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About one fourth of Americans age 18 and older said they could “certainly not” and another fourth could “probably not” come up with $2,000 in cash within 30 days from any source, according to an analysis of 2009 survey data by a team of business and sociology professors.      

The findings, an indication of the level of household savings in the U.S., were published by the National Bureau of Economic Research in a paper entitled, “Financially Fragile Households: Evidence and Implications,” by Anna Maria Lusardi of George Washington University, Peter Tufano of Harvard, and Daniel J. Schneider of Princeton.

Generally, low levels of ability to access $2,000 on short notice correlated with low income, low wealth levels, low education levels and losses in the financial crisis. But the researchers were also surprised to see so many high-income households without $2,000 readily at hand.

“It seems somewhat unbelievable that nearly a quarter of households making between $100,000 and $150,000 claim not to be able to raise $2,000 in a month, but this fact may be less shocking when one considers costs of living in urban areas, costs of housing and childcare, substantial debt service, and other factor,” the authors wrote.

“A material fraction of seemingly “middle class” Americans also judge themselves to be financially fragile, reflecting either a substantially weaker financial position than one would expect, or a very high level of anxiety or pessimism,” the paper also said.

To get $2,000 in an emergency, 52.4% of those surveyed (excluding those who were certain they couldn’t find the money at all) would draw from savings, 29.6% would turn to family members, 22.9% would work more, 20.9% would use credit cards and 18.8% would sell possessions, to list the most common resources.

Comparing developed Western nations, the researchers found that ability to “certainly” come up with the equivalent of $2,000 varied from 57.7% in the Netherlands, to 48.2% in Italy, 44.3% in Canada, 36.2% in France, 31% in Portugal, 30.7% in Germany, 24.9% in the U.S. and 24.1% in the United Kingdom.

© 2011 RIJ Publishing LLC. All rights reserved.

LIMRA has reported that the percentage of U.S. individual variable annuity (VA) buyers who purchased any guaranteed living benefit (GLB) feature fell slightly in the first quarter of 2011, to 86% from 87% in the first quarter of 2010, National Underwriter reported. It was the lowest GLB election rate since 3Q 2008.

GLB features include guaranteed living withdrawal benefits (GLWB), guaranteed minimum income benefits (GMIB), guaranteed minimum accumulation benefits (GMAB), guaranteed minimum withdrawal benefits (GMWB), and hybrid benefit guarantee features.

Insurers generated about $29 billion in VA sales during the latest quarter, and about $23 billion of those sales came with GLB elections, LIMRA analysts said.

For 8% of the sales, a GLB feature was available but not taken; for 13% of the sales, no GLB feature was available.

GMABs sold best in the career agent channel, while hybrid guarantees sold best in the bank channel.

VA assets backed by guarantees reached $558 billion at the end of the first quarter, up 7% since the end of 2010.

Auto-enrollment increases overall participation in employer-sponsored retirement plans, but auto-enrolled workers don’t contribute as much, on average, as active enrollees, mainly because employer set default contribution rates conservatively.

That was one finding of an analysis by Aon Hewitt, the human resources and consulting firm, of the saving and investing habits of three million participants in 120 large employer-sponsored defined contribution retirement plans.

Participants who were subject to automatic enrollment contributed one percentage point less on average (6.8%, compared to 7.8%) than their actively enrolled counterparts. More than three quarters of plans (76%) set default contribution rates at only 4% or less.

In addition, 41% of participants who were automatically enrolled are not saving enough to receive the full match from their employers, compared to only 25% of participants who proactively enrolled.  

The study showed record levels of participation, with 75.8% of eligible employees participated in their company’s defined contribution plan in 2010, up from 73.7% percent in 2009 and 67.2% in 2005.

Before-tax contributions to DC plans were unchanged from 2009, Aon Hewitt found. But, at 7.3% of pay, they still lag pre-recession levels (7.7% in 2007). 

Automatic enrollment is believed to be the reason for the increase in participation levels. Three in five employers (60%) auto-enrolled employees into their DC plans in 2010, up from 24% in 2006. But 85% of those who use auto-enrollment only apply it to new hires, so the participation levels are rising gradually. Where employees were subject to auto-enrollment, 85.3% percent participated in their DC plan, 18 percentage points higher than in plans where employees were not.

Many employees are clearly not using the plan to build sufficient retirement savings. Cumulatively, workers are saving over 10% of pay (including almost 4% in employer contributions. But almost 30% of participants don’t contribute enough to receive the employer match, half of all account balances are under $25,000 and, over the past three years, median annualized returns have been just 1.7%. More than one in four participants had a loan outstanding against their accounts at the end of 2010.

Most employees were not actively involved in managing their accounts. Despite strong market returns in 2009, only 14.2% of employees made any sort of fund transfer in 2010, down from 16.2% in 2009.

Those figures pertain to participants; they do not include the non-participants or the 50% of U.S. workers with no access to a workplace plan.

The study did not mention the possible impact of investment fees on employee accumulation levels, or whether plans with lower fees had higher participation rates or higher account balances. Fees and plan fee transparency are the subjects of ongoing Department of Labor rule-making efforts. The study didn’t assess the potential impact of rising health care costs or slow compensation growth on participants’ abilities to contribute to their plans.

Aon Hewitt analysts suggested that, to boost participation and contribution rates, companies combine automatic enrollment with automatic contribution escalation and target-date portfolios, and that they periodically auto-enroll non-participating employees, not just new hires. 

© 2011 RIJ Publishing LLC. All rights reserved.

To sell a lot of variable annuities, an insurance company and its wholesalers need a compelling story that’s grounded in product innovation and supported by consistent marketing and/or advertising.

Prudential Financial, for instance, has built a juggernaut of a story around its Highest Daily step-up feature. Jackson National Life’s Perspective VA topped the VA charts by promising advisors unrestricted investing with a guarantee.

Jackson National Life’s only blunder this month was that it didn’t take better care of its story.  Two weeks ago, when Tidjane Thiam, the CEO of JNL’s UK-based parent Prudential plc (no relation to Prudential Financial) told analysts that he envisioned unspecified risk reductions in the VA by end of year, he probably didn’t realize that his statement would cross into the broker-dealer media and create uncertainty. But it did. And it muddied the Jackson story. 

Now the Jackson National wholesalers are scrambling to sooth their key distributors, as they should. And if they can reassure advisors that the “no investment restrictions” story remains intact, this month’s communications malfunction shouldn’t do much lasting harm. 

Why not? Because many advisors thought the changes described by Thiam, the first African CEO of a FTSE 100 corporation, were already long overdue. “Jackson National was getting to the point where over 65% of its revenue was coming from variable annuity sales,” said one advisor who has sold a lot of variable annuities over the years.

“That’s too large a percentage of their overall book. Insurance companies make their money by taking lots of little risks, not a few big ones. What they’re doing is very smart.”

Jackson National’s product, he added, also has plenty of leeway to become more conservative. That’s because so few competitors—stocks, bonds, or other variable annuities—have a better story to tell.  

“There used to be 100 girls at the dance,” the advisor said (without pausing or bothering to beg pardon for employing such a sexist metaphor). He meant that prior to the financial crisis, during the VA arms race, an advisor could choose from a relative cornucopia of eligible and attractive variable annuity contracts. Then the financial crisis produced the Great Shakeout. 

“Now that there are only three girls left at the dance,”—meaning Prudential, Jackson National and MetLife—“and everybody wants to dance with them, they don’t have to be as pretty. They will be dialing back to something that’s still competitive and still really good,” he said.

“The word I got from Jackson National is that there won’t be any investment restriction-based changes. There may be changes to the richness of the minimum growth [the rollup options], and the withdrawal rates [the age-dependent payout percentages] might be modified. But they’ve been so far ahead of everybody else that they will still be very attractive even with the modifications. They’re too rich.”

“Right now they have a quarterly reset ratchet and seven percent accruals, at a time when others have a five percent accrual with annual resets. Even if they dial  their offering down to a quarterly reset at five percent or an annual reset at six percent, they’ll still be very competitive. They should take advantage of their pricing power. When you’re an Apple iPod and everybody wants you, you can do that.

“In 2007, there were a lot of VA products that were ‘Swiss Army knives.’ They had few investment restrictions, lots of combinations of benefits that addressed multiple needs. Since then we’ve been seeing manufacturers try to find niches where they’re most comfortable. One will have the most competitive death benefit. Another will have the best deal for a joint and survivor. We’re seeing products that are more specific-use focused,” he said.

Jackson National had one of the last of the rich contracts. “They straddled the line really well. They had a great sport SUV, and now we’ll see whether they decide to be more sport or more SUV,” he noted. ” [The anticipated changes] will absolutely take away from their sales. But that’s a good thing. They don’t want the level of volume they’ve seen. If they continue to get strong demand, it will be a more profitable business, because their hedging costs will be lower. Or their flows will slow and it will be a safer business.

“But I don’t know how anyone could have been surprised at this. It’s making so much news now because the other companies gutted their products back in 2009. Now, even though Jackson is dialing back, it may still be the prettiest girl at the dance.”

Ultimately, he said, the choice of variable annuity depends on what the advisor and the client are trying to accomplish. For somebody who wants maximum equity exposure with a safety net, the Jackson National Perspective will still fill the bill. For somebody who’s looking more for guaranteed income than for performance, another product might be better. And that’s fine.

In variable annuity sales, as in any type of selling, the story is paramount. You can tinker with the numbers and survive. But you should never tamper with the story.   

© 2011 RIJ Publishing LLC. All rights reserved.

New York Life’s first quarter SPIA sales up 45%

New York Life reported first-quarter gains in sales of life insurance, income annuities, long-term care insurance and mutual funds, and double-digit increase in the number of new agents hired in the first three months of 2011.

Individual life insurance sales increased 24% through March, while applications for life insurance are up 12.7%, compared with the first quarter of 2010. Life insurance sales by the company’s 11,900 agents were up 29%, the best three-month start to a year on record.

Sales of long-term care insurance have also increased by a robust 16% for the first quarter this year, following a strong 12% gain in 2010.

New York Life remains the leader in sales of fixed immediate annuities, with more than 25% of the market, according to an industry source. The company’s sales of these guaranteed lifetime income products rose 45% in the first quarter, with gains in sales through agents and sales through third-party distribution partners.  

Sales of New York Life’s mutual funds (including the company’s MainStay family of funds) increased by 77% year over year in the first quarter.

Chris Blunt, executive vice president in charge of Retirement Income Security, attributes the sales gains in large part to the funds’ performance. “In all our distribution channels, customers have come to recognize the strong line-up of funds managed by our investment management subsidiary,” he said.

F-Squared Investments names Bill Carey President of Retirement Solutions   

F-Squared Investments announced the appointment of Bill Carey to head its newly formed retirement division. Carey joined the company May 16, and will be responsible for F-Squared’s customized, private labeled target-date strategies and funds, as well as Collective Trust Funds and other investment solutions.

Carey has been president of Fidelity Investments’ 401(k) business and Bank of America’s Head of Institutional Retirement.

F-Squared intends to partner with financial services firms that have a product and distribution commitment to the retirement market, and then develop customized, private labeled Target Date offerings that combine F-Squared’s AlphaSector risk management capabilities with the investments of the partner firm. 

“While Target Date funds are here to stay, the failure to meet client expectations of asset protection in 2008 exposed some flaws with so-called ‘first generation’ Target Date funds,” Carey said in a release. “The next generation solution needs to be able to protect client assets during severe market downturns.”  

Sixty percent of middle-income Boomers expect to delay retirement five years

A majority (73%) of middle-income Baby Boomers in the U.S. are rethinking their retirement timing due to the recent economic crisis and of those, 79% are delaying retirement by an average of five years, according to a study by Bankers Life and Casualty Company Center for a Secure Retirement.

The study, Middle-Income Boomers, Financial Security and the New Retirement, which focused on 500 middle-income Americans between ages 47 and 65 with income between $25,000 and $75,000, found that one in seven believe that they will “never be able to retire” due to the turbulent economy.

According to the study, 71% worry about outliving their money, 68% have seen a decline in their retirement account balances since 2008 and 55% have saved less than $100,000. Three out of four expect to work in retirement and 57% say that they will have to work for financial reasons.

Two-thirds (64%) of survey participants are concerned about being forced to retire, most commonly due to loss of employment (44%) or failing health or disability (40%).

AnnuitySpecs.com releases 1Q 2011 FIA sales  

Forty indexed annuity carriers participated in the 55^th edition of AnnuitySpecs.com’s Indexed Sales & Market Report, representing over 99% of indexed annuity production. Total first quarter sales were $7.1 billion, up nearly 5% from the same period last year. As compared to the previous quarter, sales were down nearly 15%.

Allianz Life maintained its lead position with a 21% market share. American Equity kept their position as second-ranked company in the market, while Aviva, North American Company and ING rounded-out the top five, respectively. Allianz Life’s MasterDex X was the top-selling indexed annuity for the eighth consecutive quarter.

For indexed life sales, 39 insurance carriers in the market participated in the AnnuitySpecs.com’s Indexed Sales & Market Report, representing over 99% of production. First quarter sales were $203.0 million, an increase of nearly 42% over the same period in 2010. As compared to the previous quarter, sales were down over 8%.   

Pacific Life remained the market leader with a 14% share, followed by Aviva Minnesota Life, National Life Group, and AXA Equitable. Minnesota Life’s Eclipse Indexed Life took the position as the top-selling indexed life product for the first time.

NPH announces record quarterly revenue, sales

During the first three months of 2011, independent broker-dealer network National Planning Holdings, Inc., set record quarterly revenue of more than $198 million on record quarterly gross product sales of nearly $4.3 billion. The company is an affiliate of Jackson National Life.

Revenue and sales increased more than 19% and 21%, respectively, compared to the same period last year. NPH also added 93 representatives in the first quarter of 2011, bringing the network’s total representative count to 3,563, up nearly 3% from a year ago.

In 2010, NPH introduced the WealthOne advisory platform, which helps advisers adopt a fee-based compensation model using funds from Vanguard, JP Morgan, UBS, Standard & Poor’s, Russell Investments, Lazard, Avatar Associates, Loring Ward and Curian Capital LLC.

WealthOne also features NPH’s Advisory Portal, which enables advisers to access the platform directly from their broker-dealer’s website.

A survey by Fidelity Investments, the largest provider of IRAs and workplace retirement savings plans, has found that 30% of its plan participants who made a job transition are unsure of what to do with their savings.

In a separate announcement, the Boston-based firm reported that the average 401(k) balance rose to $74,900 at the end of the first quarter, marking an all-time high since Fidelity began tracking account balances in 1998. 

This also represents a nearly 12% increase from a year ago and a 58% jump from the same time period in 2009.  Nearly 10% of participants increased their deferral rate in the first quarter of 2011, the largest percentage taking such action since Fidelity started tracking the figure in 2006.

Regarding separations from plans, about one-third of participants move their money from a former employer’s plan within four months after a job transition. Those who remain in their plan do so for several reasons:

• 71% said they are consciously keeping their assets in an old plan for the time being; of those 59% were satisfied with the plan features, services or investments.
• 27% said that a lack of time or “mind share” has prevented them from taking any action.

When respondents were asked if they are planning to take any action within the next year, 24% were not sure, and 18% were going to move the money to an IRA or their current employer’s workplace savings plan. But 57% intended to keep their investments in their old plan for the next 12 months.

While consolidation and control of assets (35%), more investment options (26%) and lower fees (37%) were the top reasons they would move their former workplace plan assets to an IRA or new workplace plan, the decision overwhelms many investors, the plan provider said.

“Quite often when an investor leaves a job, they have a significant portion of their retirement savings in that former employer’s plan,” said Walsh. “This is why it’s critical for investors to consider their options carefully. Fidelity has trained representatives that can educate investors and then help them determine which option may make sense based on their individual needs.”

By 2025, six major emerging economies—Brazil, China, India, Indonesia, South Korea, and Russia—will account for more than half of all global growth, and the international monetary system will likely no longer be dominated by a single currency, a new World Bank report says.  

The report, Global Development Horizons 2011—Multipolarity: The New Global Economy, projects that emerging economies will grow on average by 4.7% a year between now and 2025.  Advanced economies, meanwhile, are forecast to grow by 2.3% over the same period, yet will remain prominent in the global economy.  

Most developing countries, particularly the poorest ones, will continue to use foreign currencies to carry out transactions with the rest of the world, and will remain exposed to exchange rate fluctuations in an international multi-currency regime.  

“Over the next decade or so, China’s size and the rapid globalization of its corporations and banks will likely mean a more important role for the renminbi,” said Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank. “The most likely global currency scenario in 2025 will be a multi-currency one centered around the dollar, the euro, and the renminbi.”

Global Development Horizons’ authors use empirically-based indices to identify high-growth countries with strong human capital and technological innovation, and that also drive economic activity in other countries. Growth spillovers are likely via cross-border trade, finance, and migration, which will induce technological transfer, and increase demand for exports.

The report highlights the diversity of potential emerging economy growth poles, some of which have relied heavily on exports, such as China and Korea, and others that put more weight on domestic consumption, such as Brazil and Mexico.

With the emergence of a substantial middle class in developing countries and demographic transitions underway in several major East Asian economies, stronger consumption trends are likely to prevail.

The shift in economic and financial power toward the developing world has important implications on corporate financing, investment, and the nature of cross-border merger and acquisition (M&A) deals.

As more deals originate in emerging markets, South-South FDI is likely to rise, with most of it going into greenfield investments, while South-North FDI is more likely to target acquisitions. As they expand, more developing countries and their firms will be able to access international bond and equity markets at better terms to finance overseas investments.

The growing role and influence of emerging-market firms in global investment and finance can facilitate moving forward with the sort of multilateral framework for regulating cross-border investment that has been derailed several times since the 1920s, the report says.

In contrast to international trade and monetary relations, no multilateral regime exists to promote and govern cross-border investment. Instead, the surge of bilateral investment treaties (BITs) —more than 2,275 BITs as of end of 2007—has provided the most widely used mechanism for interstate negotiation over cross-border investment terms, including access to international arbitration of disputes through referral to the International Centre for the Settlement of Investment Disputes, an affiliate of the World Bank.  

To maintain the solvency of the combined Old Age and Survivors Insurance and Federal Disability Insurance Trust Funds for the next 75 years, the combined payroll tax rate could be increased by 2.15 percentage points, scheduled benefits could be reduced by 13.8%, or some combination of the two could be adopted, says the annual report of the funds’ trustees, released last Friday. 

The report’s summary is reprinted below:

In 2010

At the end of 2010, about 54 million people were receiving benefits: 37 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 10 million disabled workers and dependents of disabled workers.

During the year, an estimated 157 million people had earnings covered by Social Security and paid payroll taxes. Total expenditures in 2010 were $713 billion. Total income was $781 billion ($664 billion in non-interest income and $117 billion in interest earnings), and assets held in special issue U.S. Treasury securities grew to $2.6 trillion.

Short-Range Results

The assets of the OASI Trust Fund and of the combined OASI and DI Trust Funds are projected to be adequate over the next 10 years under the intermediate assumptions. However, the assets of the DI Trust Fund are projected to steadily decline under the intermediate assumptions, and would fall below 100 percent of annual cost by the beginning of 2013 and continue to decline until the trust fund is exhausted in 2018. The DI Trust Fund does not satisfy the short-range test of financial adequacy, which requires that the trust fund remain above 100 percent of annual cost throughout the short-range period.

The combined assets of the OASI and DI Trust Funds are projected to grow throughout the short-range period, from $2,609 billion at the beginning of 2011, or 353 percent of annual cost, to $3,526 billion at the beginning of 2020, or 284 percent of annual cost, under the intermediate assumptions. This increase in assets indicates that annual cost is less than total income throughout the short-range period. However, annual cost exceeds non-interest income in 2011 and remains higher throughout the remainder of the short-range period. For last year’s report, combined assets were projected to be 353 percent of annual cost at the beginning of 2011 and 299 percent at the beginning of 2020.

Long-Range Results

Under the intermediate assumptions, OASDI cost generally increases more rapidly than non-interest income through 2035 because the retirement of the baby-boom generation increases the number of beneficiaries much faster than subsequent lower-birth-rate generations increase the labor force.

From 2035 to 2050, the cost rate declines due principally to the aging of the already retired baby-boom generation. Thereafter, increases in life expectancy generally cause OASDI cost to increase relative to non-interest income, but more slowly than prior to 2035. Annual cost is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period. However, total income, including interest earnings on trust fund assets, will be sufficient to cover annual cost until 2023. The dollar level of the combined trust funds is projected to be drawn down beginning in 2023 until assets are exhausted in 2036. Individually, the DI Trust Fund is projected to be exhausted in 2018 and the OASI Trust Fund in 2038.

The OASDI annual cost rate is projected to increase from 13.35 percent of taxable payroll in 2011 to 17.01 percent in 2035 and to 17.56 percent in 2085, a level that is 4.24 percent of taxable payroll more than the projected income rate for 2085. For last year’s report, the OASDI cost for 2085 was estimated at 17.47 percent, or 4.16 percent of payroll more than the annual income rate for that year. Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.8 percent of GDP to about 6.2 percent in 2035, then to decline to 6.0 percent by 2050, and to remain between 5.9 and 6.0 percent through 2085.

For the 75-year projection period, the actuarial deficit is 2.22 percent of taxable payroll, 0.30 percentage point larger than in last year’s report. The open group unfunded obligation for OASDI over the 75-year period is $6.5 trillion in present value and is $1.1 trillion more than the measured level of a year ago. If the assumptions, methods, starting values, and the law had all remained unchanged, the unfunded obligation would have risen to about $5.8 trillion due to the change in the valuation date.

Conclusion

Under the long-range intermediate assumptions, annual cost for the OASDI program is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period. The combined OASI and DI Trust Funds are projected to increase through 2022, and then to decline and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036. However, the DI Trust Fund is projected to become exhausted in 2018, so legislative action will be needed as soon as possible. At a minimum, a reallocation of the payroll tax rate between OASI and DI would be necessary, as was done in 1994.

For the combined OASDI Trust Funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 2.15 percentage points, scheduled benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 13.8 percent, or some combination of these approaches could be adopted. Significantly larger changes would be required if current beneficiaries and those close to retirement age were to be held harmless, or if trust fund asset levels were to be stabilized at the end of the 75-year projection period.

The projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually and workers and beneficiaries can be given time to adjust to them. Implementing changes sooner would allow the needed revenue increases or benefit reductions to be spread over more generations. Social Security will play a critical role in the lives of 56 million beneficiaries and 158 million covered workers and their families in 2011. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.

Dear editor,

Here are my observations after reading your article, “Channel Surfing for Low-Cost SPIAs” (Retirement Income Journal, May 11, 2011):

I can’t tell you how many times I’ve been contacted by clients or advisors who are implementing a SPIA into a retirement plan and have already collected their “lowest cost” SPIA quotes from all of the sources—only to discover that the final arithmetic reveals a different answer.

The cost of a SPIA is not limited to the amount that is applied to the contract. The total cost also includes the distribution charge (1.5% to 2.5% of premium), plus the fee charged by the advisor or institutional platform (0.25% to 1% for a period of years)—as well as the cost associated with using after-tax money to pay those fees. If the SPIA is purchased with pre-tax money (from a qualified account or with an exchange of assets from an existing deferred annuity), the fees may have to be paid with money from an after-tax account. To the extent that this expense isn’t fully deductible on the individual’s tax return, it could add to the cost of the purchase.

The more difficult challenge when purchasing a SPIA, however, is designing it (by choosing a period certain, installment refund, cash refund, COLA adjustment, living commuted value, or death benefit commuted value, etc.) to fit the overall architecture of the client’s retirement plan, including other income resources, assets and tax planning.

The answer to the question, “What is the true lowest cost of purchasing a SPIA?” is often very different from the first answer, once all the fees, taxes and charges have been calculated.

Curtis Cloke, CEO, Thrive Income Distribution System, LLC. (www.thriveincome.com)

Headlines about a suggestion by Tidjane Thiam, the CEO of Prudential Plc, during a May 11 analysts call that Jackson National might soon start de-risking its popular Perspective variable annuity have momentarily distracted many in the annuity industry from truly serious matters, like the Bulls-Heat matchup.   

That’s significant, but I’m not sure what all the fuss is about. Jackson National hasn’t changed any of its option-rich riders or taken any products off the market yet. If it does de-risk its offerings a bit, Jackson National would merely be following the lead of close-competitors MetLife and Prudential Financial in moderating the promises embedded in its lifetime withdrawal riders.

Given the Fed’s protracted low interest rate policy (which raises VA hedging costs even as it props up the U.S. economy) many insurance wonks have been expecting as much from Jackson. “Jackson for a long time was too rich,” one insurance insider told RIJ this week. “A lot of us couldn’t understand it, especially with Solvency II coming. They offered no restrictions on funds and they had really grown fast in the variable marketplace. So finally it looks like the parent said, ‘I’m out, guys.’”

“If your competitors step back, you’ve got to step back,” said Tamiko Toland, who covers variable annuities at Strategic Insight.

The people most likely to be upset by a Jackson National dial-down, if and when it occurs, would be the advisors who loved Jackson’s advisor-friendly  philosophy. Their reaction might be comparable to Ferrari aficionados fretting over a report that next year’s model might have only 400 horsepower instead of 500.   

Contract owners and Prudential Plc shareholders either won’t care or they’ll be cheered by the news. Advisors are only one of a variable annuity issuer’s constituencies, as Stephen Pelletier, president of Prudential Annuities, said in an interview on Monday. “We are always seeking to drive sustainable profitable growth,” he told RIJ.  “It’s always about that. We think that’s the right approach. That’s a win-win-win combination—for our shareholders, distribution partners, and our clients. That approach works for everybody. It’s what keeps us in the marketplace.” Since the financial crisis, Prudential has twice reduced the richness of its Highest Daily step-up feature and survived. 

For those who don’t recall the details of Jackson National’s popular Perspective contract: The last time I looked, it offered about 99 investment options, few if any asset allocation restrictions, and a living benefit featuring annual deferral bonuses of 5%, 6%, 7% or 8%, with rider fees ranging from 95 basis points to 130 basis points per year. Advisors can wind up the benefits, the fees and the risks right to the red line. 

“We’ve always focused on the cafeteria-style VA product, with various withdrawal and bonus options, and we decided to extend that to the GMWB option. It’s an extension of our ‘give the rep a choice’ philosophy,” Jackson National vice president Alison Reed told RIJ last fall.

That, along with its high ratings and the retreat of several erstwhile competitors after the GFC, helped Jackson National post $14.7 billion in variable annuity sales in 2010 (a 10.4% market share), third only to Prudential ($21.7 bn) and MetLife ($18.3 bn).  And Jackson National’s value proposition may feel more liberal to some advisors than either Prudential’s CPPI-based risk model or MetLife’s GMIB. In the first quarter of 2011, Jackson’s sales jumped 45%, to $4.6 billion.   

Some observers think Prudential Plc’s CEO was hearing the approaching footsteps of regulatory change when he made his comments. As a unit of London-based Prudential Plc (no relation to Newark, NJ-based Prudential Financial), Jackson National (U.S. headquarters in Lansing, MI) will be subject to Solvency II, Europe’s risk-based rules for insurance, starting on January 1, 2013.  The three “pillars” of Solvency II include the tightening of standards for capital, internal supervision and reporting. 

In any case, Jackson National isn’t likely to tamper too heavy-handedly with its successful VA formula. But if it did, would advisors switch brands? At the margins, maybe. “Sure, they’ll lose some advisors. But your core is going to stay with you because you’ll take care of them,” our insurance insider said.

“Those guys will get extra special attention,” he added. “The wholesalers are talking to them, and home office staff will travel with the wholesalers. You can do things for them that don’t cost anything. There are value-added services. You can help someone analyze his book of business.  With the wholesaling staff that Jackson has, they can soften the blow with communication. They’ll have a plan figured out that will make them look OK. They have a reputation of being advisor-friendly and that will carry them through.”

In the short run, rumors of future scarcity should boost sales of Jackson’s rich contract.

During the mid-decade VA boom, insurance companies waited until after a crash forced them to de-risk their contracts (or, in some cases, to stop selling VAs entirely). Having enjoyed the 2010 boomlet, the leading issuers are apparently listening more closely to their actuaries than before. The fact that they’re trimming sails now rather than later is good for advisors, clients and shareholders. 

© 2011 RIJ Publishing LLC. All rights reserved.

Lincoln Financial Group has simplified the structure of its Insurance and Retirement Solutions business under the leadership of president Mark Konen and “increased focus on driving results in the Life Insurance, Annuities and Group Protection businesses,” the company said in a release.

The new design “simplifies the structure of the businesses and increases the responsibilities of the senior leaders and their respective teams,” the release said. The senior leaders who were named included:

• Rob Grubka, President, Group Protection – Grubka leads all functions of the Group Protection business including strategy and marketing, product development, underwriting, distribution and service.  
• Brian Kroll, Head of Annuity Solutions – Kroll leads annuity product management, product positioning, retirement solutions research and development and funds management.  
• Mike Burns, Head of Insurance Solutions – Burns leads the manufacturing operations of the Life Insurance business, which now includes underwriting and new business, product management and  product positioning.   
• Jeff Coutts, Head of Financial Management – Coutts continues to lead the financial management portion of the Insurance and Retirement Solutions businesses, which includes valuation, profitability and risk management, product pricing review and asset liability management for all individual life insurance, annuity and group protection products.
• Kristen Phillips, Head of Strategy and Marketing –Phillips will rejoin the company in June as senior vice president and head of Strategy and Marketing for the Insurance and Retirement Solutions business.  In this new role, Phillips leads the Life and Annuity manufacturing strategy functions including marketing and communications as well as product compliance and implementation.

Phillips returns to Lincoln after three years as the Hartford Symphony Orchestra’s executive director. At Lincoln, she was responsible for developing and implementing the life insurance and annuities business strategy, including product implementation, distribution support, and compliance.

If owners of variable annuity contracts with deep-in-the-money living benefits had acted in a strictly economically rational manner in the winter of 2008-2009 and begun exercising the benefit (and perhaps shoveling their withdrawals into
depressed stocks), it would have been bad news for the insurance companies who issued those contracts.

The insurers would have lost assets under management, lost the fee revenue on those assets, and possibly (depending on their previous actuarial assumptions) had to set aside a higher level of reserves.

Fortunately for the insurance companies, most VA owners didn’t jump on that opportunity—not, perhaps, because they weren’t financially astute but simply because they chose to stay-the-course with their existing retirement plans. It remains to be seen exactly how insurance company actuaries will use that experience in making assumptions about benefit utilization and reserve requirements in the future.

Those insights come from a recent study by Ruark Consulting LLC on behalf of eight insurance companies: AXA Equitable, ING, MassMutual, Ohio National, Pacific Life, Prudential, Sun Life of Canada, and Commonwealth Annuity and Life.
Ruark’s “2010 Variable Annuity Surrender Study and 2010 Variable Annuity Benefit Utilization Study” examined the variable annuity surrender and benefit utilization data at those companies before, during and after the 2009 financial crisis and recession. The data included over 10 million
policy years of experience from January 2007 through March 2010.

Among those owners who took partial withdrawals, the study found that only about one-third of owners of in-the-money living benefits withdrew the most efficient amount—the maximum they could take without reducing their guaranteed benefit base from their contracts during the financial crisis. The rest took either more or less than that amount, which mitigated the risk to the insurance company.

“Insurance companies and actuaries would typically have expected that the benefits would be used with a high level of economic efficiency—that people would use them when they were in-the-money—but the data is not showing that,” said Rich Tucker, a vice president at Ruark Consulting.

Key findings of the 2010 Variable Annuity Surrender Study, which was follow-up to a similar study published by Ruark Consulting in 2008, included:

• Full surrender rates have declined significantly since the 2008 recession. The prevailing opinion is that owners greatly curtailed all financial activities in favor of watchfulness during this period. A combination of low interest rates and a pull back by VA writers on the aggressiveness of new living benefits also meant that fewer better alternatives to current VA contracts were available.
• Policies with guaranteed living benefits experience lower surrender rates than those without. The type of living benefit also has an effect. Policies with Guaranteed Lifetime Withdrawal Benefits (GLWB) have the lowest surrender rates, followed by Guaranteed Minimum Income Benefits (GMIB), Guaranteed Minimum Withdrawal Benefits (GMWB), Guaranteed Minimum Accumulation Benefits (GMAB), and then policies containing no guaranteed living benefit.
• Surrender rates decline significantly as the current value of guaranteed benefits increases. This is commonly referred to within the industry as “In‐the‐Moneyness” level. The In‐the‐Moneyness affect is exhibited for all types of guaranteed living benefits (GLWB, GMIB, GMWB, GMAB). Policies with a guaranteed minimum death benefit (GMDB) only also exhibit this effect, albeit to a lesser degree than found with guaranteed living benefits.
• When the equity markets dropped in 2008 and 2009, there was a temporary spike in surrender rates for contracts without valuable In‐the‐Money living benefits.
• Surrender rates will also vary noticeably by attained age, policy duration, distribution channel, commission structure, and policy size.

Ruark’s 2010 Variable Annuity Benefit Utilization Study, which was a follow‐up to the similar study published by Ruark Consulting in 2009, covered partial withdrawals under variable annuity contracts containing Guaranteed Lifetime Withdrawal Benefits (GLWB), Guaranteed Minimum Withdrawal Benefits (GMWB) and Guaranteed Minimum Income Benefits (GMIB), as well as partial withdrawals on policies that did not contain any guaranteed living benefit.

Partial withdrawals were measured by annual frequency. The amount taken, given that a withdrawal had occurred, was also measured. The amount taken was expressed as a percentage of the guaranteed base amount of each policy, the current account value, and, for GLWB and hybrid GMIB designs, the maximum allowed to be withdrawn under the terms of the benefit.

The partial withdrawal activity among owners with any of the guaranteed living benefits (GLWB, GMWB, and GMIB) was strikingly similar to those without such benefits. We’ve noted that full surrender rates have declined since the 2008 recession. At the same time, utilization of partial withdrawals under Guaranteed Living Benefits has not shown a significant increase. Owners appear to be preserving the future value of their guaranteed benefits for when they are needed in retirement.

Key findings common to partial withdrawal activity include:

• Partial withdrawal frequency increases with attained age
• Older age tax qualified policies exhibit higher partial withdrawal frequency than non‐tax qualified policies. This is due to required minimum distributions at age 70 under tax qualified policies.
• Among owners taking partial withdrawals, substantial proportions take amounts larger than the maximum allowed under their benefit (thereby causing a reduction in benefit amount). A substantial portion also take an amount below the maximum allowed. These proportions vary noticeably by the attained age of the owner.
• Withdrawal frequency and amounts withdrawn have not noticeably increased on policies with greater In‐the‐Moneyness 

After reading a Wall Street Journal article entitled, “Retirement Income? Annuities Come Up Short,” Gary S. Mettler, vice president of Nyack, NY-based Presidential Life Insurance Co., an issuer of temporary life annuities, wrote this response to the paper:

“The fixed annuity industry has already begun to address many of the issues raised in [Brent Arends’] Wall Street Journal article, published on Sunday, May 1, 2011 regarding lifetime fixed annuities by re-introducing a derivative of the lifetime annuity called ‘temporary life.’

“Temporary life is a short duration and life-contingent fixed annuity.  The contract usually doesn’t exceed durations of 5 or 6 years, with the provision that one must continue to survive to receive annuity payments, but in no case will it last more than the scheduled duration. 

“With this fixed annuity design, the Insured/Annuitant gets the benefit of two pricing elements; the interest rate assumption (now, admittedly very low) and the use of their mortality factor, based on their age and gender.  Both elements work to boost annuity payments.  But, because the contract is a short duration, again usually 5 – 6 years, the cost to purchase a temporary life “life contingent” income annuity is much lower than the cost to purchase a full lifetime annuity. 

“For example: A male, age 80 need only spend $52,793 to purchase a temporary life annuity in order receive a monthly income of $1,000 for five years vs. spending $103,505 for a lifetime income annuity.

“If this man dies after two years, then his estate is only out the $52,793 annuity cost for the temporary life annuity and not the $103,505 cost for the full lifetime annuity.  If the man survives the five years, his income ceases from the temporary life annuity. But now he can purchase a new temporary life annuity when he is five years older, at age 85

“If interest rates don’t change over this five-year period his new age 85 purchase cost for another five-year temporary life annuity will be $49,179.  However, if annuity rates improve over this period by 10% or 20% due to interest rate improvements, his new age-85 purchase cost for the temporary life annuity will be $44,264 or $39,434 respectively for the same $1,000 monthly income payment.

“In this manner, individuals can still purchase the pricing element of a life contingent income without being compelled to purchase a full lifetime annuity.  And via a multiple temporary life annuity contract purchase strategy at different ages, individuals can participate in a rising interest rate environment.”

Lincoln group VA sales now supported by TPA Channel

Lincoln Financial Group today announced that its Lincoln Director group variable annuity-based retirement solution will be available for new sales exclusively through a service model supported by the Third-Party-Administrator (TPA) channel.

The Lincoln Director solution will continue to offer plan sponsors fiduciary assistance, employee retirement education and communications, and additional opportunities for plan enhancements through value-added services.

Eric Levy, Lincoln’s head of products, Defined Contribution, said, “While TPA exclusivity for Lincoln Director is the ideal model for the micro-to-small markets, we will continue to offer a suite of competitive, full-service solutions that address the needs of the mid-and-large end of the market.”

As a plan provider, Lincoln Financial also provides fiduciary support, funds management, and accumulation strategies. Current Lincoln Director full-service retirement plan cases will not be affected by the change.

The Lincoln Director investment lineup offers 90 options from 15 fund families. The program also offers a range of distribution options, including Lincoln’s patented i4LIFE Advantage solution that ensures a lifetime of income, with a minimum guarantee and control over assets.

Allianz Life names director of Consumer and Distribution Insights

Craig Parker has been appointed the new director of Consumer and Distribution Insights at Allianz Life Insurance Co. of North America, with responsibility for consumer and distribution research, trend analysis, segmentation, analytics, and reporting functions.

Parker will also oversee the CRM team, which has responsibility for CRM administration, campaign management, and territory management. He joined Allianz Life in 2008 as a senior business process consultant, responsible for leading and coaching OPEX projects.

Prior to joining Allianz Life, Parker held market research, marketing integration, and Six Sigma roles at GE Capital and Genworth. He earned his bachelor’s degree in public relations and advertising from University of Wisconsin-Madison.

Mutual of Omaha adds new funds to Its 401(k) product offering

Mutual of Omaha’s Retirement Plans Division has added 20 new non-proprietary funds from 11 different investment managers, including Vanguard Target Retirement Funds, which the company said “are complementary to our… Mutual GlidePath series of funds.”

“Mutual’s GlidePath funds are characterized by a multi-manager approach, using a combination of actively and passively managed investments, while Vanguard Target Retirement Funds are comprised of Vanguard’s passively managed index funds,” said Tim Bormann, 401(k) product-line director for Mutual of Omaha.

Mutual of Omaha now offers three Qualified Default Investment Alternatives (QDIA) to plan sponsors. Other new funds include:

• Templeton Global Total Return Fund
• Goldman Sachs Small Cap Value Fund
• John Hancock Disciplined Value Mid-Cap Fund
• Lord Abbett Value Opportunities Fund
• MFS Value Fund
• Waddell & Reed New Concepts Fund
• Dodge & Cox International Stock Fund
• Franklin International Small Cap Growth Fund
• Nuveen Tradewinds Global All-Cap Fund
• Wells Fargo Advantage Emerging Markets Equity Fund
• Stadion Tactical Fund

Funded status of U.S. corporate pensions 89.2% in April: BNY Mellon

The funded status of the typical U.S. corporate pension plan in April rose 0.7 percentage points to 89.2%, the eighth consecutive month of improvement, according to BNY Mellon Asset Management.    

The funding ratio for the typical corporate plan has improved 4.9 percentage points since the beginning of the year, according to the BNY Mellon Pension Summary Report for April 2011.

Thanks to rising equity prices worldwide, the value of assets for the typical corporate pension plan’s assets rose by 2.6% in April, outpacing the 1.8% rise in liabilities, according to the report.  Liabilities rose because the Aa corporate discount rate fell to 5.50% from 5.61%. Lower yields on these bonds result in higher liabilities.

“An increasing number of plan sponsors are evaluating their prospects to further improve their funded status through return-seeking assets, such as alternatives and equities,” said Peter Austin, executive director of BNY Mellon Pension Services. “The question most frequently asked is whether now is the time to increase the liability hedge given interest rate trends. “

Prudential Annuities enhances investment platform

Prudential Annuities has added BlackRock Global Strategies Portfolio and AST Wellington Management Hedged Equity Portfolio to its roster of variable annuity investment options. 

The company said it is the first to offer an alternative investment asset allocation portfolio in a variable annuity. Prudential now offers six alternative strategies among a total of 18 asset allocation portfolios. 

AST Wellington Management Hedged Equity Portfolio’s 100% equity asset allocation uses an index-option overlay to provide downside protection.

Nationwide posts 29% higher net income in 1Q 2011

Nationwide reported a 10% increase in net operating income for the first quarter of 2011, compared to the same period in 2010. Net operating income of $476 million through March 31, 2011 was driven by lower claims in the company’s property & casualty business combined with continued asset growth in the financial service business and improved investment performance overall.

Total operating revenue in the quarter was $5.2 billion. Net income in the first quarter of 2011 was $512 million, up 29% from the same period in 2010. Results included $2.7 billion in property & casualty claims, life insurance benefits, credited interest, and other accident and health benefits paid to policyholders.

A table of financial highlights and further video commentary on results are available at www.nationwide.com.

Nationwide offers FDIC-insured account to plan participants

Nationwide Financial Services, Inc. has added the Nationwide Bank FDIC Insured Deposit Account option to its diverse menu of retirement plan offerings.

The new product offering is an interest earning account that provides retirement plan participants with principal protection, current income and in-plan liquidity.

Funds placed in the account are considered deposits of Nationwide Bank and are insured by the Federal Deposit Insurance Corporation (FDIC) to at least $250,000 per participant.

The Nationwide Bank® FDIC Insured Deposit Account will be offered to plan sponsors of 401(a), 401(k), 457 and executive deferred compensation plans.

Lazaro joins New York Life from Van Kampen

To broaden its defined contribution investment only (DCIO) practice, New York Life Investments has appointed Al Lazaro as Midwest regional vice president, reporting to Steven Dorval, managing director of defined contribution assets for New York Life Investments. 

Mr. Lazaro had been Van Kampen Investments’ Midwest regional vice president focused on the Midwest. A graduate of Bradley University, he has also worked at Evren Securities in mutual fund marketing.  

New York Life’s seven DCIO professionals sell the MainStay mutual fund family and New York Life’s stable value products. New York Life Investments currently has $4.3 billion in DCIO assets and $300 billion in total assets under management. 

AXA Equitable launches Cornerstone Allocator, powered by Morningstar  

AXA Equitable Life Insurance Company, with Morningstar Associates, LLC, has launched Cornerstone Allocator, a web application intended to help advisors tailor client investment allocation recommendations in AXA’s Retirement Cornerstone variable annuity.

Retirement Cornerstone, introduced in 2010, is a tax-deferred investment platform that, unlike a traditional annuity, supports two interactive but distinct accounts – one focused on the opportunity to maximize investment growth potential through over 100 sub-account fund choices, the other on providing innovative retirement income protection that can help address the inflationary impact of rising interest rates.

Cornerstone Allocator serves as a user-friendly guide to aligning the power of Retirement Cornerstone to each client’s risk profile and income objectives. Specifically, it is designed to assist financial professionals in making determinations about how to distribute assets between Retirement Cornerstone’s Investment Performance Account and Protection with Investment Performance Account and to allocate assets among the many investment options within each account.

The tool helps financial professionals facilitate Retirement Cornerstone client reviews and promote understanding of the objectives behind account and asset allocation choices. Using Cornerstone Allocator, financial professionals can generate a client-approved Allocation Report that complements hypothetical illustrations and/or marketing materials provided to the client during the account opening process.

The client-facing Allocation Report displays the following information:

·            A review of the client profile responses

·            Investment Performance Account and Protection with Investment Performance Account allocations

·            Aggregate and detailed asset allocation summary by Account

·            Individual Investment Profiles for the sub-accounts elected generated by Morningstar