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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.

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 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.   

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.

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:

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:

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.”

Not long ago, the business of following VA trends had everything to do with tracking roll-up rates and other living benefit enhancements. The so-called arms race saw insurers ratcheting up their benefits during a period of relatively low volatility and decent interest rates. However, the financial crisis has changed all this—for the better—and trend watching has become a much different sport.

For one thing, insurers are more likely to mind their own business, or at least view their competitors with a more curious than avaricious eye. Many have willfully stepped back from VAs, reducing inflows and restricting sales to less-rich products that sit comfortably within their risk tolerance. These companies are unconcerned with their market share and would be hesitant to take on a significant volume of new business even if it stood at their doors.

The emerging trends have more to do with risk management than rich benefits.  Prudential Financial, for instance, has forged tremendous success out of its Highest Daily line of withdrawal benefits and the asset transfer program that reduces the hedging onus on the insurer.

This type of system, which is based on constant proportional protection insurance (CPPI), uses an algorithm to move policyholder assets into a safe portfolio following certain triggers. A key difference between these asset transfer programs and CPPI is that the portfolio never becomes “cash-locked”—i.e. with all of the assets in the safe portfolio. 

This strategy shifts some of the hedging mechanism from the insurer to the policyholder, reducing equity volatility risk and costs for the insurer. This helps keep costs reasonable for clients and makes the product’s overall risk profile more palatable for the manufacturer.

Although some companies have followed in Prudential’s footsteps, the asset transfer trend has not become the most popular means to mitigate VA risk. Instead, many insurers have chosen to embed similar tactics within variable funds.           

AXA Equitable was the first to integrate a dynamic asset allocation component into its variable funds. Such funds use derivatives to add even more oomph than an asset transfer program. Within the context of VAs, fund-based risk management gives the insurer more flexibility over time to adapt the strategy to unforeseen changes in economic conditions. By comparison, asset transfer programs are contractually based, leaving little room for such flexibility.

Initially, sub-advisory structures dominated dynamic asset allocation, if need be allowing the insurer to dictate specifications to suit its hedging program. However, asset managers have launched and placed their own off-the-shelf strategies that some insurance companies are adopting, making this type of solution accessible to manufacturers of all sizes. After all, the sub-advisory structure demands a minimum volume of assets to make sense for all parties.

Among other things, this latest generation of products incorporates elements of hedging into products at a level where it is apparent to the investor. This takes hedging out of the black box where it used to reside, and creates the potential for new product innovations outside of the realm of VAs.

A fundamental benefit of these new strategies is the reduction of volatility. At the same time that Prudential reduces its hedging onus, it also gives its policyholders a means to preserve contract value. That benefit, though not be a bona fide guarantee, is still valuable. The same is true for dynamic asset allocation. With or without an explicit guarantee, the reduction of volatility can also benefit investors.

Our understanding is that companies are already translating the dynamic asset allocation strategies of VA funds into retail mutual funds. A similar strategy could be used in managed accounts, and even in defined contribution plan accounts.

While asset transfer programs and managed risk funds are playing a significant role in revitalizing the VA industry, their benefits may ultimately reach the wider world of investing. In the “new normal” of acute risk awareness, the price of guarantees would otherwise become prohibitive. As customers learn more about the benefits of these new risk management devices, they may embrace their use in other settings, creating potential for new product and strategy concepts.

Tamiko Toland is Managing Director of Retirement Income, Strategic Insight.

© 2011 RIJ Publishing LLC. All rights reserved.

Even as they age, Americans are gaining life expectancy. Or so it seems.

Average life expectancy at birth is 78.2 years among Americans, and average life expectancy at age 65 has reached 18.8 years, an increase of 6.8% since 2000. But the risk of dying varies by gender, race, ethnicity and geographical location.

Those were among the findings in “Death in the United States, 2009,” a data brief published this month by the National Center for Health Statistics.

In 2009, the age-adjusted death rate for the United States reached a record low of 741 per 100,000. Between 2000 and 2009, the gap in life expectancy between white persons and black persons in the United States declined by 22%, to 4.3 years.

The southeast states and non-Hispanic African-Americans tend to have the highest death rates. The gap between the life expectancies of white and black Americans at age 65 fell to 1.3 years in 2009 from 1.6 years in 2000, however.

After adjusting for differences in average age, the brief said the following ten states had the highest death rates: Alabama, Arkansas, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Oklahoma, Tennessee and West Virginia.

Although the data brief doesn’t mention financial factors, death rates appear to correlate with income. Seven of these states rank 45^th through 51^st in median annual income and none rank higher than 37^th, according to worldlifeexpectancy.com.

If current trends continue, heart disease may fall behind cancer as the leading cause of death (heart disease mortality has fallen faster than cancer mortality) and male and female life expectancies will continue to approach convergence.

Between birth and age 44, the most common causes of death in the U.S. are accidents and homicides. Between ages 45 and 64, the most common cause of death is cancer. From age 65 onward, the most common cause of death is heart disease. Alzheimer’s disease was blamed for only seven percent of deaths among the elderly in 2009.

© 2011 RIJ Publishing LLC. All rights reserved.

More than half (55%) of current plan participants say they would not be saving for retirement if not for their 401(k) plan and 19%s said they had no other retirement savings than their workplace plan, according to a new survey by Fidelity Investments. 

Fidelity, the nation’s largest provider of 401(k) plans and IRAs, surveyed 1,000 current and retired workplace plan participants. In what Fidelity took as a sign of difficult economic times, 54% said they would “contribute more to their 401(k)s if they could.

In May, Fidelity reported that nearly one in 10 corporate defined contribution participants increased their contribution rate during the first quarter of 2011, the largest percentage to do so since Fidelity started tracking the figure in 2006. This corresponds with the survey that found 53% of working respondents increased their contribution rate in the last five years, despite historic market volatility and economic uncertainty.

When asked why they increased their contributions, 23% of working respondents said they wanted to take full advantage of employer matching dollars, and 38% said they had received a raise or had extra money available.

Only 23% of working respondents reported ever decreasing their workplace plan contribution percentage. For those who decreased contributions, 46% reported needing extra money, and 9% said it was due to the elimination of a company match. Forty percent of these respondents said they already do – or possibly will – regret the decision to decrease their retirement savings contribution.

Fidelity’s survey found that 23% of working respondents have taken a loan from their retirement plan, with many saying they needed to do so for an unforeseen emergency. But 29% of those respondents said they would not do so again.

Many plan sponsors require complete repayment of the loan within 60 days if the participant leaves the company or is laid off, which could trigger a fee and tax bill.

To supplement their workplace plan, 37% of working respondents are building retirement savings in an IRA. In addition, 33% are in an employer-sponsored pension plan, 28% have savings in bank accounts, and 28% have investments in stocks or bonds. Pre-retirees 55 and older are the most active users of IRAs, with 44% saying they utilize them.   

© 2011 RIJ Publishing LLC. All rights reserved.

Morningstar adds asset allocation functionality to its direct platform for institutions

Morningstar, Inc., the provider of independent investment research, has added asset allocation and forecasting functionality to Morningstar Direct, a web-based global investment analysis platform for institutional investors.

Based on research from Morningstar and Ibbotson Associates Inc., its wholly owned subsidiary, the new tools allow investors to create optimal asset allocation strategies that take into account “fat-tailed” return distributions and measure downside risk.

In a release, Morningstar said:

“Mean-variance optimization (MVO) has been the standard for creating efficient asset allocation strategies for more than half a century and has become synonymous with Modern Portfolio Theory.

“But MVO is not without its shortcomings. Traditional MVO cannot take into account ‘fat-tailed’ or extreme asset class return distributions, which better match real-world historical asset class returns. This framework is also limited by its ability to only optimize asset mixes for one risk metric (standard deviation) and one reward metric (arithmetic return).”

The new asset allocation capabilities in Morningstar Direct allow users to choose from a number of return distribution assumptions to model asset class behavior, including traditional bell-curve shaped return distributions as well as “fat-tailed” and skewed distributions.

Users can then use scenario-based optimization to create optimal asset allocation strategies. They can elect to create strategies that will produce the highest expected return either for a given level of volatility or for one of several downside risk measures.

As the markets have shown—and reminded us most harshly again in 2008—real-life finance is often more complex than the traditional mathematical models used for portfolio optimization and forecasting,” said Xiaohua Xia, president of institutional software for Morningstar.

“Our new asset allocation functionality in Morningstar Direct offers institutional investors a flexible tool with multiple options to enhance and refine traditional mean variance optimization or take advantage of some of the most cutting-edge modeling.”

The new asset allocation functionality is included with all Morningstar Direct subscriptions. Introduced in 2001, Morningstar Direct equips more than 5,300 users at nearly 1,700 institutions globally with data and tools to interpret and communicate financial information.  

Allianz Life introduces new FMO distribution model

Allianz Life Insurance Co. of North America has launched Allianz Preferred, a new model for distributing fixed index annuities (FIAs) that will support qualifying field marketing organizations (FMOs) with increased education, training and resources for third-party oversight, as well as access to exclusive products. The first of these products will be launched on August 2.

To qualify for Allianz Preferred, field marketing organizations must hire a formal Field Compliance Officer and Field Suitability Officer who participate in ongoing training from both Allianz Life and the industry. They must also agree to a review and approval process of advertising prepared by the FMO, including review of all non-Allianz Life materials by an Allianz Life-approved third-party ad review firm, which Allianz Life will pay for. FMOs also must meet certain production requirements and must not be affiliated with a distribution group.

Financial professionals who qualify and are contracted with Allianz Preferred may sell innovative Allianz Life products that are exclusive to the Allianz Preferred program.

“As we continue to see significant changes in the economic, regulatory and distribution environments that demand a bold response, the launch of Allianz Preferred is an important step,” said Allianz Life President and CEO Gary C. Bhojwani. “Allianz Preferred reflects our belief that when we invest in agents and FMOs that are most dedicated to a relationship of reciprocal commitment with Allianz, we strengthen sales practices, help ensure uniform compliance with regulations, and continue our high service standards for all policyholders.”

Allianz Life’s release also said:

“With FIA sales setting new records in 2010, securities licensed professionals are among the fastest growing FIA sales channel. FIAs were also the number one selling type of fixed annuity for the second quarter of 2010, a first for the industry according to LIMRA.

“These trends, along with more stringent regulatory standards – lower tolerance for replacement sales, greater scrutiny on source of funds for purchasing FIAs, and more oversight of advertising value-added services, recruiting and sales practices – require a new relationship model between insurers and FMOs, something that Allianz Preferred addresses.”

Rising rates improve corporate pension funded Status by $25 billion in June: Milliman

The 100 largest U.S. defined benefit pension plans suffered a $10 billion investment loss in June but still saw their funded status improve due to a $35 billion liability reduction, said Milliman, Inc., publisher of the Pension Funding Index. The $25 billion reduced the funded status deficit to $186 billion.

“Normally when assets decline we’re in for a fall in pension funded status, but not this month,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “In fact it’s a rare combination: a funded status improvement driven by liabilities and in spite of a decline in assets. In the eleven years we have tracked this data, we have only seen this combination in a total of ten months.”

Over the last 12 months, the cumulative asset return has been 15.0% and the Milliman 100 PFI funded status has improved by $182 billion, pushing the funded ratio from 74.2% up to 87.0% at the end of June.

Great-West Retirement Services expands sales force

Great-West Retirement Services has appointed Mark Berman as regional sales director for its Great Lakes market, reporting to Pete Margiotta, national sales director, said Chris Cumming, Great-West’s senior vice president of defined contribution markets.  

Berman is based in Chicago and is responsible for developing new business in the over $50 million corporate and nonprofit defined contribution market in Illinois, Michigan, Ohio, Indiana and Kentucky.  He replaces Dan Schatz, who moved to a similar position in Texas.

Berman joins Great-West Retirement Services from Marshall and Ilsley Trust Company, where he served as vice president and sales director.  Previously, he held defined contribution market sales positions at Principal Financial Group and ABN Amro. 

He earned a bachelor’s degree in business administration from Bradley University. Berman also holds FINRA Series 6 and 63 securities registrations and life and health insurance licenses.

MassMutual Retirement Services hires three relationship managers

MassMutual has added three new relationship managers to its Retirement Services sales and client management organization led by Hugh O’Toole.

Brian Curtin has been hired as a senior relationship manager effective June 13 and is responsible for mid-market customers in the northeast region. He is based out of southern New Hampshire/Boston as part of the Boston local team. Brian joined MassMutual from Putnam Investments, where he served in a relationship management role.  

Tapas Ghosh has been hired as director of relationship management effective June 13 and is responsible for large market customers in the south-central region. He is based out of Raleigh, North Carolina as part of the North Carolina/South Carolina/Tennessee local team. Tapas brings with him a great depth of experience from prior director and relationship management roles with Fidelity Investments and The Vanguard Group.

Richard Wright has joined MassMutual’s Retirement Services Division as a senior relationship manager effective June 20 and is responsible for mid-market customers in the greater New York/New Jersey metro area. Prior to joining MassMutual, Rich held several roles with Prudential Financial, Inc., with responsibilities in participant solutions, internal sales and relationship management.

Vanguard profiles 401(k) trends of eight industries

Employees of utility companies who participated in their 401(k) or other defined contribution plan at Vanguard in 2010 tended to save more in their plans, participants in small ambulatory health care firm plans invested more of their plan assets in target-date funds, and participants in the plans of large mining companies had the highest average account balances.

The findings are part of Vanguard’s How America Saves 2011, an annual report that is a widely used barometer of retirement-planning trends. Using 2010 data, How America Saves 2011 looks at the overall patterns of more than 3 million participants in plans recordkept at Vanguard.

For the first time, supplemental industry reports to How America Saves analyze the behavior of plan participants in eight industries, including the ambulatory health care; finance and insurance; information services; legal services; manufacturing; mining, oil and gas extraction; technology; and utility industries. Plan sponsors in these industries can use a new benchmarking tool to compare their plan data with others in their industry and Vanguard plans overall.

Here are notable trends in participant behavior across these industries:

• Plan participation. The plans of small utility firms (fewer than 1,000 employees and 92% participation rate) and large mining companies (more than 1,000 employees, 88% participation rate) had the best participation among the industries in the report. Vanguard plans as a whole had a 74% average participation rate.
• Auto enrollment. Vanguard research has found that more employers (plan sponsors) are adopting automatic enrollment plans as a way to boost participation among employees. Auto enroll plans can have a variety of features. Besides the actual automatic enrollment, employers can choose to include an automatic annual increase in the payroll deferral rate (contribution rate) for participants and can choose to automatically earmark participant contributions to a default investment, such as a target-date fund, if they don’t choose an investment themselves. Employees always have the ability to opt out of the entire auto enroll program or individual features. Auto enroll plans were far more prevalent at large manufacturing companies (more than 1,000 employees) than at any other type of company in the report and Vanguard plans broadly. Sixty-seven percent of large manufacturing companies (more than 1,000 employees) had an auto enroll plan versus 24% for all Vanguard plans. At 6%, small ambulatory health care firms (fewer than 250 employees) were least likely to have an auto enroll plan.

• Contribution rates. In a typical DC plan, employees are the main source of funding, contributing to their plan via payroll deferrals. On average, participants in the plans of both small and large utilities (more than 1,000 employees) saved at a higher rate than their counterparts in the other industry plans as well as all Vanguard plans. Their 9.0% and 8.2% average contribution rate, respectively, surpassed the 6.8% average contribution rate for Vanguard plans in aggregate. The plans of large manufacturing companies lagged with a 6.5% average contribution rate.
• Target-date funds. Target-date funds (TDFs), which are broadly diversified (stock and fixed income) funds that become more conservative the closer an investor gets to the fund’s stated retirement date, have increasingly become a dominant retirement investment option. Large plans tended to offer TDFs more so than smaller plans; in the lead was the 93% of large ambulatory health care firms that offered TDFs, far surpassing the 79% of all Vanguard plans offering the funds. The standout in terms of small industry plans was utilities, 94% of whom offered TDFs. However, among participants using TDFs, those in the smaller plans covered by the reports usually invested more of their assets in the funds. For example, 62% of participant assets in small ambulatory health care firm plans were invested in TDFs, compared to the 41% of assets invested in TDFs by participants across all Vanguard plans offering the funds.
• Account balances. At $237,081, the average account balance of participants in plans of large mining companies was significantly higher than the average account balance of participants in Vanguard plans collectively ($79,077). In contrast, the lowest average account balance was the $63,697 for participants in large information services company plans (more than 1,000 employees). It is important to note, however, that current plan balances are only a partial measure of retirement preparedness for many participants. A more accurate reflection of retirement readiness includes the participant’s plan balance in addition to age, plan tenure, expected Social Security income and assets that may be in personal savings, other employer plans, or a spouse’s retirement plan.

The How America Saves 2011 industry benchmark reports are based on Vanguard’s 2010 recordkeeping data for nearly 2.2 million participants in 1,552 qualified defined contribution plans offered by companies in the ambulatory health care; finance and insurance; information services; legal services; manufacturing; mining, oil and gas extraction; technology; and utility industries.

The Austrian government should abolish all incentives for early retirement, according to the Organization for Economic Cooperation and Development’s latest country survey, Investments & Pensions-Europe reported.

Though Austria’s statutory retirement ages are 65 for men and 60 for women, Austrian men retire at age 58.9 on average while women retire at age 57.5 on average. People in most other OECD countries—the world’s 40 most developed countries—retire just one or two years below the statutory retirement age.

The OECD pointed out that this was mainly due to the high number of people exiting the labor market through disability pensions, as well as still existing early retirement programs.

“All subsidies that encourage early retirement [in Austria] should be eliminated, while benefits and social transfers – which amount to 20% of GDP – should be better targeted,” the OECD said, adding that the provision that time spent in non-compulsory education can be substituted for regular years of contributions by paying a high lump-sum per month was “particularly problematic,” as it “increases the incentive for high-skilled individuals to leave the labor market.”

Economists at the Rand Corporation recently analyzed the economic resources of a group of Americans between ages 66 and 69 to see how well prepared they were to maintain their established standard of living (“level of consumption”) throughout retirement. Those who died with positive assets were considered to have been adequately prepared.   

“We find that 71% of persons in our target age group are adequately prepared according to our definitions, but there is substantial variation by observable characteristics: 80% of married persons are adequately prepared compared with just 55% of single persons,” wrote Susann Rohwedder and Michael D. Hurd in a new paper, “Economic Preparation for Retirement” (National Bureau of Economic Research Working Paper No. 17203, July 2011).

The researchers looked at the impact of reducing Social Security benefits. “We estimate that a reduction in Social Security benefits of 30% would reduce the fraction adequately prepared by 7.8 percentage points among married persons and by as much as 10.7 percentage points among single persons,” the paper concluded. Only 29% of single females without a high school diploma were prepared. The authors factored in the effects of taxes, spousal death, variations in life expectancy and out-of-pocketing health care costs. 

“Many singles who lack a high school education are not well prepared: even were they to reduce initial consumption by 10 percent, about 64% would still face a probability of running out of wealth greater than 5 percent,” the paper said. “Economic preparation by couples is much better than preparation by singles. Nonetheless there is substantial variation by education with some 89% of college graduates being prepared compared with 70% among those lacking a high school education.”

The authors believe that the income replacement ratios normally recommended for retirees (i.e., 70%-80% of pre-retirement income) are not ideal, since many retired people can live as well as ever on much less money, simply because their expenses often decline significantly after they retire.

© 2011 RIJ Publishing LLC. All rights reserved.