.e., monetizing the debt—could only lead to Weimar-style inflation. Better just to torch those obligations.

The Social Security Trust Fund and other U.S. agency trust fund should also forgive the $4.6 trillion in Treasury securities they hold. That’s just more worthless paper. I say, shred it and be done with it. Our children will thank us.

China, Japan, Saudi Arabia and the U.K. may be slow to forgive and forget their $4 trillion in Treasury securities. But did they ever really think that those bills and bonds would ever be worth their face value? Please.

Of course, some people claim that every dollar of Treasury debt is also a dollar of savings. Warren Mosler, whose thoughts appear in a Guest Column in today’s issue of RIJ, believes that the country’s financial assets and its liabilities are simply two sides of a single balance sheet. Read the column and decide for yourself.

It occurs to me that, even after we’ve disposed of our government bonds, we still won’t have completed the job of relieving our children and grandchildren of financial baggage. We’ll still be asking them to buy the more than $15 trillion in stocks that we currently hold. How realistic is that?

Which leads me to the obvious conclusion that we should write off all of our paper. Let’s face it, stocks and bonds are nothing but a big unfunded liability. Am I right or am I right? Let’s send all of it to the recycling center, so that our grandchildren can inherit a country that’s the world’s biggest creditor—as it was 4o years ago this month, when Richard Nixon severed the last thread of the gold standard.

Raymond James launches the RightBRIDGE Annuity Wizard

Posted on August 2, 2011 by Editor Test -

Raymond James, the 4,500-advisor independent broker-dealer, has launched a new tool, the RightBRIDGE Annuity Wizard, to help advisors choose the most appropriate annuities for their clients.

Raymond James Insurance acted as a development partner with CapitalRock and assisted CapitalRock personnel in designing and configuring the RightBRIDGE Annuity Wizard.

The RightBRIDGE Annuity Wizard is a new component of Capital Rock’s RightBRIDGE sales intelligence solution. It gathers key information from clients about their preferences for income, liquidity, time horizon, risk tolerance, expenses, and guarantees, the two companies said in a release.

The calculation engine then filters the company’s inventory of available annuities and living benefit options and chooses those that best meet the client’s objectives. The tool’s “audit text” assists the professional in communicating how the specific annuity and living benefit configuration meets the client’s needs. A “reason text” also describes for the client and future heirs the disciplined approach used to determine the suitability of a product.

Scott Stolz, President of Raymond James Insurance said, “There are numerous products on the market that provide a wealth of product information, but none of them has the capability of analyzing the various living benefits to determine which ones match up best with an individual client’s retirement needs.

“By simply entering some basic client information and answering a handful of very simple questions, our advisors will be presented with a short list of variable annuity living benefits that are likely to best allow their client to meet their retirement goals. Just as importantly, the tool will allow our advisors to clearly document the suitability of their recommendation.”

Raymond James Financial Services, Inc. is a national investment firm that provides financial services to individuals, corporations and municipalities through more than 2,000 offices throughout the United States.

CapitalRock, LLC uses existing data on clients to maximize sales opportunities within a company’s book of business. The firm’s founders began using expert systems in the financial planning and wealth management arena in 1987, and over the years have applied various analytical and rules engines to the areas of online trading, compliance and suitability and wealth management.

The Bucket

Posted on August 2, 2011 by Editorial Staff -

Chris Ashe moves to New York Life from Prudential Annuities

Chris Ashe has joined the New York Life as senior vice president and chief financial officer of the company’s Retirement Income Security (RIS) unit, reporting to Chris Blunt, the executive vice president in charge of RIS. Ashe will oversee financial planning and reporting, product pricing, investment alignment and risk management for the RIS business unit.

Ashe spent the past sixteen years at Prudential Financial, most recently serving as vice president of financial and strategic planning at Prudential Annuities. Prior to that, he served as CFO in the retirement division at Genworth Financial, and assistant controller and operations director at Wachovia Corporation.

He holds a bachelor’s degree in business management from Rutgers University, an M.B.A. from Georgia State University, and a chartered financial analyst (CFA) professional designation.

Boomers are redefining the word ‘grandparent’

A new report from the MetLife Mature Market Institute shows that there are 65 million grandparents in the U.S. today, up from 40 million in 1980. In general, they are younger, more financially comfortable and more generous to their grandchildren than their predecessors.

The report, “The MetLife Report on American Grandparents: New Insights for a New Generation of Grandparents,” was produced with demographer Peter Francese. Data for was gathered from the 2010 U.S. Census and compared with previous Census figures. Other information came from the Centers for Disease Control and Prevention and the Department of Labor’s Bureau of Labor Statistics.

Contrary to the stereotypical “grandma” and “grandpa” of yesteryear, today’s grandparents are far from dependent, the study fond. They are more likely to be sharing their resources with their children and grandchildren. Many of them are working age and most are heading households.

While the real income of those ages 55 and over has risen, that of their children has declined. Grandparents are more likely than ever before to be college graduates, while college graduation rates have remained the same among younger men.

“The number of multi-generational households has increased, due in part to the recession,” said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute. “This trend, coupled with the increased financial instability of today’s younger families, has huge business implications.

“The fact that grandparents are spending a great deal of money on infant food and equipment, children’s clothing, toys, elementary and secondary school tuition, and financial, mortgage and insurance products, represents a change in buying habits and may change the way marketers and advertisers focus their efforts.”

The MetLife Report estimates that by 2020 there will be 80 million grandparents who will represent one in every three adults. While the majority of today’s grandparents are women (124 grandmothers for every 100 grandfathers), the gap is expected to close because older men are now healthier and living longer.

Additionally, the study found:

Households headed by those ages 55 and older are now spending $2.43 billion annually on primary and secondary school tuition, about 2.5 times the amount of $853 million in 1999.
According to the U.S. Census Bureau, the average age of new grandmothers is 50; it is 54 for new grandfathers.
In 2010, there were 39.8 million grandparent-headed households, one of every three households in the U.S. Only one in five grandparents lives alone.
An estimated 4.5 million grandparent-headed households include one or more of their grandchildren; 11% of grandparent households have at least one grandchild and 60% of multi-generational households have two or more grandchildren.
Incomes of households headed by those ages 55 or older rose by $491 from 2000 to 2009, while those in the 25-34 and 35-44 age groups saw their incomes decline. 45- to 54-year-olds had just a $42 increase.
A rise in spending on auto insurance by those ages 55 and older, coupled with a decline in such spending among younger people, suggests that grandparents may be buying insurance and/or cars for their children or grandchildren.
One in five grandparents is African-American, Hispanic or Asian.

“The MetLife Report on American Grandparents: New Insights for a New Generation of Grandparents,” can be downloaded from www.MatureMarketInstitute.com.

Huntington VA funds chosen by Lincoln Financial Group

Philadelphia-based Lincoln Financial Group has chosen two Huntington variable annuity funds to be included in the company’s long-term investment variable annuity. Huntington VA Balanced Fund and Huntington VA Dividend Capture Fund will be included in the Lincoln ChoicePlus Design annuity, which will offer clients several options for creating retirement income, including an income stream for life.

Lincoln ChoicePlus Design is available only through The Huntington Investment Company and the Raymond James Financial Group.

The Huntington VA Dividend Capture Fund has a five-star rating from Morningstar for the overall and five-year time period in the financial funds category. The Huntington VA Balanced Fund consists of 11 Huntington Funds in a balanced portfolio.

Still River Announces Free Limited Version of RetirementWorks^® II for Consumers

RetirementWORKS, Inc., and its parent company, Still River Retirement Planning Software, Inc., have released a simplified, free version of the RetirementWorks II financial software for retirees and near-retirees.

The free version takes into account assets, debts, income sources, household expenses, insurance, benefits, health, and financial needs at death. It also can make integrated recommendations on about two dozen financial issues that confront people in this age group.

People approaching retirement, or already retired, can try out the free version by going to the company’s website. http://www.RetirementWorks2.com. When they have registered their information, they will be provided a link to the web-based software, along with a User ID and Password. They can test it out as much as they like. To upgrade to a more detailed and accurate version of the system, they can link back to the RetirementWorks2 website and do so. Most of their initial inputs will be retained, but much more information will also be requested.

To offer the free version to your clients, and for more information, contact Chuck Yanikoski at [email protected], or call 978-456-7971.

Weiss Ratings gives U.S. debt a ‘C-minus’

Weiss Ratings, an independent rating agency of U.S. financial institutions and sovereign debts, has downgraded the debt of the United States government from C to C-minus.

The C-minus rating for the U.S. reflects a continued deterioration in the weaknesses cited in the Weiss Ratings release of April 28, 2011, including heavy debt burdens, shaky international stability, and poor economic health.

On the Weiss Ratings scale, which ranges from A (excellent) to E (very weak), a C-minus rating is the approximate equivalent of a triple-B-minus on the scales used by other credit rating agencies, or approximately one notch above speculative grade (junk).

“Our downgrade today is not contingent on the outcome of the debt ceiling debate in Washington,” said Weiss Ratings senior financial analyst Gavin Magor. “It is driven exclusively by the numbers, which indicate that, in addition to a decline in the long-standing weaknesses we noted three months ago, the U.S. has already lost the golden halo that helped guarantee liquidity and acceptance of its government securities in global markets.”

MassMutual consolidates funds under RetireSMART brand

In a brand consolidation initiative, MassMutual’s Retirement Services Division has rebranded its Select Destination target date funds and Journey lifestyle funds so that they are part of the company’s RetireSMART series of funds. The funds’ old names (on the left) and new names (on the right) can be seen in the chart below.

Previous Select Destination Retirement Fund Target Date Series	New RetireSMART Target Date Series
Select Destination Retirement Income Fund	RetireSMART In Retirement Fund
Select Destination Retirement 2010 Fund	RetireSMART 2010 Fund
Select Destination Retirement 2015 Fund	RetireSMART 2015 Fund
Select Destination Retirement 2020 Fund	RetireSMART 2020 Fund
Select Destination Retirement 2025 Fund	RetireSMART 2025 Fund
Select Destination Retirement 2030 Fund	RetireSMART 2030 Fund
Select Destination Retirement 2035 Fund	RetireSMART 2035 Fund
Select Destination Retirement 2040 Fund	RetireSMART 2040 Fund
Select Destination Retirement 2045 Fund	RetireSMART 2045 Fund
Select Destination Retirement 2050 Fund	RetireSMART 2050 Fund
Previous Journey Lifestyle Series	New RetireSMART Lifestyle Series
Conservative Journey Fund	RetireSMART Conservative Fund
Moderate Journey Fund	RetireSMART Moderate Fund
Aggressive Journey Fund	RetireSMART Moderate Growth Fund
Ultra Aggressive Journey Fund	RetireSMART Growth Fund

Many pension participants “lack awareness” of their benefits: Fidelity

Seventy one percent of corporate defined benefit pension participants surveyed by Fidelity Investments don’t really know how their pension plans work, even though more than half said they would rely on those pensions in retirement.

The Boston-based mutual fund and retirement plan giant examined the attitudes and behaviors of more than 500 corporate employees who participate in employer-sponsored pension plans nationwide.

Nearly one-third (31%) of those surveyed said they don’t know their plan’s vesting schedule, 40% don’t know what their payment options will be upon retirement or when leaving their company and about one-quarter (27%) don’t know at what age they can begin to receive payments.

Most of those surveyed (61%) said they have never inquired about how much money they will receive upon retirement. When asked to explain their passive approach to determining the monetary value of their pensions, 43% said they rely on their employer to provide the information when necessary and more than one in four (29%) said they lack knowledge about the plan and/or they don’t know whom to ask for information.

On average, participants expect their pension benefits to supply almost one quarter of their retirement income, the survey found. Most (56%) said they will rely on their pension payouts to cover living expenses during their retirement years, rather than as “extra” money for expenses like travel or hobbies.

The breakdown of expected sources of income in retirement, on average, is as follows: pensions (23%), defined contribution plans (27%), Social Security (26%) and savings/other (24%).

Most of the pension plan participants surveyed (56%) said they expect to receive annuitized payments from their plans when they retire. Just 10% plan to take lump sum payments and 9% expect a combination of both a lump sum payment and a form of annuity.

One-quarter of those surveyed said they don’t know how they will be paid. Among those surveyed who plan to receive only annuitized payments, the median expected amount is $1,500 a month. The median expected lump sum payment is $95,000.

Cerulli identifies niche retirement market opportunities

The primary retirement markets—401(k), 403(b), public and private DC and DB, and traditional and Roth IRAs—may represent nearly $14 trillion in 2010, but the secondary or niche markets represent a not-to-be-sniffed-at $1 trillion, says Cerulli Associates.

Cerulli identifies six burgeoning areas of growth and asset-gathering potential for firms willing to look beyond the crowded mainstream retirement markets. They include:

Taft-Hartley Plans: In an effort to improve their funded ratios, these plans are primed to increase their allocation to international investments as they seek to improve performance.
Nonqualified Deferred Compensation Plans (NQDCP): As economic conditions improve, hiring activity will lead employers to consider enhancements to benefit plans, such as adding a NQDCP, in order to gain an edge in the competition for talent.
457 Plans: While-asset gathering opportunity is limited and specific, firms that are able to offer a 403(b) plan together with a 457 plan are poised to win assets as this combination allows for the creation of higher balance accounts.
412i Plans: The asset manager opportunity is limited due to requirements related to the funding vehicles used in these plans. There are opportunities, however, for B/Ds and insurance companies because plans are attractive to small, but very profitable businesses, typically characterized by highly compensated, late-career professionals with significant assets.
Small Business IRAs: With 70% of small business owners not saving for retirement in any vehicle, these plans provide the solution, and thus can’t be ignored by firms seeking asset-gathering opportunities.
Solo 401(k) plans: Current growth is positive for these plans and may be augmented by Baby Boomers who, working past retirement age, may see the flexibility of a sole-proprietorship arrangement, and desire to continue to save for retirement through this familiar vehicle.

Do VA ‘Roll-Ups’ Have the Desired Effect?

Posted on August 2, 2011 by Kerry Pechter -

When insurers price their variable annuities and annuity riders, they have to anticipate more than movements in the stock market or decisions at the Federal Reserve. They also have to anticipate how contract owners will use those riders.

In the case of guaranteed lifetime withdrawal benefit (GLWB) riders, profitability may depend on how many people buy the riders as well as when they start taking income. Insurers often offer deferral bonuses or “roll-ups” to discourage early withdrawals, but it’s unclear—except in retrospect—whether those bonuses have the desired effect.

Milliman, the global actuarial firm, periodically publishes a survey, called the Variable Annuity Guaranteed Living Benefits Study, to reveal some of that behavior. In the most recent survey, based on sales in the first half of 2010, 18 insurers responded to Milliman’s questions. Milliman provided an executive summary of the study to RIJ.

One result surprised Sue Saip and Noel Abkemeier, the Milliman consultants who co-authored the study: a higher-than-expected proportion of contract owners seemed to be taking out money in the first year of the contract. The deferral bonus wasn’t having the expected impact.

“If you look company by company it doesn’t seem to have had a significant impact on withdrawals,” Saip told RIJ. “That was our take.” The highest first-year rate was 40%, reported by a major VA seller whose product included a roll-up. “I would think that they did not expect withdrawals at that level,” she said.

Among the 18 companies in the survey, “about 15% of GLWB purchasers are pulling the trigger and exercising their GLWB in the first year,” said Abkemeier. “That’s not particularly different from the last few years. When the survey first came out, I was surprised that the withdrawal rate was as high as it was.

“My expectation was that if people wanted income right away they’d buy a SPIA as opposed to this, and that the percentage of VA owners who took withdrawals right away would be 5% or lower,” he added.

In other words, some contract owners seemed to be leaving money on the table by not taking advantage of the roll-ups. That doesn’t seem optimal or rational. On the other hand, they may simply have been reacting to the fact that their contracts were “in the money.” That is, the guaranteed value exceeded the account value—so they were more likely to take withdrawals.

“In-the-moneyness does significantly influence withdrawal benefit exercise rates,” Saip said. Among those whose contracts were at least 50% in the money (where the guaranteed base was 50% or more greater than the account value), a high percentage of people—56.5% on average across 18 companies (with a range of 7.5% to 98.9%)—started exercising their income benefit. The older they were, the more likely they were to exercise withdrawals.

But did the contract owners who took withdrawals from depressed accounts immediately invest their withdrawals in the depressed stock market, as some advisors were recommending? If they did, there’s no clear evidence of it. They may simply have needed the income. But no one knows whether people truly understand the features of the variable annuities they buy.

The study confirmed that most people are buying VAs with lifetime income riders, but in some cases the riders are automatically included in the annuity. Among companies that offered an optional GLWB on some products, on average, 90.4% (median: 95.1%) of variable annuity purchases (by dollar value) in the first half of 2010 were of products that offered a guaranteed lifetime withdrawal benefit as an option. But where a GLWB rider wasn’t automatically bundled in, the GLWB was purchased in 59.8% of sales on average (median: 69.2%).

Another finding was that more new money has been coming into the VA industry in recent years, as opposed to money simply moving from one insurer to another. That was partly to be expected, since new contracts tend to be less generous than old ones, and because many existing contracts may have been in-the-money at the time the survey was conducted.

“The number of external exchanges has fallen as the benefits have gained value,” Saip said. We haven’t seen as many customers rolling over. We had only eight companies reporting data on that, but of those, some had as much as 80% of sales being new money coming in. And that included some pretty major players.”

The product de-risking process continues to go on, with companies raising fees in subtle ways. Besides moving toward less frequent step-ups in the value of income base subsequent to an increase in the account value, Saip noted that some companies are reserving the right to raise a rider fee at any time, not just when the client elects to take a step-up.

“Companies are moving to a little more frequency, where they can change the expense ratio on the anniversary or change it at anytime. That gives companies a little more control, which means they may not have to set the maximum as high. If you can only change the fee when there’s a step-up in the benefit base, you tend to set a higher maximum,” she said.

The Milliman survey also asked companies about their hedging habits. “Our participants nearly all said that they hedge 100% of delta and 100% percent of rho. They don’t all hedge vega and gamma. Four companies said they were hedging gamma, with an average of 75% of gamma hedged. Of those who hedged vega, 62.5% was hedged on average. By far, companies are hedging 100% of the Greeks that they hedge,” Saip said.

[Delta is the rate of change of the option value relative to changes in the value of the underlying asset. Gamma is the rate of change of delta relative to changes in the value of underlying asset. Vega measures sensitivity to volatility, rho measures sensitivity to the interest rate.]

According to Milliman, companies that participate in the survey use it mainly to benchmark their own results against industry averages. Reading the results like tea leaves to determine the motives of investors is more difficult. That information remains largely the object of speculation. The issuers have a better idea of why advisors sell variable annuities than they do about why individuals buy them.

“My view is that people buy the variable annuity because they’re sold it,” Abkemeier told RIJ. “Aside from that, their understanding may be that the product provides a floor of investment protection that’s denominated in lifetime income benefits. They may also understand that if their account goes up a lot, their income may also go up. But I think they’re primarily buying an accumulation product and see the income guarantee as a secondary consideration.

“I think that investors want to keep their options open,” he added. “They’ve heard about the downsides of the income annuity. There’s an element of optimism where they think, ‘My variable annuity will grow at a nice attractive rate. I’d like to keep my money growing.’

“In the backs of their minds, they may also think, ‘If the account value goes way down, I’ll still have this guarantee that will let me take out more money than the contract has value,” he said. “But they don’t necessarily figure out all the arithmetic, which would tend to show that they may win in the end, but they’ll win not by hitting a home run but on a walk with the bases loaded in the bottom of the ninth inning.”

Boomers are redefining the word “grandparent”

Posted on August 2, 2011 by Editor Test -

According to a new report from the MetLife Mature Market Institute, there are 65 million grandparents in the U.S. today, up from 40 million in 1980, and they are, in general, younger, financially comfortable and more generous to their grandchildren than ever.

Additionally, the study found:

Households headed by those ages 55 and older are now spending $2.43 billion annually on primary and secondary school tuition, about 2.5 times the amount of $853 million in 1999.
According to the U.S. Census Bureau, the average age of new grandmothers is 50; it is 54 for new grandfathers.
In 2010, there were 39.8 million grandparent-headed households, one of every three households in the U.S. Only one in five grandparents lives alone.
An estimated 4.5 million grandparent-headed households include one or more of their grandchildren; 11% of grandparent households have at least one grandchild and 60% of multi-generational households have two or more grandchildren.
Incomes of households headed by those ages 55 or older rose by $491 from 2000 to 2009, while those in the 25-34 and 35-44 age groups saw their incomes decline. 45- to 54-year-olds had just a $42 increase.
A rise in spending on auto insurance by those ages 55 and older, coupled with a decline in such spending among younger people, suggests that grandparents may be buying insurance and/or cars for their children or grandchildren.
One in five grandparents is African-American, Hispanic or Asian.

“The MetLife Report on American Grandparents: New Insights for a New Generation of Grandparents,” can be downloaded from www.MatureMarketInstitute.com.

Allianz Life’s new FIA features rising withdrawal percentage

Posted on August 2, 2011 by Editor Test -

Allianz 360, a new fixed index annuity (FIA) from Allianz Life Insurance Co. of North America, offers an annual 50% interest rate bonus during the accumulation stage and a withdrawal percentage that rises by about 35 basis points for every year that the contract owner defers income.

Starting August 2, the product will be distributed exclusively by Allianz Life’s Preferred field marketing organizations, a group of 29 wholesaling organizations that meet Allianz Life’s standards for compliance and suitability. Of the 29 FMOs, Allianz Life owns nine. Allianz 360 is available in 26 states. The mandatory rider costs 95 basis points a year and is assessed on the accumulation value.

“The longer you hold Allianz 360 before taking lifetime income withdrawals, the greater the percentage of income available for lifetime withdrawals will be,” said Eric Thomes, Allianz Life senior vice president of sales. “If a customer purchased the contract at age 55 and held it for 10 years, their annual withdrawal percentage would increase from 3.50% to 7% or from 4.50% to 8%, depending on the income option they chose. No other annuity offers this benefit.”

Where many annuities with living benefits offer a bonus on the guaranteed benefit base for each year income is deferred, the Allianz 360 offers a 50% increase in the actual account value during the accumulation period. If the contract earns 4% for the year, the bonus will bring it up to 6%. The minimum credit in any year is 0.50%, according to an Allianz Life product brochure.

“With most other annuities, you have an income benefit value and an account value,” Thomes said. “This contract has one value. Your withdrawal value, your income value and your death benefit are all the same value. It makes it very simple for the advisor and the client.”

During the income period, which doesn’t require annuitization, contract owners can take level payments at whatever withdrawal rate they’ve earned or they could take rising payments at a slightly lower withdrawal rate. For instance, a 65-year-old might take 8% of the final accumulated value for life. Alternately, he or she might take 7% of the accumulated value, and continue to have the accumulated value grow under the same crediting method as during the accumulation period. The payouts can ratchet up but can’t go down.

“The line we use in distribution is, ‘You get increasing income on a depreciating asset,” Thomes told RIJ. He said that between 55% and 60% of the producers who sell Allianz 360 are registered to sell securities as well as insurance. “That’s up significantly from a few years ago,” he said. As a result, it’s possible that the FIA will come into direct competition with variable annuities with lifetime income riders.

In general, VAs—where much of the assets are invested in stocks—have lifetime income riders that offer a lower floor income but more upside potential, while FIAs—where most of the assets are invested in bonds—have lifetime income riders that offer a higher floor income but less upside potential.

Policy analyst critiques debt ceiling agreement

Posted on August 2, 2011 by Editor Test -

The new debt ceiling agreement will achieve the essential goal of avoiding a potentially catastrophic default in the days ahead. But the deal places the nation on a disturbing policy course and sets what may become important precedents that are cause for serious concern.

The agreement starts with:

Nearly $1.1 trillion (or $840 billion, depending on the budget baseline used) in discretionary (i.e., non-entitlement) spending cuts over ten years, enforced by binding annual caps through 2021.
A Joint Select Committee on Deficit Reduction to propose, by November 23, steps to reduce the deficit by at least another $1.5 trillion over ten years, and for the House and Senate to consider the proposal under fast-track procedures that guarantee an up-or-down vote in both bodies, with a simple majority needed for passage.
If policymakers achieve less than $1.2 trillion in deficit reduction through this process, an automatic across-the-board cut in non-exempt discretionary and entitlement programs will take effect to make up the difference between what they accomplished and the $1.2 trillion target.

Establishing multi-year discretionary caps without an agreement on increased revenues makes it even harder to secure revenue increases for deficit reduction in the future. That’s because the only way to secure a bipartisan agreement that includes increased revenues is to provide anti-tax policymakers with significant spending cuts in return, likely including substantial savings from imposing discretionary caps.

To be sure, the joint committee will have the legal authority to produce a balanced package that includes revenue increases as well as program cuts. But House Speaker John Boehner, in an effort to secure votes for the deal, is undermining the joint committee before it’s even established. Boehner has circulated documents to his caucus claiming the agreement requires the use of a “current-law revenue baseline,” thus “making it impossible for Joint Committee to increase taxes.”

That’s not true. Even with such a baseline, policymakers could choose from among numerous tax proposals — such as the President’s proposals to end special tax preferences for corporate jets and tax breaks for oil and gas companies — that would produce deficit reduction. That one party is being led to believe that the deal does bar the joint committee from raising tax revenue is not helpful, to say the least.

Coupled with Speaker Boehner’s pledge not to name any members to it who will raise any tax revenue at all and to defeat any joint committee-produced package on the House floor if it raises any revenue, this interpretation of the agreement seems to give the joint committee only three places to go:

Severe cuts in entitlement programs.
Deep cuts in entitlements coupled with even deeper cuts in discretionary programs (i.e., cuts on top of the at-least $1.1 trillion in discretionary cuts that the annual caps will produce)
A failure to meet its target.

If the joint committee were only to cut entitlement programs to reach its target, how deep would those cuts be?

The deal that President Obama and Speaker Boehner were negotiating several weeks ago would have raised Medicare’s eligibility age, raised Medicare cost-sharing charges, shifted significant Medicaid costs to states, modified cost-of-living adjustments in Social Security and other benefit programs (and in the tax code), and instituted other entitlement savings. Those steps would have saved $650 billion to $700 billion over ten years.

The joint committee would have to produce cuts twice as deep—and roughly twice as deep as those in the Gang of Six plan. Democrats on the joint committee would not conceivably agree to entitlement cuts, or a mixture of entitlement and deeper discretionary cuts, that deep.

Hence, if Speaker Boehner honors his pledge to keep revenue increases off the table, the committee will surely fail — and gridlock and policy warfare will continue.

The joint committee could agree on a much smaller amount of savings without revenues, but nothing close to $1.2 trillion to $1.5 trillion. Thus, unless Republicans back off their refusal to consider any increase in revenues, the joint committee will fail to produce savings anywhere close to $1.2 trillion—triggering across-the-board cuts that are of unprecedented depth and will remain in place for nine years.

In key respects, then, this deal postpones the biggest battle over deficit reduction, creating an even more cataclysmic clash that would occur most likely in a lame-duck congressional session after the 2012 election. At that point, three huge events will loom:

Across-the-board cuts in January 2013, with half of them coming from defense (amidst likely charges that they will jeopardize national security);
The scheduled expiration of President Bush’s tax cuts at the end of 2012; and 3)
The renewed specter of default if policymakers do not raise the debt ceiling quickly again by early 2013.

Where all of that will lead policy debates and outcomes is impossible to predict at this point.

Anticipating the policy battles to come, we should not lose sight of an alarming development. Those who have engaged in hostage-taking—threatening the economy and the full faith and credit of the U.S. Treasury to get their way—will conclude that their strategy worked. They will feel emboldened to pursue it again every time that we have to raise the debt limit in the future.

The agreement has some partially—but important—redeeming features. For one thing, the Administration ensured that half of the automatic cuts that could be triggered will come from defense programs, and that basic entitlement assistance programs for low-income Americans, as well as Social Security, will be exempt from such cuts.

This could provide helpful leverage for a more balanced solution in the showdown likely in the 2012 lame-duck session. For another, the deal raises the debt ceiling until about early 2013, so the nation’s credit will not be threatened in coming months by election-year politics.

The Center on Budget and Policy Priorities is a nonprofit, nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs. It is supported primarily by foundation grants.

The Extinction of Retirement

Posted on July 31, 2011 by Editor Test -

For the better part of a century the foundations for a semi-comfortable retirement for many Americans have rested on the financial pillars of rising real estate and equity prices, positive real interest rates on savings, the continued solvency of public and private pension plans, and the reliability of national entitlement programs (Social Security, Medicaid).

But in the last few years, the economic sands have fundamentally shifted and these pillars are no longer sturdy, some have cracked completely. For many Americans, the traditional idea of a comfortable retirement, filled with golf carts, cruises, and fishing trips, is going the way of the dodo bird.

Over the last decade incomes and job growth have stagnated, causing savings rates to drop. According to Jim Quinn author of The Burning Platform, 60% of retirees have less than $50,000 in savings. Such sums won’t last very long, especially when consumer prices are up 3.2%, import prices are up 12.5% and commodity prices are up 35% year over year.

What’s worse, any savings placed in a bank will pay next to zero interest and will likely not even pay for the fees associated with the account. With cash savings essentially non-existent, the other pillars of income take on paramount importance. But these former bastions of financial security are being washed away by a torrent of red ink.

For years the essential Ponzi-like structures of Social Security and Medicare were concealed behind positive demographics. But once taxes collected from current payers fall short of the required distribution owed to current recipients, the ruse will be laid bare. That day is now in the foreseeable future. With insolvency a real and present danger, at least a consensus is now forming that Social Security must be structurally altered if it is to survive.

According to the Social Security Administration, in 2008, Social Security provided 50% of all income for 64% of recipients and 90% of all income for 34% of all beneficiaries. With these numbers, it’s not hard to see how even small cuts will spark big protests. Now try cutting the $20 trillion prescription drug program and the $79 trillion Medicare entitlements and watch the political sparks fly! However, given the realities, it’s hard to see how the program can escape deep cuts.

In the past many retirees could count on accumulated stock market wealth to help fund retirement. Not so much anymore. As of this writing, the S&P 500 is now no higher than it was in January of 1999. For over 12 years the major averages have gone nowhere in nominal terms and have declined significantly in real (inflation adjusted) terms. The dreams of becoming rich from investments have crashed along with Pets.com and Bernie Madoff. Then there is always the supposedly safest asset of all–a retiree’s home.

Despite a misguided faith that real estate prices could never fall, they have done just that…with a vengeance. According to S&P/Case-Shiller, the National Home Price Index has declined some 30% to levels not seen since the middle of 2002. And prices are still falling, with the rate of decline accelerating. The National Index dropped 4.2% in Q1 of 2011, after dropping 3.6% during Q4 2010. This means that only those retirees who have owned their homes for at least 10 years have any hope of selling at a profit. Ownership of significantly longer periods may be needed to have built up significant equity.

That leaves public and private pension plans. But here again there are serious issues. Let’s just look at state public pension shortfalls. According to the American Enterprise Institute for Public Policy Research, “States report that their public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assumes plans can earn high investment returns without risk.”

Huge returns without risk? Bond yields are the lowest they have been in nearly a century! What world are these states living in? With few options, the states will undoubtedly look to the Federal government (taxpayers) for a bailout. Failing that, cuts are inevitable.

The sad facts are: Americans are broke, the real estate market is still in secular decline, stock prices are in a decades-long morass, real incomes are falling, public pension plans are insolvent and our entitlement programs are structurally unsound. If the pillars that seniors have relied on in the past fail to miraculously regenerate (and there is certainly no reason to believe they will), all that most retirees will have will be freshly printed greenbacks that come from a never ending policy of federal deficits and an obliging Federal Reserve.

Unfortunately, the inflation that will result from such a policy will sap most of the purchasing power that those notes possess. In other words, for most people retirement is now an illusion, and many Americans will find themselves working far longer, for far less real compensation, then they ever imagined. The quicker we realize this, and plan accordingly, the better off we will be.

Michael Pento, senior economist at Euro Pacific Capital, may be reached at [email protected].

A Memo to Congress about Money

Posted on July 31, 2011 by Editor Test -

Imagine a card game, where every entity in the economy is a player, and you, Congress, are the scorekeeper. My message here is to clarify the difference between a scorekeeper and a player.

The problem is that, though you are the scorekeeper, you act as though you were one of the players. And you support your mistake with false analogies. The correct analogy is between a scorekeeper in a card game and your role as scorekeeper for the U.S. dollar.

A scorekeeper in a card game keeps track of how many points everyone has. He awards points to players with winning hands. He subtracts points from players with losing hands.

How many points does the scorekeeper have? Can he run out of points? When he awards points to players with winning hands, where do those points come from? When he subtracts points from players with losing hands, does he have more points?

Do you understand the difference between being a scorekeeper and being a player?

Congress, you are the scorekeeper for the U.S. dollar. You spend by marking up numbers in bank accounts at your Fed, just as Fed Chairman Ben Bernanke has testified before you. When you tax, the Fed marks numbers down in bank accounts. Yes, the Fed is also a scorekeeper. It accounts for what it does, but it doesn’t actually get anything—just as the scorekeeper of a card game doesn’t get any points himself when he subtracts points from the players.

When Congress spends more than it taxes, it’s just like the scorekeeper of the card game awarding more points to the players’ scores than he subtracts from their scores. What happens to the players’ total score when that happens? It goes up by exactly that amount. What happens to dollar savings in the economy when Congress spends more than it taxes? It goes up by exactly that amount. To the penny.

The scorekeeper in a card game keeps track of everyone’s score. The players’ scores are accounted for by the scorekeeper. The scorekeeper keeps the books. Likewise, the Fed accounts for what it does. It keeps accounts for all the dollars that all its member banks and participating governments hold in their accounts at the Fed. That’s what accounts are—record keeping entries.

So when the Chinese sell us goods and services and get paid in dollars, the Fed—a scorekeeper that works for and reports to Congress—marks up (credits) the number in their reserve account at the Fed. When the Chinese buy U.S. Treasury securities, the Fed marks down (debits) the number in their reserve account at the Fed and marks up (credits) the number in China’s securities account. That is what ‘government borrowing’ and ‘government debt’ is—the shifting of dollars from reserve accounts to securities accounts at the Fed.

Yes, there is some $14 trillion in securities accounts at the Fed. This represents the dollars the economy has left after the Fed has added to our accounts (when the Treasury spent), and subtracted from our accounts (when the IRS taxed). And it also happens to be the economy’s total net savings of dollars.

Paying back the debt is the reverse. It happens this way: The Fed, a scorekeeper, shifts dollars from securities accounts to reserve accounts. Again, all on its own books.

This is done for billions of dollars every month. There are no grandchildren involved.

The Fed can’t ‘run out of money,’ as you’ve all presumed. The Fed spends by marking up numbers in accounts with its computer. This operation has nothing to with ‘debt management,’ which oversees the shifting of dollars between reserve accounts and securities accounts, or with the Internal Revenue Service, which oversees the subtraction of balances from bank reserve accounts.

And so, yes, the deficits of recent years have added that many dollars to global dollar income and savings, to the penny. Just ask anyone at the CBO. It is no coincidence that savings goes up every time the deficit goes up—it’s the same dollars that you deficit-spend that necessarily become our dollar savings. To the penny.

A word about Greece. Greece is not a scorekeeper for the euro, any more than the U.S. states are scorekeepers for the dollar. The European Central Bank is the scorekeeper for the euro. Greece and the other euro member nations, like the U.S. states, are players. Players can run out of points and default, and they may look to the scorekeeper for a bailout.

What does this mean? There is no financial crisis for the U.S. government, the scorekeeper for the U.S. dollar. It can’t run out of dollars, and it is not dependent on taxing or borrowing to be able to spend. The sky is not falling. Ever. Let me conclude that the risk of under-taxing and/or over-spending is inflation, not insolvency. And monetary inflation comes from trying to buy more than there is for sale, which drives up prices.

But, as they say, to get out of a hole first you have to stop digging. (I don’t think Congress, or anyone else, believes acceptable price stability requires 16% unemployment.) Someday there may be excess demand from people with dollars to spend for labor, housing and all the other goods and services that are desperately looking for buyers with dollars to spend. But, today, excess capacity rules.

A more informed Congress, one that recognizes its role of scorekeeper, and recognizes the desperate shortage of consumer dollars for business to compete for, would be debating a compromise combination of tax cuts and spending increases. Instead, presuming itself to be a player rather than scorekeeper, Congress acts as though we could become the next Greece, thereby repressing the economy and helping to turn us into the next Japan.

A New Arm for a New VA Arms Race

Posted on July 27, 2011 by Editor Test -

A tactical investment process that AllianceBernstein created four years ago to provide less volatile returns for wealthy investors has been adopted by several variable annuity issuers who are using it to control investment risk and protect their lifetime guarantee riders.

Last week, the asset management firm announced that its Dynamic Asset Allocation services and/or Dynamic Asset Allocation fund portfolio had been chosen during the past year by these insurance companies to provide a safer investment option in their variable annuities:

AXA Equitable, which is applying the DAA strategy in a new subadvised portfolio to further enhance investment choices in its variable annuity products with guaranteed living benefits.
MetLife, through its affiliate MetLife Advisers, LLC, which created a customized portfolio incorporating DAA for its recent GMIB/EDB max rider launch.
Ohio National and SunLife, each of which in the last several months committed to the firm’s new DAA Variable Insurance Trust (VIT), where we apply the Dynamic Asset Allocation tool set to an equity-tilted globally diversified portfolio.
Transamerica, which launched its partnership with the DAA service just under a year ago, making it available across a number of their variable annuity products.

According to a two-page product profile, the DAA fund managers, co-CIOs Seth Master and Dan Loewy, have a wide range of latitude. They can put zero to 80% of assets in equities (except emerging market) and 20% to 80% of assets in fixed income instruments. They limit themselves to 15% in emerging market stocks or global real estate and no more than 10% in commodities, emerging market debt or high-yield bonds. During “favorable” stock market conditions, the fund overweights global equities, and during “unfavorable” conditions, it overweights global bonds, the handout said.

“Of course, there’s no such thing as a free lunch,” said a lengthy booklet on the product. Historical back-testing showed that the fund would be less likely to lose as much as comparable static-allocation 60/40 funds during downturns but more likely to lag static allocation funds during recoveries.

Mark Hamilton, AllianceBernstein’s investment director, told RIJ this week that DAA doesn’t use Constant Proportion Portfolio Insurance, a modified version of which is used in Prudential’s HD variable annuity income rider and which offered relatively better protection of the firm’s guarantees during the financial crisis.

Not CPPI

“No, it’s definitely not a form of CPPI,” Hamilton said. “Those strategies are typically a form of portfolio insurance that tends to reduce exposure to the market as the market is falling, with the idea of setting a floor. This is not that. We monitor risk across the marketplace and adjust the fund very actively in terms of its asset exposures.

“I wouldn’t think of it as a hedge fund either, because it doesn’t use leverage or follow a short-long strategy. This is much more of a flexible approach to balancing risk and return.” The investments vary widely across the globe, he said, and may include high-yield bonds, REITs and emerging market equities.

“Post-2008,” Hamilton added, “we’ve seen a number of significant changes both in terms of how insurers think about variable annuities, and what investors are looking for in investment options. Among insurers, 2008 exposed a lot of the potential costs involved during periods of high volatility. They’re looking for volatility solutions so that they can offer more generous guarantees.

“On the investor side, people are less interested in fixed-allocation balanced funds, which they know can entail a great deal of risk. They’re looking for more flexibility, for funds that will respond automatically to the overall risk and return environment.

“This fund and this strategy are designed to meet those objectives. We’re trying to give insurers a fund that manages volatility, and to let them offer the guarantee. We look at both risk and return, and forecast volatility and correlation across markets.

“If you were only looking at risk side, you’d look at VIX triggers. But you can get whipsawed that way. There’s no guidance in the VIX about what the future compensation or expected return might be. If you compare September 2008 and March 2009, volatility was high during both periods. But there was a big difference in what followed. We’re trying to balance those two competing inputs, risk and return. That’s something that you won’t get if you’re just tracking the VIX.

“Typically when we see risk in the marketplace rising, and see credible evidence that it’s not just a blip, we will typically move to reduce risk in the portfolio. That’s part of the process. But we don’t do it in a simple knee jerk fashion the way you would if you were using CPPI or a VIX trigger, which don’t take compensation into account.

“At some point you need to get into the market, and another component of this guides us on getting back in. Sometimes the return perspective provides the early warning signal. When valuations are high, you’re more vulnerable—even when the market isn’t showing high volatility.

“We’re not simply building in some form of tail risk protection. It’s a fund whose strategic allocation over the long run will be comparable to a 60/40 fund, but which also has a lot of flexibility to move around. We could be much below that, or higher than that. Historically, tactical funds have focused more on return than on risk, but we’ve found that the risk component is the key to providing smoother experiences over time for investors. The risk side, in fact, has a better degree of predictability.”

DAA started as a research project in 2007 at AllianceBernstein, Hamilton said. It was first offered to private clients and other high net worth investors, and later was used in target date funds for the defined contribution plan market. About $25 billion of the $70 billion in AllianceBernstein’s private client practice is managed with the DAA method, he said.

AllianceBernstein is part owned by AXA. At June 30, 2011, AllianceBernstein Holding L.P. owned approximately 37.8% of the issued and outstanding AllianceBernstein units and AXA owned an approximate 62.4% economic interest.

Italy: The good, the bad, and the pension policy

Posted on July 27, 2011 by Editor Test -

Economic growth is the crucial issue for Italy and specifically for pensions. Without growth, pension costs – which are now 11.4% of gross domestic product (GDP) – will increase in relative terms. Pension benefits will reduce because they are linked to GDP, not inflation, and many young people cannot find a regular job that allows them to pay pension contributions.

The Italian economy is failing to deliver: it is anaemic, and it grows at a much slower pace than expected – worse than that of similar European countries like France as the Italian central bank’s governor Mario Draghi pointed out in his last annual report.

In order to stimulate the economy Draghi suggested cutting public spending ‘‘selectively” and reducing taxes on workers and companies. How “selective” these spending cuts could be, and who would benefit from tax cuts, is now the focus of the political debate.

“Everybody claims that the Italian pension system is well balanced and doesn’t need to be corrected, but if the government must save €40bn in public spending to fulfill its European obligations, how is it possible not to affect also the pension sector, which represents a large share of public spending?” asks Giuliano Cazzola, vice-chairman of the House of Representatives’ labour committee and member of Berlusconi’s People of Freedom (PdL) party.

Still, after the elections Berlusconi himself promised not to touch the pension system: “It would be easy to cut taxes if we do what other countries do about public employees or pensions,” Cazzola continues. “But we are not willing to do so, even if we reform the tax code.” The welfare minister Maurizio Sacconi reaffirmed that there was no need to interfere again with the pension system after the changes introduced last year. These will provide around €1bn in targeted savings.

A tax reform could mean many things for the pension system, depending on political point of view. It should be used to redistribute income in favor of workers and the retired, according to Susanna Camusso, the national leader of CGIL, the left wing union organization that supports the Democratic Party (PD).

She says that the unions’ goal should be to guarantee future pension benefits that represent at least 60% of final salary, so that “we avoid building a country of poor people.”

Camusso recalls that because of 2008-09 financial crisis, the new pension rules and the difficulty of finding steady employment, young Italians will enjoy meager retirement benefits, based entirely on their contributions.

She adds that the social consequences could be serious: “Pension benefits, even if low, have ensured social cohesion in Italy. It’s the retired people in the households who supplement young temporary workers’ income, offer them a home and babysit their children.” The CGIL leader thinks that fighting tax evasion may be sufficient to get the resources necessary to finance richer pensions, because tax cheating is such a huge phenomenon in Italy. On the same page is Raffaele Bonanni, the leader of the other important Italian union, the Catholic-centrist CISL, which is more favorable to the government: “We need to tighten the fiscal clamps to find means for workers and retirees.”

However, fighting tax cheaters has been a ‘top priority’ of many Italian administrations of all political colors without visible results. On the other hand, it remains to be seen whether cutting taxes on earned income will foster economic growth, as foreseen by Renato Brunetta, the minister in charge of public employees, who last year succeeded in raising the retirement age for women employed in the public sector to 65 years. This will be effective from 2012.

“Reducing the tax burden on labor, we create incentives to work, hire, produce and invest more,” said Brunetta, clarifying that these cuts will have to be compensated by raising taxes on consumption.

Tax reform may solve a problem that afflicts Italian pension funds: they pay taxes on virtual annual earnings, while in most European countries pension funds enjoy better fiscal treatment.

Another possible change for pension funds regards their investment limits: Antonio Finocchiaro, the chairman of the pension authority COVIP, advocates more freedom for the funds’ managers in order to achieve better performance and attract more members. He is working with the treasury to decide which new assets and financial activities should be included in a fund’s portfolio.

Indeed the mediocre competitiveness of the pension funds that have the largest membership (around two million employees) – the so-called closed funds that are co-managed by employers and unions – may be one of the reasons why Italian workers don’t run to join them: in 2010 their average return was 3%, compared to the 2.6% revaluation of trattamento di fine rapporto (TFR), which is the money that employers put aside to give as a lump sum to employees when they leave and which is an alternative to pension funds. With memories of the 2008 financial market crash and of pension funds’ losses still fresh, one can understand why 77% of Italian eligible pension funds’ members prefer to keep their TFR. Among actual fund members, only 17% are under 35 years old.

So on 25 May 2011 the government launched a new campaign to inform young people about what to expect for their pensions and how to start early to build up their retirement savings. ‘One day for the future’ was the slogan of the initiative, which is supposed to go on all year around under the responsibility of INPS, the Italian Social Security system, with lessons in schools and online educational material.

Teaching teenagers that their future is their pension reveals a typical Italian state of mind: it emphasizes the importance of relying on the welfare state from cradle to grave, more than the value of being creative and productive as early as possible in order to generate wealth for oneself and society.

It’s a mentality common to both left and right in Italy and it can explain why the country is stagnant. Even Berlusconi, the self-made entrepreneur who 17 years ago became a politician with the promise to shake the status quo, has not been successful in introducing structural changes in the system. Now that Berlusconi’s star is declining, it’s unlikely that in the next two years – if he stays in power – he will be able to achieve a fiscal reform that sparks a recovery for the economy and for pension funds too.

‘Fee compression’ will alter retirement landscape, study finds

Posted on July 27, 2011 by Editor Test -

The growing role of retirement advisors will be one of the most noteworthy changes the industry will see over the next five years, according to Diversified Investment Advisors’ new Prescience 2015: Expert Opinions on the Future of Retirement Plans.

Facing a need for “ongoing holistic service from a third party,” the report said, many plan sponsors will seek a professional retirement plan advisor who earns a fee or retainer instead of an asset-based charge.

“The emergence and organization of professional retirement plan advisors will have a profound impact on our business over the next five years,” said Joe Masterson, Diversified senior vice president.

Diversified predicted that:

Among plan sponsors switching providers, 35% will use the services of a professional retirement plan advisor.
Only 10% of plan sponsors will actually change service providers annually through 2015. More than one-third of plan sponsors will perform due diligence of their service provider.
Seventeen percent will add or replace at least one investment option.

The Prescience study panel agreed that several additional trends will emerge over the next five years:

Advisors will have established professional service standards in areas such as fiduciary practice, contracting, revenue mix and fee disclosure;
Fee disclosure will make it difficult for plan sponsors with retirement plan assets exceeding $25 million to compensate an advisor in any way other than a direct fee for service—usually a set retainer;
By 2015, advisors will no longer be in a position to receive compensation unless they assume ERISA Section 3(21) fiduciary responsibilities. This differs from the current regulatory framework, which allows plan sponsors to choose from other models including broker-dealer, consultant and advisor models;
The trend toward reliance on professionals will also be seen at the participant level, as many American workers would prefer to rely on a knowledgeable expert to make their retirement plan investment decisions rather than learn about investments themselves.

Pressures on pricing will squeeze profitability throughout the industry, the study forecast. Sixty-two percent of the experts predicted that by 2015 service provider margins will fall below 11 basis points. In addition most plan sponsors will establish expense budget accounts in an effort to manage discrepancies between asset-based revenue from investment managers and the cost of services.

“Advisors, like service providers, will also experience fee compression as more business shifts from an asset-based compensation model to a retainer model,” noted Laura White, vice president of Marketing at Diversified.

Mergers and acquisitions in the benefits consulting and investment consulting arenas are expected to continue. In addition, the Prescience study panel expects at least two major service providers to spin off their retirement plan service business in an effort to meet corporate revenue targets and demands for complete open investment architecture.

Prescience 2015: Expert Opinions on the Future of Retirement Plans was conducted in the first quarter of 2011. Currently in the fourth iteration of a modified Delphi study, it examined trends in retirement plans with $25 million to $1 billion in assets. Sixty-eight retirement plan experts from 54 organizations nationwide answered the survey.

The panel was comprised of professionals in the retirement plans business representing policymakers, trade associations, research organizations, consulting firms, academic institutions, financial professionals, investment management firms, service providers and trade media. To request a copy of the study, email [email protected].

Canada, far smaller than the U.S., has smaller age-related economic challenges

Posted on July 27, 2011 by Editor Test -

Canada is beginning to tackle issues related to population aging, but more action is needed, argues a new report by Schroders, the investment management company.

As boomers retire, reduced labor supply will depress GDP growth unless the country increases immigration or raises the labor force participation rates of older workers, according to Schroders’ Virginie Maisonneuve, head of global equities, and Katherine Davidson.

Canada is doing just that, they wrote, but its efforts won’t be adequate.

However, this will not be enough to meet the growth challenge. Future growth will have to be driven by improvements in labor productivity. Canada is expected to face the highest age-related spending of any OECD member state.

“The challenge for Canada today is to manage the costs of a rapidly aging population without compromising its superior health status and further worsening standards of service” the paper states.

Canada has a record of controlling the cost of social insurance, which should work in its favor. It spends 10% of GDP on health care versus the US at 16%. There is also a lower reliance on the state for pension provision because private pensions and other investments provide over 40% of retirement income, compared to the OECD average of 20%.

Other Schroder research findings:

By the 2020s, all of Canada’s population growth is expected to come from immigration and many sectors of the economy will rely on foreign workers. It is unlikely, however, that higher immigration will fully offset the effect of domestic population aging.
While the healthcare and financial sectors should increase their share of GDP, other sectors – education, manufacturing, construction and retail – will shrink.
Early recognition and steps to address the demographic issue result in a pension plan that is expected to be perfectly solvent by 2050 – a marked contrast with US Social Security, whose surpluses will soon end.

The Bucket

Posted on July 26, 2011 by Editorial Staff -

Putnam appoints research and investment executives

Putnam Investments has named Aaron M. Cooper as its director of Global Equity Research and Richard “Shep” Perkins as co-head of International Equities. Perkins will partner with London-based Putnam veteran Simon Davis. All three managers will report directly to Walter C. Donovan, Putnam’s Chief Investment Officer.

Cooper will oversee Putnam’s global equity research efforts, and will join the team of portfolio managers who run Putnam Research Fund and Putnam Global Sector Fund.

He will also be named portfolio manager of Putnam Global Equity Fund, joining Darren Jaroch.

Like many current Putnam senior executives, including CEO Robert Reynolds, Cooper and Perkins previously held investment roles at Fidelity Investments. Cooper was managing director of research at Fidelity Investments from 2007 to 2011. He led the company’s cyclical team, covering cyclicals, media and healthcare as an analyst. He also formerly managed the Fidelity Advisor Health Care Fund, the Fidelity VIP Health Care Portfolio and the Fidelity Select Medical Equipment and Systems Portfolio. Cooper holds a B.A. in economics from Harvard University.

Perkins was the portfolio manager of the Fidelity Mid-Cap Stock Fund from 2005 to 2011. Prior to that, he was responsible for the Fidelity OTC Fund. Earlier, he was a research analyst at Donaldson, Lufkin & Jenrette, covering the chemical, healthcare, telecommunications and technology sectors. He received a B.A. in economics from Amherst College and is a CFA.

Kevin Knull joins Symetra to start registered annuity business

Symetra Life has named Kevin Knull to head up product strategy and development of an expanding annuity business. He will lead the creation of a registered annuity business, with an initial focus on lower-cost variable annuities that do not offer living benefit guarantees. He will report to Dan Guilbert, executive vice president of Symetra’s Retirement Division.

Knull most recently served as CEO of The Knull Group, LLC, a consulting firm focused on product and sales strategies for investment and insurance companies. He previously spent nine years at The Hartford Financial Services Group in a variety of sales leadership positions. At The Hartford, Knull and his team of wholesalers represented variable annuities, fixed annuities, 401(k) and other tax-deferred investments with financial planning, wirehouse and regional investment firms.

Knull earned a B.A. at the United States Coast Guard Academy. He is a Certified Financial Planner (CFP) and currently serves on the board of directors of the National Capital Area Financial Planning Association in Washington, D.C. He will be based in Bellevue, Wash.

Allianz Life appoints Sherri Du Mond as head of distribution training

Allianz Life Insurance Company of North America has appointed Sherri Du Mond, formerly vice president of Internal Sales and Sales Development, to the newly created post of Head of Distribution Training.

Du Mond will define and execute training strategies for all areas of distribution including sales training, sales development and customer events, and regulatory training.

Under Du Mond, the Sales Training team will provide sales and product training for employees in both internal and external supporting roles for FMO Distribution, Broker/Dealer Distribution, ADG Distribution, Life Distribution, and Distribution Relationship Management.

The Sales Development and Customer Events team will be responsible for developing both the field and the careers of Distribution employees. This team will partner closely with the Meeting and Events Team in planning and coordinating field training events and will also lead programs such as Broker/Dealer University and WINGs (Winning in Navigation Growth) that provide employees with training to help them develop their careers.

The Regulatory Training team is newly formed and will work closely with the Legal, Compliance, and Suitability departments to ensure training efforts align with changes occurring in the regulatory environment.

Du Mond joined Allianz Life in 2008 as vice president of Marketing Solutions, responsible for Allianz marketing solutions programming as well as Advanced Markets, Allianz Academy and value-add programming. She transitioned to the Allianz FMO Distribution team in November of that year, leading the FASTeam internal sales desk as vice president of Internal Sales and Sales Development.

Prior to joining Allianz Life, Du Mond was national recruiting vice president with Securian. Du Mond received her Bachelor of Arts degree from Washington University and has done graduate work in business administration at the University of Dayton. She is a Certified Financial Planner and holds Series 6, 63, 7 and 24 FINRA registrations.

Pacific Life to buy Manulife life retrocession business

Pacific Life has agreed to buy Manulife Financial Corporation’s $106 billion life retrocession business. The portfolio of individual life reinsurance face amount will make Pacific Life the leading individual life retrocessionaire in North America, with a market share of about 41%. Terms of the purchase agreement, including the purchase price, were not disclosed and the transaction is expected to be completed during the third quarter pending customary closing conditions.

Insurance companies purchase reinsurance from a reinsurer to diversify and manage their insurance risk. Often, these reinsurers also wish to reinsure their insurance risk, which is then accomplished through retrocession agreements with another insurance company, called a retrocessionaire.

“The businesses of reinsurance and retrocession are not new to Pacific Life,” said James T. Morris, Pacific Life’s Chairman, President and CEO. “Pacific Life Re, a subsidiary of Pacific Life, is focused on providing life reinsurance solutions and support to insurance clients in the U.K., Ireland, and Asia. Additionally, Pacific Life’s Life Insurance Division has been in the life retrocession business since 2002.”

Virtually all employees from Manulife’s Life Retrocession business unit have been offered jobs with Pacific Life. Operations centers for the business will remain in Toronto, Canada and Boston, Massachusetts. London-based David Howell, CEO of Pacific Life Re, will oversee the new operations.

The Phoenix Companies partners with Legacy Marketing

The Phoenix Companies, Inc. has allied with the Legacy Marketing Group, an independent marketing organization that partners with insurance companies to design and market proprietary fixed annuity products. They will co-develop annuity products and bring these solutions to a larger universe of consumers.

Simultaneously, Legacy is launching the CommandMark, series of fixed indexed annuities for both pre-retirees and retirees, available only through the Phoenix and Legacy alliance.

The CommandMark Series features vesting bonus options of up to 12%, a choice of index crediting strategies, and an optional income rider. Clients can access up to 10% of premium in penalty-free withdrawals each year after the first.

“This latest product offers a combination of features unlike any other fixed annuity in the market including: built-in strategic diversification, high bonus options, a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, and a generous liquidity option,” said Preston Pitts, Legacy’s president.

Russell expands DC team

Given continued growth in the defined contribution market, Russell Investments has added Keith Lennon and Michelle Rappa to its institutional DC team. Both will report to Dick Davies, managing director, defined contribution, Americas Institutional.

Lennon, an internal appointment, joins the DC team in Seattle after being promoted to the newly created role of director, defined contribution solutions. He is responsible for enhancing Russell’s offerings to institutional defined contribution plan investors, including glide path management and customized target date funds.

Lennon has more than 20 years of experience at Russell in various client service, analytical and managerial positions. Most recently, he served as director of product for Americas Institutional and led the team responsible for all aspects of product development and management across the defined benefit, defined contribution and non-profit market segments.

Rappa joins Russell as director of business growth, defined contribution, and is based in New York. In addition to formulating and executing Russell’s DC strategy for institutional clients, she will lead new business development initiatives focused on identifying Russell investment management capabilities relevant to DC plan sponsors and introducing them to the marketplace.

Most recently, Rappa worked as an independent consultant with the Russell Indexes team to design and develop product strategy for various Russell Indexes. She was formerly managing director and head of marketing at Seligman Advisors where she was responsible for the strategic direction of the firm’s retirement plans, mutual funds and college savings businesses. Earlier in her career at Oppenheimer Funds and Oppenheimer Capital, she gained significant experience building and marketing retirement plan products.

The Hartford finds more Americans saving for retirement

In a recent survey, the Hartford found that participation in 401(k)s and other defined contribution retirement plans by employed adults rose to 76% overall in 2011, up from 71% a year ago and up from 63% two years ago.

The study, conducted in spring 2011, polled 1,000 employed adults ages 18-65 who had a minimum household income of $25,000.

Three demographic sub groups of respondents showed the biggest gains:

Participation by boomers – those closest to retirement – rose to 79%, up from 71% in 2010 and from 63 percent in 2009;
77% of Gen Xers, or those ages 32-46, contributed to their employer’s retirement plan in 2011, an increase from 71% in 2010 and from 67% in 2009; and
Participation by men jumped to 81%, up from 71% last year and from 66% two years ago.

A slight decline was seen in participation by employees ages 19 to 31 and participation among women overall was flat. Seven in 10 women contributed to their employer’s retirement plan, unchanged from the previous year when women showed greater improvement than men. Participation in retirement plans amongst Gen Y declined by two percent.

Asked about the next 12 months, 34% of study respondents said they were “extremely” or “very confident” that their lives would improve. Those expressing optimism cited expected improvements in their personal finances:

53% said reducing debt and increasing savings were part of their financial goals;
52% indicated they were “extremely” or “very” confident their personal finances would continue to improve; and
42% said securing their financial future was their primary goal.

More people (26%) said they “live comfortably” in 2011, an increase from 19% in 2010. Nearly half of all respondents (48%) said they “meet my expenses with a little left over for extras.”

Plan to retire in a market boom? A bust may follow.

A new University of Missouri study, sponsored by Prudential Financial, on the timing of individual retirement decisions from 1992 to 2008 demonstrates that Americans are more likely to retire after periods of strong equity market performance, following the retirement of a spouse, or if they participated in a defined benefit (DB) pension plan.

“The study clearly shows that the stronger the equity market performs over any period, the more likely it is that near-retirees will, in fact, retire,” said Professor Rui Yao of the University of Missouri, who conducted the study for Prudential.

“A 10% increase in the S&P 500 index results in a 25% increase in the likelihood that individuals will retire, compared to a year in which the S&P 500 index performance was flat—all other factors being equal,” he added.

But the stronger that equities performance over a prior three-year period, the likelier they are to fall in the subsequent year, according to an analysis of the historical returns of the S&P 500 index from 1926 to 2010 conducted by Prudential Financial.

As a result, Americans are more likely to choose to retire at a time when there is more risk that their retirement assets will decline in value just after retiring.

The study also found:

Pre-retirees with only defined benefit plans are almost twice as likely to retire in any given year versus those covered only by a defined contribution plan.
Pre-retirees with a retired spouse are almost two-and-one-half times as likely to retire in any given year as their counterparts with a working spouse.

A Prudential white paper on the findings of the study and its implications for individuals and financial advisors, “Why Do Individuals Retire When They Do and What Does it Mean for Their Retirement Security?” is available at http://www.news.prudential.com/. The University of Missouri’s academic paper on the research is expected to be published in the coming months.

The research is based on the analysis of voluntary retirement decisions of a cohort of pre-retirees and retirees tracked by the Health and Retirement Study, a national biannual panel survey that tracks the retirement, health, insurance and economic status of a sample of individuals over age 50 and their spouses/partners.

The study’s results support the ongoing theme in Prudential’s marketing and advertising materials, which claim that retirees’ assets are particularly vulnerable to economic downturns that occur during a “red zone” stretching from about five years before to about five years after the retirement date.

A Pair of VA Contenders

Posted on July 26, 2011 by Editor Test -

Nationwide and Sun Life are two financial services companies that claim to be committed to the variable annuity space and aim to be, if not one of the pace-setters, then at least among the top ten sellers. And that’s about where they are today.

Ohio-based Nationwide, which took itself private a few years ago, sat in seventh place at the end of 1Q 2011, with $1.7 billion in sales, up from ninth place at year-end 2010. Canadian-owned Sun Life climbed to 10^th on March 31, 2010, but had slipped to 12^th by the end of the first quarter of this year.

The double-your-benefit-base-in-10 years has become the standard deferral bonus among VA contracts, and both the Nationwide Destination and Sun Life Masters offer a version of it. Nationwide’s “L.inc” income rider offers a simple 10% annual rollup (or anniversary account value, if greater). The contract’s age-65 withdrawal percentage, at 5.25%, is a quarter-percent richer than the typical payout.

Sun Life has introduced the Maximizer, an 8% compounded deferral bonus that can be “stacked” on top of annual step-ups, if any. The Maximizer Plus offers the additional feature of income protection; after payments begin, the withdrawal amount goes up by 2.5% each year for life.

Recently, RIJ had a chance to talk about VA strategy with Eric Henderson, senior vice president for individual investments at Nationwide, as well as with Sun Life’s Steve Deschenes, senior vice president and general manager annuities, and Barbara Hume, chief marketing officer for annuities.

We asked Eric Henderson about Nationwide’s ambitions in the VA space.

“We want to grow faster than the industry but at a responsible pace—not doubling our sales each year. Part of our risk management is around [product] diversification, and some is around time diversification. We grew by 30 percent last year, and this year we’re growing faster than industry again. We are out there offering a consistent, simple value proposition of the highest guaranteed income from a strong and stable company.

“The fact that we’ve been consistent with our offer has resonated with advisors. Back in 2009, in March and in May, we pulled back a bit. We did a price increase. Then, last year, when we went from a payout of 5% to 5.25%, we raised the price again. Our research shows us that, of all the variables, the roll-up rate resonates the most with advisors. Among the bells and whistles we don’t have is the stacking—the roll-up on top of the ratchet—or the daily or quarterly step-ups, or open asset allocation. We said, we’ll place our chips on the highest roll-up.

“We put our chips there for two reasons. First, people are buying this for the guarantee, and they want the highest guarantee. Two, it’s a lot easier to hedge our benefit, because we know what’s going to happen. Open asset allocation and stacking adds a lot more variability. With the 10 percent roll-up, I know exactly what my bogey is year after year. We did the research, and it was the combination of the roll-up rate and the payout rate that advisors chose as the most important.

“There are a number of hurdles we need to get over. When advisors [first] hear about SALB, they drool. But when you get down to the issues, it’s not so appealing. One is the state approval issue. A handful of big states don’t allow it. The other big thing is the investment models that it covers. The real appeal of the SALB is that, instead of asking advisors to stop what they’re doing, they can keep doing what they’re doing, and wrap SALB around it. But in reality, with hedging, we end up wrapping a lot fewer portfolios than what’s realistic. The question is, how do we go back to original value proposition.”

“I can’t go into some of the newer ideas. On these products, the benefit will never be as rich as in a variable annuity. In a traditional variable annuity, the base product stands on its own, and when you add the [income] rider, you just need to get a return on any additional capital. But without having the base product as part of it, especially where you have B share, you don’t have—support is the wrong word, and it’s not a subsidy.

“Here’s an analogy. If you’re selling a radio in a car, for instance, you’re already selling the car and it’s easy to add a radio. But if I were just selling a radio on a stand-alone basis, I’d have distribution and operational costs that weren’t shared with the distribution and operational costs of selling the car. We’re distributing through Smith Barney, but sales have not been big at all. The timing was bad—we came out in the middle of the financial crisis, just as Smith Barney was merging with Morgan Stanley, and this was put on a brand new Smith Barney platform. We have a high a percentage of the total sales on that platform, but the platform is tiny.”

Sun Life is among the VA issuers that have reduced the vulnerability of their guarantees to market risk by including a hedged “dynamic asset allocation fund” into their contract’s investment lineup. It was one of five companies (along with AXA Equitable, MetLife, Ohio National, and Transamerica) that are using AllianceBernstein’s Dynamic Asset Allocation Porfolio (see today’s RIJ story).

VA contract owners who opt for a Sun Life Maximizer or Maximizer Plus lifetime income rider must invest between 40% and 60% of their premia in one or more of five options. One is the AllianceBernstein fund. Two more are MFS Global Tactical Allocation Portfolio and PIMCO Global Multi-Asset Portfolio. The others are an SC Ibbotson Balanced Fund and Conservative Fund.

“We’ve tried to do a better job of managing the assets inside the VA for the long term viability,” said Steve Deschenes, who came to Sun Life in 2009 and stints at Fidelity and MassMutual. “We have created core retirement funds, that have at their essence a dynamic risk management. We think of it as a volatility-managed investment with hedging strategies inside the fund.

“You’re trying to capture more of the upside and less of the downside tail. You can have signals that move you in and out of asset classes. It uses out of the money puts, so that instead of managing to the return of a 60% stocks, 40% bonds fund, you can manage to volatility of 10.5.

“Going back a few years most VA issuers said, ‘Invest where you want and we’ll hedge to that.’ Now we’re saying, ‘What’s the right asset allocation to support both our roles?’ Everyone is trying to strike the right balance. When you look at the demographics, we see long-term demand. So our feeling is that we can support that demand and provide an array of products that were comfortable with too.”

Sun Life also offers an Income Riser optional living benefit that provides a 7%/ 10-year annual deferral bonus. That deferral bonus renews for a fresh 10 years at every step-up to a new high-water account value, if any. The Maximizer roll-ups do not renew at step-up. On the inflation-adjusted Maximizer Plus, the payout at 65 is just 4%–one percentage point less than the plan Maximizer.

On the marketing front, Barbara Hume said Sun Life recently published new plain-language product collateral that’s intended for individual clients as well as their advisors.

“At the last IRI [Insured Retirement Institute] meeting, a group of financial advisors told us that they couldn’t use most VA sales kit with clients. They said the charts were way too technical. So we had consumers work with us on how they understood the benefits. Firms have come back to say it’s the first time they’ve seen a sales kit that can be used throughout the sales process,” she said.

Since the financial crisis, Sun Life has been pursuing an aggressive branding initiative. The normally quiet company wanted to avoid being confused with SunAmerica, whose parent, AIG, generated so much negative publicity during the financial crisis. “Sun Life was having an image issue,” Hume told RIJ. “When AIG was going through trouble, we were mistaken for SunAmerica.”

Sun Life has intentionally sought out sponsorships that exploit the large astronomical body featured in its name. It bought the naming rights to the stadium in sunny greater Miami where the NFL’s Miami Dolphins and National League Florida Marlins. It also sponsors the Cirque de Soleil acrobatic performance artists. The head of the brand initiative is Bill Webster, who, while at MetLife, was responsible for the ‘if in Life’ campaign,” Hume said.

More Generous VA Benefits On the Way: Morningstar

Posted on July 26, 2011 by Editor Test -

Carriers significantly bumped up their product development activity in Q2 2011. There were 162 product changes filed during the quarter, up 226% from the first quarter of 2011 (49 changes) and 110% (77 changes) year over year.

We don’t expect product development to remain at the same brisk levels for the rest of 2011, though we continue to expect the pendulum to swing back toward more generous benefits going forward. Innovation appears to be strong, which also increases complexity for those trying to keep track.

Many carriers got into the act. Product filings were spread among 24 carriers, with 16 choosing to issue new contracts or benefits. Product innovation picked up:

SunLife came out with an innovative step-up method.
Protective created a different withdrawal guarantee structure than is typical.
MetLife added an RMD-ratio to its step up calculation.
Lincoln released its innovative long-term care rider.
Several firms released new O-share contracts that modified the VA fee structure to accommodate a large broker dealer.

Living benefit activity was vigorous. The Lifetime GMWB still dominates, but a few GMABs made a return, as well as enhancements to the GMIB by the major player, MetLife (AXA remained quiet this quarter, having made numerous filings last quarter). Step-ups crept upward this quarter, with many carriers offering 8% fixed, simple step-ups to compete with the 5% compounded products. Lifetime withdrawals are mostly age-banded, with levels for a 65-year-old typically coming in at 5%. Overall, about 80% of all Lifetime GMWB benefits currently available offer an age-banded withdrawal structure.

Sales flows for the first quarter of 2011 (most current data available) continued to show strength, with new sales of $38.7 billion, a 23.2% increase over first quarter 2010 sales of $31.4 billon. First quarter sales were also 4.3% higher than fourth quarter 2010 sales of $37.1 billion. Assets under management posted another all time high of $1.56 trillion, a 3.6% increase over year-end assets of $1.50 trillion.

The top-selling companies did not change their rank, and market share continued to concentrate in the top companies. The number one and number two spots were Prudential and MetLife with market shares of 17.6% and 14.7%, respectively, versus 16.4% and 13.8% in the fourth quarter of 2010.

Just under one-third of variable annuity sales were sold by these two companies. Jackson National, the third-ranked VA issuer, grew its share of the market to 11.8% from 11.2%. New sales for the top 5 companies accounted for 58.9% of reported sales, up from 57.4% for the top 5 in the fourth quarter of 2010.

Second quarter 2011 contract updates

Hartford is back in the game with the Personal Retirement Manager II (A,B,C,I,L shares) and two new Lifetime GMWBs. The riders come in single-life and joint-life versions. The first offers a 6% step up and a 5% withdrawal for a 65-year-old and carries an 85 bps charge (Future6). The second offers a 5% step up and a 5% withdrawal for a 65-year-old and charges 125 bps (Future5). Hartford also added a GMAB with the standard 10-year waiting period for 110 bps.

Jackson National released a variety of living benefits and a credit enhancement. Two RMD-friendly GMWBs are available: a 5% withdrawal with a highest account value step up each quarter before withdrawals are taken (annual step up thereafter), and an identical 6% withdrawal benefit. Costs are 85 bps and 100 bps, respectively, charged against the benefit base. Jackson closed six old benefits to make room for the new ones. (AutoGuard5 and AutoGuard6).

Jackson released a Lifetime GMWB for its L-share contract that offers a 5% withdrawal for a 65-year-old with a highest anniversary value step up that includes bonus credits. There is also a death benefit component, and the contract has limited release. The fee is 115 bps. (Jackson Select Protector for Perspective II L-share).

John Hancock rolled out a new B-share VA contract with a 115 bps fee and a Lifetime GMWB rider. The living benefit has a 5% withdrawal percentage. Two types of step ups are applied if no withdrawal is taken: a highest anniversary value step up; or a 5% simple interest increase for 10 years (6% if 65-years or older). The 10-year step up period restarts and rolls forward until age 95 if a highest anniversary step-up occurs. The fee is 1% charged against the benefit base. (John Hancock Venture; Income Plus for Life 6.11)

Lincoln National activated a much-anticipated new long-term care benefit that pays a monthly amount for long-term care expenses and costs 0.87% to 1.71%, depending on options chosen (fee calculation is complicated). This benefit pays for long-term care expenses up to three-times the initial purchase amount (which must range from $50,000 to $400,000). Payments are offered monthly beginning after the first anniversary and are not taxable. The optional Growth feature (50 bps) gives the ability to increase the annual payment amount by capturing the investment gains (highest anniversary value) through age 76. The benefit is capped at $1.6 million, covers a single life, and applies only to non-qualified assets. (Lincoln Long-Term Care Advantage)

Lincoln National also released a B-share contract that is 100% liquid and applies to rollover amounts transferred in from other Lincoln products. The contract carries a Lifetime GMWB, the i4Life hybrid income benefit, an annuitization option with minimum annuitization payments that change with inflation, and an enhanced death benefit. The contract fee is 105 bps. (ChoicePlus Rollover)

MetLife released a GMIB with a benefit base that can be annuitized on or after the 10th anniversary. Step ups continue up to age 91 and consist of a highest anniversary value step up; a fixed 6% step up; or alternatively, if the ratio of the RMD amount divided by the benefit base offers a greater percentage, then that becomes the step up percentage. A unique “no lapse” feature offers a 5% annuitization payment rate, or 6% after age 70, if no withdrawals are made. A GMAB feature allows the owner to restore initial purchase payments, in which case the GMIB portion terminates (GMIB Max). MetLife also bumped up the step up amount on their GMIB Max benefit to 6% for the Series Xtra 6 contract.

Pacific Life released a new contract with a full suite of living and death benefits (GMIB, GMAB, GMWB, Lifetime GMWB and three death benefits). The fee is 110 bps fee (B-share) or 145 bps fee (L-share). (Pacific Journey Select).

Principal introduced a new B-share contract with a 125 bps charge, a Lifetime GMWB benefit and two types of death benefits (return of premium and highest anniversary value). The new Lifetime GMWB offers a 5% step up on the first two anniversaries and a 5.25% withdrawal rate for a 65-year-old (4.75% for joint life version). The rider fee is 73 bps. (Principal Lifetime Income Solutions) (Guaranteed Minimum Withdrawal Benefit)

Protective released a Lifetime GMWB with a different guarantee structure than usual. The guaranteed withdrawal amount is based on the account value. The withdrawal percentage is set at the time of election and increases each year. The withdrawal percentage ranges from 5.152% for a 60-year-old to 8.133% at age 80 based on the age of the older owner. (Joint-life version offers withdrawals ranging from 4.83% (age 60) to 7.88% (age 80) based on the younger joint owner.) For a 65-year old, the withdrawal is 5.406% (5.102% for joint life version). At the time of re-calculation each year, the withdrawal amount will not go down and will not go up more than 10%. It equals the greater of a) the withdrawal percentage applied to the current anniversary account value, or b) 90% of last year’s value, or c) the initial withdrawal amount. The fee is 100 bps or 110 bps if elected later. (Protective Income Manager)

Prudential released a new share class contract (O-share) specifically designed for Edward Jones. The fee structure pulls elements from both the A-share and B-share structure. The base contract fee is 85 bps. A sales charge is spread over 7 years, ranging from 15 bps to 70 bps based on breakpoints from $50,000 to $1 million. The contract offers a Lifetime GMWB and a Return of Premium death benefit. (Premier Retirement)

SunAmerica also created a new O-share for Edward Jones. The fee structure pulls elements from both the A-share and B-share structure. The base contract fee is 95 bps. A sales charge is spread over 7 years and assessed quarterly, ranging from 18 bps to 71 bps based on breakpoints from $50,000 to $1 million. The contract offers a Lifetime GMWB and Return of Premium and HAV death benefits. (Polaris Platinum O-Series)

Sun Life activated two new Lifetime GMWBs. The first offers a 5% withdrawal for a 65-year-old and the three standard step ups: highest anniversary value, a fixed 8% (simple) bump up annually for 10 (withdrawal free) years, or a 200% of purchase payments reset after the later of 10 years or age 70. The fee is 110 bps. (Sun Income Maximizer)

Sun Life’s second Lifetime GMWB released adds an innovative step up feature. The withdrawal for a 65-year-old starts lower at 4%, but an additional 2.5% is added to the benefit base each year during the withdrawal period. The fee is 125 bps. (Sun Income Maximizer Plus)

Transamerica released a Lifetime GMWB benefit with a 5% withdrawal for a 65-year old. The rider offers a 5% simple step up or highest anniversary value. Fee percentage is based on the weighted average account value in each of three allocation models ranging in cost from 45% to 1.40%. (Retirement Income Choice 1.5)

The new VALIC Lifetime GMWB has an interesting two-tiered guaranteed withdrawal percent. For the IncomeLOCK Plus 6, a 65-year-old investor can take a first withdrawal of 6% (single ife) that lasts until the account value reaches zero. Then the withdrawal percent drops to 4% for life. Over the first twelve years, the benefit offers the three standard step-up options in the usual “greatest of” structure: fixed percentage increase of 6%, highest anniversary value, or a deferred step up to 200% of purchase payments if the account is withdrawal-free after twelve years. A second version of the benefit offers a higher step up at 8%, with a lower withdrawal of 5.5% (single life), moving to 4% when the account value hits zero. (IncomeLOCK Plus 6; IncomeLOCK Plus 8)

Several firms closed contracts:

John Hancock discontinued sales of three share classes of the AnnuityNote: A-, C-, and I-share. Integrity discontinued sales of the PinnaclePlus.
Riversource discontinued sales of both the Innovations Select and the FlexChoice Select.
Allstate closed the Retirement Access contract.
MetLife closed the Series XC and XTRA Bonus shares and Class B.
Minnesota Life closed an L-share and Protective closed a C-share.
Security Benefit closed B-share and C-share contracts.

‘Financial Services for the Greater Good’

Posted on July 26, 2011 by David Lindorff -

Back in 1918, when World War I was raging in Europe and the US federal budget was a mere $12.6 billion, industrialist Andrew Carnegie created the Teachers Insurance and Annuity Association (TIAA) to provide retirement security for university professors.

Today, $12.6 billion is what the IRS spends on taxpayer audits each year, while the 2011 US budget is $3.82 trillion. And Carnegie’s creation, now TIAA-CREF, has grown into the retirement plan for 3.7 million active and retired teachers, professors, researchers, and others nationwide.

A not-for-profit company that’s ranked No. 87 on the Fortune 500, with $453 billion in managed assets (including $383 billion in its group variable annuity contract), TIAA-CREF pioneered the use of annuities for retirement planning, and its well-educated plan participants continue to favor them.

The company has always taken a fairly conservative, straightforward approach to retirement planning, without offering its participants “a lot of bells and whistles,” David Richardson, principal research fellow at the TIAA-CREF Institute, told RIJ recently. Richardson delivered a presentation on his research on TIAA-CREF participant behavior at a Pension Research Council meeting last spring.

Initially, TIAA’s only investment option was a fixed premium guaranteed deferred annuity. Then, in 1952, as the US economy boomed and inflation flared, the company created the College Retirement Equities Fund (CREF), the first variable annuity, to allow professors to participate in the rising stock market. A plain vanilla product at first, CREF eventually featured options like systematic withdrawals and interest-only withdrawals. Richardson said, “As we’ve added options, people have opted for them.”

Along the way, “The definition of retirement has changed. People are working longer, and they don’t retire all at once. They go into phased retirement,” he added. This is especially true in higher education, where universities often encourage older faculty members to step back from full-time to part-time teaching after they reach 65 or 70.

Recently, the TIAA-CREF Research Institute studied its participants’ retirement planning and investment behavior. While the plan’s mix of retirement products is different from most other firms (participants can contribute to a deferred income annuity during the accumulation period) and its participants behave a bit differently, the results should prove useful to companies on the for-profit side of the retirement business.

One striking finding was that TIAA-CREF participants seem increasingly concerned about avoiding losses should both they and a spouse die. “It’s odd,” said Richardson. “We public policy people are worried about people outliving their retirement benefits. But people seem to be more worried about dying young, and not leaving anything for their children or relatives.”

Why “odd”? Because “our participants tend to live longer than the general population. They are more educated, stay active and pay more attention to their health,” he said.

Year after year, the study shows, nearly 80% of TIAA-CREF participants who choose annuities opt for a guaranteed payment period, which assures that payouts continue for a certain number of years even if the annuity holder (and spouse) dies in the meantime. Richardson added, “And remember, these guarantee options are expensive. You pay a premium for them.”

A second surprise in the survey involves the investment behavior of TIAA-CREF participants under age 35. Because its members see retirement as something distant, this group in general has tended to opt for greater risk in hopes of building up a larger nest egg over time. Indeed, that’s what financial advisors and portfolio theorists tell younger clients to do.

In this survey, however, the under-35 group shows a big shift in 2010 from investments in equities into balanced funds— to 40% in equities and 24% in balanced funds in 2010 from 45% in equities and 8% in balanced funds in 2006. (Some of the money going into balanced funds in this group also came from fixed and guaranteed income investments, which fell to a combined 31% from 39% over the period.)

“But the balanced category is basically composed of target-date funds,” says Richardson, “and for people in that younger age group, a balanced fund is probably even riskier than an equities fund” in terms of whether it will enable them to achieve their long-term goals. He attributes the change to the financial crisis.

“After the 2008-9 market crash, people may just be saying, ‘I give up. Here’s a life-cycle fund, and I won’t have to think about it,’” he said. Most of the people opting for target date funds put all their assets in them.

A similar if less pronounced shift away from equities and annuities into balanced funds has occurred among the 35-44 and the 45-53 age brackets, with equities dropping to 40% from 52% for the first group and to 43% from 49% for the second.

Yet, especially for those aged 35-44, the move to target date funds could also be more risky than just investing in equities alone would be, based on historical performance. In the older age cohorts, the shift out of equities was minimal. The percentage of investors who moved into guaranteed or fixed annuities actually rose slightly.

It remains to be seen, said Richardson, whether the rebalancing of allocations observed in TIAA-CREF participants’ portfolios would persist. “When you have a big event like 2008, there is always a question of how long people will continue to respond to it. So far, people have stayed out of equities,” he noted.

In fact, the shift towards a more conservative investment posture predates the 2008 crash, and extends through last five years covered in the study (see P. 5 of the presentation referenced above). The percentage of those participants putting 100% of their assets in equity products dropped steadily over the period, to 8.2% in 2011 from 12.1% in 2005.

The percentage putting over 50% of assets into equities also fell, to 31.4% in 2010 from 39.2% in 2005. Over the same period, the percentage that put between one percent and 50% of assets into equities fell to 24.6% from 28%. The percentage that put no assets in equities rose from to 35.7% in 2010 from 20.7% in 2005.

“There can be a lot of inertia in these kinds of decisions,” said Richardson.

Richardson’s data also shows a trend toward delaying the first annuity payment by TIAA-CREF participants, which suggests that they may be working longer. In 1986, 54.3% of first life annuity payments were taken between the ages of 56 and 64. In 2009, that portion dropped to 38.2%. Between 1980 and 2009, the percentage starting payments at age 65 dropped by more than half, while the percentage taking at age 66 or later increased from 13.5% to about 47%.

Mutual Satisfaction

Posted on July 20, 2011 by Editor Test -

Western & Southern Financial Group, a Cincinnati-based financial services company, sold only about $22 million worth of Integrity Life, National Integrity Life and Western-Southern Life Assurance Co. variable annuities in the first quarter of 2011, but it has high hopes for its rollover money-only VAROOM contract, which was announced in 2010 but didn’t receive final SEC approval until this year.

When we asked Mark Caner, president of W&S Financial Group Distributors, what the VAROOM “story” was, he used a metaphor that compared the VA to a vehicle that carries people on a journey through retirement. The vehicle, he said, should be strong, it should allow the driver to change course nimbly, and it should be inexpensive to own.

“If you think about the retirement journey in terms of driving through it, our statistics tell us that people may be in retirement for 20 to 25 years and will hit three dominant risks,” Caner said. “First, there are vehicle risks—can the vehicle survive a crash, is it solid and stable? Then there are detour risks—events people will need to pivot on—and fuel risks—the costs of the investments. In our marketing department, we thought about retirement as a journey, similar in some ways to driving in traffic.”

Vehicle risk, of course, refers to financial strength. “That’s arguably the greatest risk,” Caner said. “Western and Southern has been referenced by A.M. Best and Standard & Poor’s as one of the eight strongest life insurers. Couple that with the strength of a Fortune 500 company and a 100-year legacy of meeting commitments.

“Of companies in our space, we have the highest capital to asset ratio. That speaks to vehicle risk. If you took the top 15 publicly traded companies, their average capital to asset ratio is about half ours. The average for the top 15 is 7.6%. Ours is over 15.5%. We are a mutual company. We looked at conversion [to public ownership] in the 1990s, but when people look back on the 2008 crisis, they see that the ones who came through in the best shape were the mutuals.”

Then there’s detour risk, which refers to withdrawal flexibility. “Given that the VAROOM product is tailored for rollover money, it’s more likely that clients will have to tap into it. Many products create a punitive effect for withdrawals, and we established a mantra not to do that. When you take an unscheduled withdrawal from our contract, you forgo your deferral credit for that year only. That detour is very important, because it’s very likely that they will need access,” Caner said.

Fuel risk is the last piece, and refers to expenses. With lower plain-vanilla hedging costs, VAROOM can afford to offer a few unusual benefits: a 10-basis point increase in the withdrawal rate for every year of deferral 10% penalty-free withdrawals and a living benefit rider fee that’s levied on the account value instead of the often-higher benefit base.

“We made a deliberate decision to keep costs down,” Caner told RIJ. “Because we offer ETFs, our expenses are significantly lower. The average expense ratio is about 20 points, compared with 100 basis points for the average VA. The all-in expense on this product is 255 basis points, versus 332 basis points on average.

“Another feature that is tied to fuel risk is that our fees are on the account value. Others assess their fees on the benefit base, which is generally higher than the account value. When living benefits first came out, some companies charged on the account value and some on the benefit base. When people started increasing fees and benefits, most switched to the benefit base, and that doesn’t help the client,” he added.

“Comparing [the hypothetical performance of] VAROOM to the average of the top-selling VA contracts, if you put $200,000 into each, after 15 years, the VAROOM account value would be $443,000 and the average for the top VAs would be $393,000. The annual withdrawal rate would be about $28,000 for VAROOM versus $23,000 for the other.

“The reps who find us most appealing would be those who concentrate on rollovers and who have used ETFs or like ETFs, and the ones who like variable annuities with a distribution strategy. By having individual ETFs in VA subaccounts, we think that’s significantly more transparent, and it allows us to hedge the benefit a lot more easily,” Caner said. (Note: VAROOM is set up as a rollover IRA, allowing rollover assets to remain tax-deferred. Otherwise, because VAROOM assets are invested directly in retail ETFs, in violation of Section 817(h) of the IRS Code, the assets wouldn’t qualify for tax-deferral.)

In short, Western & Southern is one of the companies betting on the cheaper, simpler sort of VA—not a surprising approach for a mutual company that doesn’t have to satisfy earnings-hungry shareholders—and focusing on marketing to a cost-conscious, consumer-oriented niche rather than to the widest possible audience.

Fixed annuity sales improve in 1Q 2011

Posted on July 20, 2011 by Editor Test -

Fixed annuity sales by banks and other depository institutions generated $4.93 billion in this year’s first quarter, a 16% percent increase over the same period a year ago, according to data released by the American Bankers Insurance Association. Quarter-to-quarter sales grew 56%. The sales estimates are based on findings from the Beacon Research Fixed Annuity Premium Study.

“Though low by historical standards, fixed annuity rates were higher than in fourth quarter 2010,” said Jeremy Alexander, president and CEO of Beacon Research. “Decisions by many carriers and banks to increase fixed annuity sales undoubtedly played a role as well. In addition, risk aversion has increased, and that tends to favor sales of fixed annuities over variable annuities.”

A surge in sales of fixed rate annuities without market-value adjustments, or MVAs, drove overall results. MVAs increase or decrease the value of annuity withdrawals, depending on whether interest rates have fallen or risen since the annuity was purchased.

Improved sales were reported by more than one-third of the bank channel carriers tracked by Beacon’s study, with 69% reporting improved quarter-to-quarter sales. Western National Life maintained its position as the leading bank channel company among study participants.

First quarter 2011 bank channel results for the 10 leading companies were as follows:

First Quarter 2011 Bank Fixed Annuity Sales
Company	Sales ($000s)
Western National Life (AIG)	2,103,924
New York Life	618,304
Symetra Life	548,366
Great American Financial Resources	271,448
Lincoln FInancial Group	252,839
American National	238,454
Protective Life	215,064
Jackson National Life	179,258
W&S Financial Group Distributors	177,536
Pacific Life	81,659
Source: Beacon Research

Western National’s Flex 7 moved up two places to become the quarter’s top bank channel fixed annuity. Protective Life’s ProSaver Secure II rejoined the top ten in tenth place. Lincoln Financial Group’s New Directions continued as the only top-ten indexed annuity, coming in fifth place.

The first quarter’s leading bank-sold annuities were as follows:

Leading Bank-Sold Annuities
Company	Product	Type
Western National Life	Flex 7	Fixed Rate Non-MVA
Western National Life	Proprietary Bank Product A	Fixed Rate Non-MVA
New York Life	NYL Preferred Fixed Annuity	Fixed Rate Non-MVA
Western National Life	Flex 5	Fixed Rate Non-MVA
Lincoln Financial Group	Lincoln New Directions	Indexed
Western National Life	Proprietary Bank Product F	Fixed Rate Non-MVA
New York Life	NYL Secure Term Fixed Annuity	Fixed Rate Non-MVA
Western & Southern Life	MultiRate Annuity	Fixed Rate Non-MVA
Western National Life	Proprietary Bank Product B	Fixed Rate Non-MVA
Protective Life	ProSaver Secure II	Fixed Rate Non-MVA
Source: Beacon Research

Voters of all stripes want Wall Street swept clean

Posted on July 19, 2011 by Editor Test -

A majority of Americans of all major political persuasions are in favor of “strong, sensible oversight of the financial services industry, including a strong and independent Consumer Financial Protection Bureau,” according to a poll sponsored by AARP, the Center for Responsible Lending and Americans for Financial Reform.

The poll, conducted by Lake Research Partners, found:

After hearing arguments in support of and in opposition to financial reforms, voters across party lines solidly support the Wall Street reform law.
Voters favor a single federal agency with the sole mission of safeguarding the public from deceptive financial practices and predatory products.
Voters believe safeguards will help restore the economy and not, as some on Wall Street say, stand in its way.

Additional findings included:

63% of voters, including 61% of independents, want more government oversight of financial companies. Just one in four want less government oversight.
74% favor a single agency with the single mission of protecting consumers from potential misconduct by financial companies. The poll found 83% of Democrats, 73% of independents and 68% of Republicans in favor.
93% favor requiring credit card companies, banks, and other lenders to provide clearer explanations of their rates and fees.
77% favor regulations against loans with risky or confusing features, such as low teaser rates.
73% favor banning payments from lenders to mortgage brokers for putting homeowners into higher rate mortgages than they legitimately qualify for.
63% want the Dodd-Frank law to fully take effect.
48%, including 43% of independents, would be less likely to vote for a member of Congress who voted to repeal Wall Street reform. Just 22% are more likely to support a member of Congress who voted to repeal Wall Street reform.
66% agree that “Wall Street must be held accountable and prevented from repeating the same actions again and believe this will help the economy.”
23% agree with the opposite statement, “Wall Street reform is a job killer that creates excessive government regulation and bureaucracy that stands in the way of our economic recovery.”

Chris Ashe moves to New York Life from Prudential Annuities

Boomers are redefining the word ‘grandparent’

Huntington VA funds chosen by Lincoln Financial Group

Still River Announces Free Limited Version of RetirementWorks® II for Consumers

Weiss Ratings gives U.S. debt a ‘C-minus’

MassMutual consolidates funds under RetireSMART brand

Many pension participants “lack awareness” of their benefits: Fidelity

Cerulli identifies niche retirement market opportunities

Not CPPI

Putnam appoints research and investment executives

Kevin Knull joins Symetra to start registered annuity business

Allianz Life appoints Sherri Du Mond as head of distribution training

Pacific Life to buy Manulife life retrocession business

The Phoenix Companies partners with Legacy Marketing

Russell expands DC team

The Hartford finds more Americans saving for retirement

Plan to retire in a market boom? A bust may follow.

Data Connection

Lists*

Still River Announces Free Limited Version of RetirementWorks^® II for Consumers