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In response to RIJ’s article last week on the Lifetime Cash Flow product from the Bank of Montreal, we received a letter from RIJ reader and guest columnist Garth Bernard, CEO of Sharper Financial Group, and former resident of Toronto.

Saying that the product “is a fair value with room for improvement,” Bernard observed that the guaranteed lifetime withdrawal riders on U.S. indexed and variable annuities offer more income than Lifetime Cash Flow (LCF) and that differences between U.S. and Canadian tax law would prevent a U.S. bank or insurer from offering an identical product. “Essentially, BMO has introduced a Canadian version of the GLWB to Canadian retirees,” he wrote.

After reviewing LCF’s data sheet and disclosures, Bernard found:

• Lifetime Cash Flow’s 10-year deferral with a payout of 6% of the original deposit for life is substantially less than a U.S. variable annuity with a GLWB would pay. LCF also provides no inflation protection.

• The initial principal deposit for LCF is invested in an illiquid structured note for the 10-year deferral period. The note’s underlying investments are mutual funds. As with a GMAB (guaranteed minimum accumulation benefit) on a U.S. variable annuity, the value of the note at the maturity date is the greater of the mutual fund value or the initial principal deposit.

• After the 10-year period, the client can receive a distribution of 6% of the original principal per year for 15 years (or take a lump sum equal to the fee-adjusted value of the underlying mutual fund account). In the 25th year, after the 10-year deferral and 15 years of distributions, the client can continue the 6% distributions regardless of the value of the underlying funds. In that sense, it is no different from a GLWB after the 10th year).
• Tax-free principal is distributed first from the LCF, followed by taxable distributions of gains. This is exactly the opposite of the tax treatment of deferred annuity distributions in the U.S., where taxable gains come out first and non-taxable distributions later. 
• BMO recommends funding an LCF with after-tax savings, allows the use of pre-tax savings. Funding with pre-tax dollars wouldn’t work in the U.S., where the illiquidity of the product during the first 10 years would prevent purchasers over age 61 from making their required minimum distributions starting at age 70½.
• The article says that the income is not insured. That’s incorrect.  If the funds are depleted to 10% of the original principal, BMO makes the payments for life. Therefore, the income is effectively insured—by the claims-paying ability of the bank. Insurance, income tax and securities laws are different in Canada. A Canadian bank can insure a product like LCF, but a non-insurance company in the U.S. could not.  
• The fees on this BMO product appear quite high in relation to the guaranteed benefits provided. Under Series 1 of the notes, the explicit fees are 275 basis points. But there is an implicit additional fee because the participation rate of the principal-protected note in the performance of the underlying fund portfolio is 75%. In other words, there is an additional fee equal to 25% of the underlying fund performance. For example, if the funds were to return a steady 6% every year, the total annual fee would be 275 bps + 150 bps (0.25 x 6%) for a total of 425 bps. The net return to the client would be only 1.75%.
• The product does provide a benefit for beneficiaries that the article doesn’t mention. The article says that payouts after year 25 do not come out of the account value. BMO’s product disclosures state however that interest distributions are paid from the account value after year 25, but 10% of the capital is preserved. Remember that only 90% of the original principal (15 x 6%) was distributed by year 25. So, instead of tapping into its own reserves when the account value goes to zero, BMO taps in when the account value reaches 10% of principal. As a result they leave 10% of the original principal for beneficiaries.

“In conclusion,” Bernard wrote, “this product resembles a VA with two riders. The first rider is a 10-year GMAB with no guaranteed increase (“rollup”) in the benefit base; the second is a 6% GLWB with a 10-year waiting period, no rollup, and no step-ups (mark-ups of the benefit base to the account value).

“The Canadian version differs in that there is no liquidity for the first 10 years (not possible under U.S.-regulated deferred variable annuities), and the fees would be comparable to those of a relatively rich U.S. benefit. I would speculate that the profits on LCF would have to be high relative to variable annuity profits because reserve requirements are higher in Canada than in the U.S.

“As a result, makers of U.S. annuities—variable annuities with GLWBs, fixed indexed annuities with GLWBs, and 10-year deferred income annuities  (which currently yield 11% of principal for life at age 65 when purchased by a 55-year-old male from Symetra)—probably wouldn’t want to issue a product identical to LCF even if they could.”

© 2011 RIJ Publishing LLC. All rights reserved.

In the 1990s, Poles faced a situation like the one the U.S. faced in early 2005, when Social Security reform dominated domestic politics. Supporters of reforming Poland’s state pension, including the central bank, the stock exchange, and the pension fund industry, said the state pension was unsustainable because of Poland’s aging population. They called for a diversion of a portion of the payroll tax to privately-run DC pension funds.

Pension reform was enacted. Poles used to contribute 19.5% of their pay to the DB state pension. Since the reforms, however, they’ve diverted 7.3% of that to the DC pensions. But the government can’t seem to afford the diversion away from public coffers. Its public debt is 55.5% of GDP. Anything over 55% triggers automatic public spending cuts, including freezes of pension benefit increases.

In the 2000s, the privately-run pension funds were roiled by financial crises. Personal account values fell, jeopardizing retirement security.  Liberals now argue that the pension reforms of the 1990s were a mistake.  

Last autumn, prime minister Donald Tusk told his chief adviser, Michael Boni, to revise the rules for managing the DC funds. Boni’s proposals were published in October and included:

• Target-date investing. The existing, one-size-fits-all portfolio, which includes an equity cap of 40% of the net asset value of the portfolio, and a 5% limit on overseas investment, would be replaced with three sub-funds, A, B and C. “A,” for new entrants to the labour market, would be a high risk, high- growth portfolio. The equity limit for “B” would be raised to 45%, for mid-career workers. When workers reach 55, their funds would be incrementally transferred to “C,” a low-risk portfolio with a 15% limit on equities. Workers could delay or accelerate their move to “C” by up to five years.
• Lower fees. A reduction in the up-front management fee, currently capped at 3.5% of contributions, to 2.8% for sub-funds A and B, and 2.1% for sub-fund B. However, as an incentive to improve performance, the pension fund management companies could earn a 2% profit fee.
• No more costly poaching. Client soliciting (acquisition) by pension fund companies of members of other funds will be curtailed and banned outright by 2014. In the meantime, agents would only be able to contact by email, phone or post, not in person. The reasoning is that the management companies are spending large sums of monies on poaching each others’ clients. Companies competing for new entrants to the labour market would have to supply them with historical returns.

In mid-November, Boni proposed the creation of retirement (pension) bonds. Returns of the illiquid bonds, in 20 and 30-year maturities, would be linked to GDP growth and redeemable at maturity by the state Treasury. Boni assured the parliament that the bonds would not count as public debt under EU criteria. Most observers are said to be baffled by the proposal.

Prime minister Tusk at one point suggested that participation in the DC schemes could be voluntary. His deputy, Waldemar Pawlak, announced that the 2011 budget was being drafted on the basis of suspended contributions, but Pawlak was contradicted by the finance ministry, which drafts the budget. Tusk has reassured pension fund members and the markets generally that he won’t adopt Hungary’s strategy of effectively nationalizing its DC system.

As of 2011, Polish DC contributions will be reduced to 5% from 7.3%. The reduction in new DC monies could total close to €5bn in 2009 and €4.4bn in the first three quarters of 2010. That will hurt the Warsaw Stock Exchange and the Polish private pension funds, which are heavily invested in equities. According to the stock exchange, in the first half of 2010, payroll DC contributions funded 21% of equity trading.

With 65-odd IPOs completed in the first 11 months of 2010, the Warsaw exchange is also one of Europe’s leading venues for new issues. The exchange is concerned that reduced DC contributions would decrease liquidity and reduce available capital. Fifteen IPOs set for November 2010 were reportedly postponed due to the prospect of declining pension contributions. 

© 2011 RIJ Publishing LLC. All rights reserved.

The Annuity Solutions division of Morningstar has published a report summarizing the variable annuity industry highlights of 2010 and predicting that “the pendulum [will] swing back toward more generous benefits during 2011” after the de-risking trend of 2009 and early 2010.

The report, “Continued Innovation Helps Fuel VA Sales in 2010,” also noted new filings of products not yet available:

• Allianz filed a Lifetime GMWB with a guaranteed withdrawal percentage based not on age, but on the rate of a 10-year treasury note. This ties payouts directly to market performance, removing the age factor. The benefit has not been rolled out yet.

• Lincoln National filed a new long-term care benefit that pays a monthly amount for long-term care expenses and costs 1.26% to 1.57%, depending on options chosen (fee calculation is complicated). This benefit pays for long-term care expenses up to three times the initial purchase amount (which must range from $50,000 to $400,000). Payments are offered monthly beginning after the first anniversary and are not taxable. The optional Growth feature gives the ability to increase the monthly maximum benefit amount using a calculation based on the investment growth and the remaining benefit base. The Growth option has a step-up feature through age 76. The benefit is capped at $800,000, covers a single life, and applies only to non-qualified assets.

© 2011 RIJ Publishing LLC. All rights reserved.

Income earned from the sale of annuities at bank holding companies (BHCs) declined 7.6% to $1.84 billion in the first three quarters of 2010, down from $2 billion in the first three quarters of 2009, according to the Michael White-ABIA Bank Annuity Fee Income Report. 

Wells Fargo & Company (CA), Morgan Stanley (NY),  JPMorgan Chase & Co. (NY) and Bank of America (NC) led all bank holding companies in annuity commission income in the first three quarters of 2010, accounting for just under 60% of the total for BHCs. Wells Fargo became a leader in bank annuity sales by acquiring Wachovia Bank in the financial crisis.

Morgan Stanley and BBVA USA Bancshares (TX) posted the greatest annuity commission growth, with 41% and 26% higher sales through the first three quarters of 2010 compared to the same period in 2009.  JP Morgan Chase, Bank of America, PNC Financial, and SunTrust all posted double-digit declines, year-over-year.  

Third-quarter annuity commissions fell 3.1%, to $621.3 million from $640.9 million in 2Q 2010 and 7.3% less than the $669.8 million earned in 3Q 2009.

Compiled by Michael White Associates and sponsored by the American Bankers Insurance Association, the report measures and benchmarks the banking industry’s annuity fee income. It is based on data from all 7,020 commercial and FDIC-supervised banks and 915 large top-tier bank holding companies operating on September 30, 2010.

Of the 915 BHCs, 386 or 42.2% sold annuities during the first three quarters of 2010. Their $1.84 billion in annuity commissions and fees constituted 11% of their total mutual fund and annuity income of $16.84 billion and 15.9% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $11.6 billion.

Of the 7,020 banks, 923 or only 13.2% sold annuities, earning $560.9 million in annuity commissions or 30.4% of the banking industry’s total annuity fee income. However, bank annuity production was down 20.5% from $705.5 million in the first three quarters of 2009.

Seventy-four percent (74%) of BHCs with over $10 billion in assets earned third quarter year-to-date annuity commissions of $1.74 billion, constituting 94.1% of total annuity commissions reported. This was a decrease of 8.1% from $1.89 billion in annuity fee income in the first three quarters of 2009.

Among this asset class of largest BHCs in the first three quarters, annuity commissions made up 10.5% of their total mutual fund and annuity income of $16.59 billion and 15.9% of their total insurance sales volume of $10.92 billion.

BHCs with assets of $1 billion to $10 billion recorded a slim 0.2% increase in annuity fee income, rising to $91.6 million in the first three quarters of 2010 from $91.4 in the same period a year before and accounting for 36.7% of their mutual fund and annuity income of $249.6 million.

BHCs with $500 million to $1 billion in assets generated $16.9 million in annuity commissions in the first three quarters of 2010, up 1.0% from $16.7 million in the first three quarters of 2009.

Only 33.5% of BHCs this size engaged in annuity sales activities, which was the lowest participation rate among all BHC asset classes. Their annuity commissions constituted just 13.3% of their total insurance sales volume of $127.5 million.

Among BHCs with assets between $1 billion and $10 billion, leaders included Stifel Financial Corp. (MO), Hancock Holding Company (MS), and National Penn Bancshares, Inc. (PA).

Among BHCs with assets between $500 million and $1 billion, leaders were First American International Corp. (NY), CCB Financial Corporation (MO), and Ironhorse Financial Group, Inc. (OK).

© 2011 RIJ Publishing LLC. All rights reserved.

In a risk-reduction move that was first announced early last December, Prudential is reducing the size of the roll-up guaranteed by its top-selling Highest Daily Lifetime variable annuity rider to 5% per year until the first withdrawal from 6% per year.

Prudential was the largest seller of variable annuities through the first three quarters of 2010, with $15.55 billion in total sales.

On future sales, a new Highest Daily Lifetime and a Spousal Highest Daily Lifetime rider will replace the existing Highest Daily Lifetime 6. Under the rider, the benefit base—the notional amount on which the future annual payouts will be calculated—ratchets up at an annualized compounded rate of 5% every business day or grows with the account value, whichever is greater.

The benefit base grows as long as withdrawals are deferred, and the benefit base is guaranteed to double after 12 years if withdrawals are deferred for that time. After income payments begin, at the rate of 2.6% to 6% per year depending on the age of first withdrawal.

The mortality and expense risk fee for Prudential variable annuities ranges from 55 to 185 basis points, depending on the share class. The HD lifetime income rider is available for an additional 95 basis points. Investment management fees are extra. 

Prudential controls the downside risk of the product by automatically re-allocating assets out of equities and into an investment grade bond portfolio when equity prices fall. This method, a form of Constant Proportion Portfolio Insurance, tends to limit losses during bear markets but may also prevent the account value from reaching new high-water marks during a recovery.

© 2011 RIJ Publishing LLC. All rights reserved.

Most target-date fund investors understand the funds’ basic design and their risks, but need “education about the highly diversified nature of a single-target date fund,” according to a new study by Vanguard, the second-largest manager of target-date funds in the U.S.

In its Investor Comprehension and Usage of Target-Date Funds: 2010 Survey, Vanguard also found “opportunities exist to improve investors’ knowledge of target-date fund (TDF) mechanics at and around the target date, and the implications of combining TDFs with other assets.”

The study showed that only 62% of plan participants who owned TDFs had ever heard of a TDF.  That finding didn’t surprise Vanguard, since most of those participants were probably defaulted into TDFs and, ipso facto, didn’t need to know or understand them.     

 “Participants who are not aware of TDFs are likely to be unengaged investors—and these funds are intended to provide such investors with a prudently diversified portfolio,” said John Ameriks, head of Vanguard Investment Counseling & Research.

The study was released this month, prior to the Department of Labor’s deadline for comments on proposed regulations on disclosures for TDFs, which came under Congressional and regulatory scrutiny after they failed to protect near-retirement investors from significant losses in the 2008-2009 financial crisis.

For the study, Vanguard in January 2010 surveyed 4,700 Vanguard IRA owners and participants in Vanguard-administered retirement plans, some of who owned TDFs and some who didn’t.  

Among Vanguard’s findings:

• Some 95% of TDF investors in IRA accounts reported having “heard of a target-date fund,” versus 62% of TDF owners in defined contribution retirement plans. Vanguard wasn’t surprised, because participants are frequently defaulted into TDFs.
• Only 24% of the participants knew that the asset allocation of most TDFs continues to change after the target year. 
• 61% of participants said they chose TDFs because they wanted “a balanced portfolio, simplicity, and convenience.”
• Among investors who hold other investments along with a TDF, 56% said they did so to hold “more aggressive investments.” Another 41% thought they needed a mixed portfolio for adequate diversification.
• 75% of participants said they intended to gradually draw down their target-date fund assets.
• more than 90% of the respondents plan to have an equity position in their portfolio at retirement.
• 77% knew that the asset allocation becomes more conservative as the target year approaches, showing an understanding of these funds’ changing asset allocation.
• 68% recognized that target-date funds offer a diversified mix of stock and bonds. (Diversification does not ensure a profit or protect against a loss in a declining market.)
• 87% believed target-date funds involve “some risk” or more; less than 1% felt they were risk-free.
• Only 8% of participants incorrectly believed that target-date funds provide “guaranteed income” and only 4% of participants incorrectly indicated that TDFs provide a guaranteed return or become risk-free at the target date.        

© 2011 RIJ Publishing LLC. All rights reserved.

Last Friday, January 14, was the deadline for industry comments on the Department of Labor’s proposed amendments to regulations surrounding target-date fund disclosures, and most of comments were submitted on the final day.

There weren’t many. Only 30 comment letters on TDF regs were filed since late November 2010 with the DoL’s Employee Benefit Security Administration (EBSA). But many came from organizations—or from the general counsels of those organizations—that represent millions of people and trillions of dollars.   

We’re talking about Vanguard and Fidelity (managers of 60% of TDF assets), the American Council of Life Insurers (variable annuity issuers), the Profit-Sharing Council of America (plan sponsors), the Defined Contribution Institutional Investors Association (asset managers), the Investment Company Institute (mutual funds), AARP (retirees), etc.

(You can find all the comments at the EBSA website.)

The industry’s comments pointed in many directions, but boiled down to a half dozen concerns that regulations might make the whole TDF mess even messier. For instance, makers of TDFs fear that fresh warnings about the risks of TDFs might give the impression that TDFs are any riskier than other investments. 

In the same spirit of damage control, industry lawyers wanted to make sure that regulations for TDFs don’t apply to managed accounts in retirement plans, and that new regulations don’t simply duplicate old regulations—a justifiable fear—and that EBSA won’t set too short a deadline for compliance.

New TDF disclosure requirements appear to be inevitable, however, mainly because TDFs blew up during the financial crisis. Yes, they’ve since bounced back. But the crisis revealed that, as a class, they lacked the standardization and transparency that you might expect of a product that had been approved as a qualified default investment alterative (QDIA) for broad use by America’s least astute investors. The primary problem was a dangerous overweighting in equities under the fuzzy rationale that retirees with inadequate savings should own risky assets in order to avoid running out of money.

Now the activist administration that the financial crisis helped usher into office—specifically, EBSA chief Phyllis Borzi—wants to make sure the TDF industry doesn’t go back to business as usual simply because the funds have rebounded (with massive help from the Fed, but that’s another story). Hence the current verbal duel between regulators and lawyers. 

Sadly, most (but not all) ignored the 800-pound irony in the room: Why negotiate over disclosures when the people who invest in TDFs don’t read disclosures? TDFs are designed for plan participants who don’t have the time, expertise or inclination to get involved in saving or investing. Eighty percent of them, according to one EBSA comment letter, abandon their TDFs at retirement anyway.

The most pertinent and compelling comments came from those who pointed out what should be obvious: that plan sponsors and plan fiduciaries are responsible for ensuring that plan participants have investment options that will help them accumulate adequate savings by their retirement age with minimal risk. DC plan fiduciaries, not regulators, should be the ones demanding investment options that don’t have hidden vulnerabilities.  

One fog-clearing letter came from Joe Nagengast, a principal at Target Date Analytics, LLC, Marina del Rey, Calif.. He posited that a TDF’s “ floor objective is to deliver at target date accumulated contributions intact plus inflation, and a target objective is to grow assets as much as possible without jeopardizing the floor objective.” A TDF’s pursuit of other objectives—like solving longevity risk by investing in equities—only jeopardize the primary objective,” he wrote.

Regarding the all-important fiduciary issue, Ron Surz, president of Target Date Solutions, of San Clemente, Calif., wrote in his EBSA comment letter: “Proposals that focus on participant enlightenment are misguided for two reasons: participants don’t choose TDFs and they don’t read disclosures.

“Fiduciaries, namely plan sponsors and their advisors, choose target date funds, and they should read disclosures, although it would seem that they don’t. So why is this an important distinction? You wield the stick of potential litigation, probably best focused on fiduciaries rather than fund companies.” Surz, a frequent critic of the mainstream TDF industry, wants fiduciaries to insist on zero equity allocation at retirement.

Yes, I know that TDFs might be better than nothing, and that most TDFs are sold by circumspect outfits like Vanguard and Fidelity. But, at the margins, TDFs can be guilty of, if not murder, then reckless endangerment. They’ve succeeded because they’re a convenient way to provision a large, captive, undiscriminating audience, and because they bear the QDIA stamp of approval (with its attendant moral hazard)—not because they have intrinsic merit. Custom TDFs might represent an improvement, but that’s a different story, and the latest round of comments doesn’t appear to address them.  

© 2011 RIJ Publishing LLC. All rights reserved.

Global pension funding levels ended the year slightly up, despite a roller coaster year, according to a new analysis from Aon Hewitt, the global human resource consulting and outsourcing business of Aon Corporation.

Aon Hewitt monitors and analyzes daily pension funding levels of U.S., U.K., Continental European and Canadian companies in the S&P 500, FTSE 350, DJ Euro Stoxx 50 and TSX, through its Pension Risk Tracker tool.

The analysis found that the funded status of global pension plans were 87% at the end of 2010, up slightly from 86% at the beginning of the year. According to Aon Hewitt’s estimate, global pension assets increased by 8% during the year, while pension liabilities increased by 7% over the same period.

Analysis by region

According to Aon Hewitt’s analysis, global pension assets gained in 2010, fueled by a strong performance in equity markets and bond price appreciations due to falling interest rates.  

United States

• Pension funded status in the U.S. closed 2010 at 88%, unchanged from the start of the year. Three quarters of positive returns offset the negative returns of the second quarter and the drop in interest rates.
• Strong equity returns of 5% to 15% and a 30-50 basis point recovery in corporate bond rates boosted end-of-year status by six percentage points.

“Action [in 2011] will take the form of dynamic de-risking…  Plan sponsors will also shift their focus to the payment of lump sums starting in 2012, when the changes in terms brought on by the Pension Protection Act are fully implemented,” said Joe McDonald, Aon Hewitt’s Global Risk Services leader in the U.S.

United Kingdom

• Accounting deficits eased significantly for U.K. companies in the FTSE 350 index during the fourth quarter of 2010. Assets rose by just over 2% and liabilities fell by 4%.
• The drop in liability values was largely due to an increase in corporate bond yields of 40 basis points, although this was partially offset by an increase in market implied inflation.
• The average funded ratio increased to about 91% at the end of the year from 85% at the start of the final quarter, despite a rise in bond prices and collapse of equity prices on the last trading day of the year.  as bond prices increased and equities fell.
• The year saw double-digit growth in asset values outstripping the increase in liabilities. The aggregate deficit of FTSE 350 companies reduced from pounds Sterling 60bn at the start of the year to under pounds 50bn—an improvement but still low compared to 2008 and 2009.
• Volatility of funding ratios continues, with many daily changes in excess of 1 percentage point—not critical, but enough to cause significant distress to finance directors seeking to control emerging quarterly results.

Continental Europe

• In Continental Europe, average funded ratios fell to 71% from 75% over the course of the year, as liabilities grew faster than asset values.  
• Funding levels fall as low as 64% in August, before peaking at 73% just before the December holidays. Rising bond yields boosted fourth quarter funding levels. Funding levels fell a full percentage point on the last trading day of the year.   

Canada

In Canada, a positive fourth quarter 2010—assets rose 4%, liabilities fell 2%–helped reverse some of the losses by pension plans in the first three quarters.

The average funded ratio among companies in the S&P/TSX index increased from to 94% on December 31 from 88% on October 1.  However, the positive results were not enough to reverse loses experienced during the first three quarters. Volatility continued to be a major concern throughout the quarter, with daily changes in funded ratios of 2%.  

© 2011 RIJ Publishing LLC. All rights reserved.

A new study by BNY Mellon Asset Servicing says U.S. retirement plan sponsors face “unprecedented cost pressures” and that many “are reducing the benefits they offer or looking to rebalance funding between employers and employees.”  

The study, Redefining Retirement: What Changes to Defined Benefit and Defined Contribution Plans Mean for Plan Sponsors and Their Service Providers, concludes that plan executives believe that they “will either pay now for their retirees’ benefits or that they, or society, will pay later.”

The study found that:

• 50% of private company executives surveyed said that their plans made them more competitive as an employer, whereas 73% of public plan executives felt that their plans were an asset.
• The attractiveness of defined contribution plans for employers lies in the reduction of funding volatility; in the long run, funding costs for defined contribution may be higher or lower than current costs, but the ability to control volatility is seen as an unparalleled advantage.
• Hybrid defined benefit/defined contribution plans offer the professional management of defined benefit with the portability of defined contribution; some type of hybrid plan may be the best solution for employers and employees if employer costs can be managed effectively.
• Executives are looking to their service providers for help in assessing performance for private equity and other illiquid assets, and defining new strategies for assuring a stable retirement for their employees.

The study was co-produced with research and consulting firm Finadium LLC.  

“The most pressing question that sponsors of defined benefit and defined contribution plans have to answer today is how to provide retirement benefits that offer employees sufficient funding without causing further strain to employer balance sheets or government budgets,” said Laurin Moore, head of the US Tax Exempt Business at BNY Mellon Asset Servicing.

As the study notes, 55% of plan sponsors surveyed expect to need greater assistance in respect of performance measurement, while 35% expect the same in respect of risk management, particularly for illiquid investments in their defined benefit programs.

The study is based on interviews with large US pension plans conducted during June 2010, accounting for US$749.9 billion in assets across 30 retirement systems (16 corporations and 14 public entities). Of the systems surveyed, 81% of assets were in DB plans with the remainder in DC and a handful of health care retirement accounts. Over two-thirds of the plans surveyed held assets in the US$5 billion to US$50 billion range. The study is available at bnymellon.com/foresight/pdf/redefiningretirement.pdf.

© 2011 RIJ Publishing LLC. All rights reserved.

American International Group (AIG) has executed its previously announced recapitalization plan with the U.S. Treasury, the New York Fed, the AIG Credit Facility Trust (the Trust), including repaying about $21 billion to the Fed and exchanging various forms of government support into common shares. 

As a result, the Treasury Department will owning about 92% of AIG’s common shares. AIG expects that over time the Treasury Department will sell its stake in AIG subject to market conditions.

 “Now, we will continue to focus on strong business performance for the benefit of all of our stakeholders, including our largest shareholder, the Treasury Department,” said Robert H. Benmosche, AIG president and CEO. “We continue to believe [taxpayers] will realize a profit on their investment in AIG.”

© 2011 RIJ Publishing LLC. All rights reserved.

The Federal Reserve’s quantitative easing programs are supposed to jump-start the economy and generate jobs but have only helped raise stock prices, according to TrimTabs Investment Research. 

 “While QE1 and QE2 have worked wonders on the stock market, their impact on GDP and jobs has been anemic at best,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. 

“GDP increased a modest 2.7% in the third quarter of last year,” noted Schnapp.  “We need GDP growth of 3.0% to 3.5% to significantly reduce unemployment.  Employment gains averaged only 94,000 monthly in 2010, much less than the 150,000 per month needed to absorb population growth, and consumers collectively have $1.1 trillion less to spend annually than in 2008.”

TrimTabs noted a correlation between quantitative easing and equities.  The S&P 500 rose 67% during QE1, the period from March 2009 to March 2010 when the Fed bought nearly $2 trillion in mortgage-backed securities, Treasuries, and agency debt. 

Stock prices fell 13% in the subsequent five months, but have risen 20% since Fed Chairman Bernanke announced QE2 at the end of last August 2010.“When QE2 ends in June, the economy is in danger of returning to slow growth mode unless its structural problems are addressed,” predicted Schnapp. 

© 2011 RIJ Publishing LLC. All rights reserved.

AXA Equitable names pair to executive team

 AXA Equitable Life has named Nick Lane and Rino Piazzolla to its executive management team–Lane as senior vice president of Retirement Savings and Piazzolla as senior vice president of human resources.

Both will report to Mark Pearson, 52, who will become AXA Equitable’s chairman and CEO on February 11. Pearson had been CEO of AXA Japan.

Lane, 37, had served as head of AXA Group Strategy in Paris since 2008. Prior to that, he was a director of AXA Advisors, LLC and vice chairman of AXA Network, LLC, AXA Equitable’s retail broker dealer and insurance general agency, respectively. Previously, Lane was a leader in the sales and marketing practice of the strategic consulting firm McKinsey & Co. He holds a B.A. from Princeton University and an M.B.A. from Harvard Business School and served as a captain in the U.S. Marine Corps.

Piazzolla, 57, most recently was UniCredit’s head of Human Resources in Italy. Before joining UniCredit in 2005, he held various human resources management positions in the U.S. and abroad at General Electric Co., PepsiCo and S.C. Johnson Wax. He succeeds Jennifer Blevins, 53, who is retiring after nine years. 

FINRA arbitrators rule for retiree, to tune of $136,000 

A retired California woman won a six-figure damages award against Smith Barney (now Morgan Stanley Smith Barney) to compensate her for investment losses caused by the Wall Street firm’s recommendation that she buy preferred shares of GM stock not long before the company’s bankruptcy.    

On November 18, 2010, a Financial Industry Regulatory Authority (FINRA) arbitration panel ruled that a Smith Barney advisor in Whittier, Calif., unsuitably recommended that Joanne Bohnke invest a substantial portion of her retirement savings in preferred shares of GM in 2007, not long before the auto maker’s bankruptcy. She lost three-fourths of her investment. The panel awarded her $136,000. 

“This Time Is Different” wins TIAA-CREF award   

Carmen M. Reinhart and Kenneth S. Rogoff won the 2010 TIAA-CREF Paul A. Samuelson Award for their best-selling book, “This Time is Different: Eight Centuries of Financial Folly.”

Reinhart is the David Weatherstone Senior Fellow at the Peterson Institute for International Economics and Rogoff is the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard.  

The Samuelson Award is given annually in recognition of an outstanding research publication containing ideas that the public and private sectors can use to maintain and improve America’s lifelong financial well being. The winner receives $10,000.

“Combing through data from 66 countries and across five continents, Reinhart and Rogoff focused on patterns of currency crashes, high and hyperinflation, government defaults on international and domestic debts, housing and equity prices, capital flows, unemployment and government revenues to demonstrate that these crises are not isolated events. Reinhart and Rogoff show how closely each of these events fit a discernible and predictable pattern through the last eight centuries,” TIAA-CREF said in a release.

The TIAA-CREF Institute presented the Samuelson award on January 7 in Denver during the annual Allied Social Science Associations annual convention.

Prudential Investments Launches Real Assets Mutual Fund

Prudential Investments, the mutual fund family of Prudential Financial announced the launch of the Prudential Real Assets Fund, a mutual fund that focuses on investments in real estate, metals, fuel, and other commodities.

The fund will also invest in Treasury Inflation Protected Securities as a hedge against inflation and interest rate risk.   

“Investing in real assets may also help prove beneficial if the rising U.S. deficit, coupled with reduced tax revenue, puts upward pressure on interest rates and inflation,” said a Prudential release.

“According to data from Ibbotson Associates, when the Federal Reserve raised interest rates from 1.00% to 5.25% percent between June 2004 and June 2006, real assets post-inflation returns produced average annual real returns of 9.35%, versus 4.56% for stocks or the 0.34% loss for bonds.”

The fund’s dynamic asset allocation strategy is led by Quantitative Management Associates, which manages nearly $40 billion in asset allocation strategies, including real assets.

Principal endorses investment principles

Principal Global Investors, the Des Moines, Iowa-based asset manager with $227.4bn (€170bn) in mostly pension fund assets under management, has become the latest “mainstream” firm to sign up to the United Nations Principles for Responsible Investment, according to responsible-investor.com.
The firm, a unit of Principal Financial, runs assets for 10 of the 25 largest pension funds in the world, says “the appropriate consideration of environmental, social and governance (ESG) issues is part of delivering superior risk adjusted returns.”
Other recent well-known asset manager signatories include Capital International, Legal & General Investment Management and T. Rowe Price.   

$5.3 billion sets a sales record at MassMutual Retirement

MassMutual Retirement Services Division wrote over $5.3 billion in sales in 2010, breaking the record set in 2009. Assets under management in retirement plans administered by MassMutual reached a record $50 billion or so at year-end 2010 (including First Mercantile), up 16% increase vs. year-end 2009. The division reported net cash flow of about $2 billion for the second consecutive year.

MassMutual also earned record-high satisfaction levels in numerous 2010 industry and proprietary surveys of retirement plan advisors and plan sponsors, with a plan sponsor retention level of 95%.  

According to Hugh O’Toole, senior vice president and head of sales and client management for MassMutual’s Retirement Services Division, MassMutual has seen strong growth in its core defined contribution, defined benefit and TRS segments as well as in the nonprofit, Taft-Hartley, and professional employer organization (PEO) markets.

Securian Retirement certified by CEFEX

For the third consecutive year, the Centre for Fiduciary Excellence awarded Securian Retirement the CEFEX certification for fiduciary due diligence regarding investment management.

The CEFEX certification is used by benefits advisors, consultants, brokers, and their clients to assess the performance, consistency, and appropriateness of investment options. “The CEFEX certification is especially important in the markets we serve,” said Bruce Shay, executive vice president, Securian Financial Group, Inc. “Some employers do not have HR and legal experts on staff to monitor plan performance.”

Securian’s retirement plans are offered through a group variable annuity contract issued by Minnesota Life Insurance Company. The Securian due diligence process is led by an in-house committee of four CFAs who also hold the Accredited Investment Fiduciary designation.

CEFEX is an independent, global assessment and certification organization providing comprehensive assessments as measures of risk and trustworthiness of investment fiduciaries. A CEFEX assessment includes reviews of an organization’s practices by an independent Accredited Investment Fiduciary Analyst (AIFA).

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