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No more compulsory annuities in U.K.

Posted on December 15, 2010 by Editor Test -

Investors in the United Kingdom will be able to spend part their tax-deferred retirement savings—known as “pension pots” in Britain—before they retire, under new pension rules.

Employees with defined contribution pension schemes will no longer have to buy annuities by age 75, and may take out up to a years’ worth of funds before retirement.

For those who can demonstrate that they have a secure pension income of at least £20,000 (about $31,500) a year, there will be no limit on the amount that they can withdraw early.

“The majority of people have quite small pension pots on retirement and this safety net will mean that in practice they are still likely to buy an annuity to make sure they have an income through retirement,” said the Association of British Insurers in a release.

The British Treasury estimates that 12,000 people a year will be eligible to use the flexible pension draw-down rules. Tax on pension funds left unspent at death has also been cut to 55% from 82%. The rules will go through Parliament as part of the 2011 budget, and are set to come into force from April 2011.

Phoenix issues “Medicaid annuity”

Posted on December 15, 2010 by Editor Test -

The Phoenix Companies, Inc., has launched the Phoenix FamilyShield Annuity, a single premium immediate annuity designed to meet federal regulations that allow people to qualify for Medicaid long-term care benefits while protecting an income stream for their healthy spouses.

“For those who do not have long-term care insurance, Medicaid or other government programs may cover some of the cost of this care,” said Philip K. Polkinghorn, senior executive vice president, business development, at Phoenix. “These programs permit an individual to use marital funds to purchase a certain type of annuity so as to provide an income stream for a loved one.”

The product can be customized with a choice of premium amounts and payment periods:

It must be funded with a minimum single premium payment of $10,000 in non-qualified or qualified/IRA funds.
It will immediately begin a monthly stream of income payments for a period certain between two and 30 years. If the owner/annuitant dies before the end of the period, the designated beneficiary will receive the remaining monthly payments.
As required by Medicaid regulations, the contract has no cash value, is irrevocable, non-transferable and non-assignable.
It is generally only appropriate for individuals and spouses who are applying for Medicaid or other government benefits.

Phoenix FamilyShield Annuity was developed in conjunction with The Ohlson Group, Inc., which will work with Saybrus Partners, Phoenix’s distribution company. Because Medicaid regulations vary by state and are subject to change, Phoenix does not guarantee eligibility for assistance.

Money market funds grow as bond appetite slows

Posted on December 15, 2010 by Editor Test -

After contributing $26.8 billion to long-term mutual funds in October, investors added just $2.7 billion in November, according to Morningstar, Inc. The decline reflected a loss of enthusiasm for fixed-income funds and the continued outflow from U.S. stock funds.

Money market funds were the direct beneficiaries of these trends, with inflows of $24.7 billion, their best month since January 2009. U.S. exchange-traded funds (ETFs) saw inflows of $10.3 billion in November, pushing year-to-date inflows to $95.6 billion and total industry assets to $951.5 billion.

Additional highlights from Morningstar’s report on mutual fund flows:

Inflows for taxable-bond funds reached just $6.1 billion in November versus $21.0 billion in October, the smallest monthly inflow for the asset class since May. After 22 consecutive months of net inflows, municipal-bond funds saw net outflows of $7.6 billion in November. This reversal comes after investors added nearly $105.6 billion to the asset class from January 2009 through October 2010 and marks the worst month for municipal-bond funds in terms of net outflows except for the $8.0 billion redeemed in October 2008 during the credit crisis.
Rising rates and currency swings contributed to a tough month for emerging-markets bond and world-bond funds, some of the more aggressive areas of the bond market. Nevertheless, money continued to flow to emerging-markets bond funds. These offerings have collected more than $13.7 billion in 2010, and total assets have nearly doubled over the last 12 months to $36.8 billion.
Large-growth funds had the biggest outflows of any Morningstar category this year, losing $43.5 billion.
Investors pulled $1.0 billion from Vanguard funds in November, the firm’s first month of long-term fund outflows since October 2008. Equity-oriented families including American, Fidelity, and Columbia also continued to suffer outflows. Despite redemptions of $1.9 billion from PIMCO Total Return, the fund’s first month of net outflows in two years, PIMCO still took in $1.1 billion during November.

Additional highlights from Morningstar’s report on ETF flows:

U.S. stock ETFs, with inflows of $7.9 billion, topped all ETF asset classes in November, followed by international-stock ETFs with weaker, yet positive flows of $2.3 billion as a result of renewed sovereign credit fears in Europe and a stronger U.S. dollar.
Vanguard collected $6.3 billion of the $10.3 billion assets added industry-wide in November. The firm’s ETF assets rose more than 62% over the last 12 months, allowing it to capture nearly 15% of the market share.
After recording inflows during every month this year, taxable-bond ETFs saw outflows of $660 million in November.
Silver ETFs continued to see healthy inflows. Investors looking to increase their commodities allocations may see silver, which has seen price appreciation of 65% year to date, as a good alternative to gold, which has gained 26% over the same period.

The complete flow report is available from Morningstar.

E&Y offers four keys to success for life insurers

Posted on December 15, 2010 by Editor Test -

Despite entering 2011 with a stronger balance sheet, reasonable earnings momentum and slightly rising direct premiums, the U.S. life and annuity insurance industry will be challenged by broad regulatory changes and an uncertain economic environment, according to Ernst & Young’s Global Insurance Center 2011 US Outlook for the life insurance industry.

Insurers will need to create new products and services and leverage distribution channels for top line growth, while reducing costs and unprofitable risks for bottom line earnings, according to Doug French, Principal, Financial Services and Insurance and Actuarial Advisory Services Leader at Ernst & Young LLP (US).

“We remain in a challenging environment where it’s difficult to attract new customers and retain existing ones,” French said. “Companies that clearly understand these issues and react quickly and prudently in their strategic core businesses will gain a competitive advantage.”

Ernst & Young identified four issues for US life and annuity insurance companies:

1. Responding to the changing regulatory environment: New legislation and regulations, such as the Dodd-Frank Wall Street Reform, Solvency II and ongoing accounting changes driven by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB), will raise the potential of altering the growth trajectory of the life and annuity insurance industry in the US. They might also compel insurers to exit particular lines of business.

2. Establishing capital and risk management solutions post-crisis: As the industry returns to pre-crisis levels of new business and seeks further growth, capital will require careful management to efficiently fund new business needs. A key challenge will be identifying the most cost-effective capital solutions to support strategic growth initiatives. The redundant regulatory reserve requirements will also continue to be an issue for insurers. Similarly, insurers selling annuity products will need to seek solutions that manage the risk and reserves required to support the guaranteed benefits embedded in these products.

3. Improving customer relations and increasing operational efficiencies: Insurers seeking to reach new customers and maintain existing relationships will need to strengthen distributor networks and improve their administration and customer service systems. Insurers must also control costs to achieve adequate profit levels and protect the balance sheet. To do so, companies are expected to increase the ease of doing business through investments in technology and lower their resource costs through shared services, offshore captives and outsourcing.

4. Reinventing products and distribution to generate growth: Although the life and annuity insurance industry will enter 2011 with strengthened capital, questions remain about how best to deploy this capital to achieve long-term growth.

Baby Boomers have become acutely aware of their looming retirement challenges and the risk of market losses, and are beginning to clamor for meaningful guarantees. Meanwhile, Generation Y has reached an age where they should be forming households, yet the weak employment environment has, in part, compelled them to remain single or childless in record numbers. If the economy remains stagnant, it could suppress both their desire for savings and life insurance products and their ability to pay for them.

The complete Life Insurance Industry 2011 Outlook report can be found at www.ey.com/insurance.

Social Security Seeks to End Free Loans

Posted on December 15, 2010 by Editor Test -

The government’s “interest-free” loan loophole may soon be officially closed.

The Social Security Administration published new rules this week that limit the ability of Social Security recipients to essentially receive interest-free loans from the agency. The rules took effect immediately.

Under the old policy, people who could take their Social Security benefits early, then later withdraw their application for benefits, as long as they repaid the full amount of the benefits received, with no interest charged on the money. They could then also reapply for benefits later on and receive higher benefits.

While this policy was intended to help those who decided to take an early retirement and then went back to work, it ended up becoming a way to get a free loan from the government. People would apply for Social Security benefits, put that money in investments and earn interest and then withdraw their application, paying the government back just the benefit amount.

Now, the new rule limits the time period that beneficiaries can withdraw an application to within 12 months of the first month of entitlement. It also permits only one application withdrawal per lifetime.

“The agency is changing its withdrawal policy because recent media articles have promoted the use of the current policy as a means for retired beneficiaries to acquire an ‘interest-free loan,’” according to the agency. “The 12-month limitation period is a financial disincentive,” the new rules said. “There is little to be gained by investing benefits for only 12 months.”

The statement, and the rules, also noted that the “free loan” was not really free since it “costs the Social Security Trust Fund the use of money during the period the beneficiary is receiving benefits” and the withdrawal processing also involved the use of the agency’s limited administrative resources.

While the new rules are effective immediately, there is a 60-day public comment period. The agency said it would consider comments and publish another final rule.

Rep. Ryan’s Express Could Save—or Derail—Public Pensions

Posted on December 15, 2010 by Kerry Pechter -

A bill recently introduced by Reps. Paul Ryan (R-Wisc), Darrell Issa (D-Calif) and Devin Nunes (R-Calif) would punish states that fail to transparently disclose their public pension funding status each year by revoking their right to issue bonds that are exempt from federal income tax.

If the bill were passed—perhaps by the incoming Republican-controlled House of Representatives—it would be hard for a non-compliant state to sell bonds for any purpose, not merely to finance pension benefits for their retired teachers, snowplow drivers, policemen and other public sector workers.

“In the case of a failure… of State or local government employee pension benefit plans to meet reporting requirements,” the proposed bill says, “no specified Federal tax benefit shall be allowed or made with respect to any specified bond issued by any such State or political subdivision.”

Perhaps the most pointed aspect of the bill, H.R. 6484, is its requirement that states use Treasury rates, which are historically low, to discount pension obligations and calculate funding requirements. Since Treasury rates are far below the rates (as high as 8%) that states now use to project the growth of their pension funds, the switch could instantly double a state’s reported funding gap—and send shock waves through the electorate.

Why use Treasury rates when states don’t invest pension fund assets primarily in Treasuries? “The argument being made by the congressmen is that because the pensions are risk-free”—that is, the states are obligated to pay them—“you should use a risk-free rate to discount them,” said Ethan Kra, vice president of pensions at the American Academy of Actuaries vice president of pensions. “This bill addresses reporting and disclosure. It does not address funding or required investment risk,” he added.

The bill, which state pension administrators consider politically partisan, reflects the nation’s broad climate of fiscal anxiety in general and about public pensions in particular, Kra said. The Security and Exchange Commissions is worried that states with overwhelming pension costs might end up defaulting on their bonds. Taxpayers nationwide fret that states may plead for pension fund bailouts from Uncle Sam.

Two of the three sponsors of the bill, Darrell Issa and Devin Nunes, represent districts in California, whose state public pension funding has fallen behind since the dot-com crash of 2001. According to the Pew Center on the States, the California State Teachers Retirement System paid less than two-thirds of its $4.3 billion contribution obligation in 2008.

But overall the state’s projected pension liability of $454 billion is 87% funded. Between 1999 and 2008, the state pension’s liabilities grew 125% while assets grew only 65%. The big hole is in health care, where virtually none of the state’s $62 billion in retiree health care and other benefit promises are funded.

The other sponsor, Paul Ryan, was described in a recent New Yorker article as “the GOP’s designated thinker on the big issues, like entitlement reform.” Ryan, who turns just 41 in January but has represented Wisconsin since 1999, drew attention in early 2009, when he introduced a bill that would have eliminated the Obama stimulus package, replaced Medicare, reduced the top individual income tax rate to 25% and introduced a value-added consumption tax of 8.5%.

A stick, not a carrot

As for the bill’s blunt threat to withdraw a state’s tax-exempt bonding privileges unless it improves its pension accounting practices, Kra noted that Congress has a limited array of levers for influencing the states. “They have to do it this way, because under separation of powers, [the federal government] can’t force the states to do anything,” Kra noted.

The bill’s sponsors assert that some states are purposely hiding the impact of past promises to public employees.

“As we speak, lucrative pension promises are being made to public employees that taxpayers simply cannot afford. The plans themselves admit to more than a $1 trillion in unfunded liabilities,” said Rep. Devin Nunes in release. “Unfortunately, the true level of unfunded liabilities associated with these plans—perhaps more than $3 trillion—is being hidden thanks to unrealistic accounting standards.”

Not surprisingly, state pension fund managers resent this characterization, and have denounced the bill’s implied accusation that they are hiding their pension obligations. A coalition of state organizations led by NASRA, the National Association of State Retirement Administrators, in a December 8 press release, said:

“Inaccurate and inflammatory descriptions of the state of public pensions and unnecessary calls for federal intervention are unwarranted and only serve to confuse the public and unduly alarm state and local government retirees.”

It went to say that “Pension fund asset values have been growing since March 2009, and the most recent data show current assets are approximately $2.9 trillion. The Government Accountability Office has found that public pensions on the whole are financially secure and positioned to meet their long-term pension obligations, and even after the market decline, aggregate public pension funding levels are around 80 percent.”

A pension official in one state told RIJ that the bill is seen more as part of an attempt to undermine public support for state pension plans and hasten their conversion to defined contribution plans, rather than as an attempt to force pension administrators to put the plans on a firmer financial footing.

“What they’re doing is mean, heavy-handed and punitive,” said the official, who asked not to be identified. “As soon as [the bill] came out, the associations were just deadly opposed to it. There’s a negative reaction everywhere because it’s as though someone’s trying to come in and run your business. It’s also a way to produce the most conservative view of a state’s pension liabilities. But it’s the wrong punishment for the behavior.

“If I understand it correctly, the bill doesn’t refer to the tax benefits of the pension itself, but about the tax treatment of the state’s bonding authority. The state’s ability to issue tax-exempt bonds is related to a lot of things other than pensions. There’s no direct relationship.

“I don’t see the connection between the bonding authority and the pension disclosures. They’re looking for a way to get this information disclosed in the way they want it disclosed. That’s not necessarily wrong, but they’re using the wrong punishment to get us there. It’s too draconian. There’s probably better ways to evaluate the pension liability than with the Treasury rate.

“It would approximately double the pension liability. That would shock people and I think that’s the effect that they’re aiming for. I don’t know where the assumption came from that the federal government has to bail out the state pensions. Anybody’s who is responsible in this area understands the wisdom of easing toward a more realistic assumed earnings rates. But this bill could create a disaster.”

The pension official said that the push for more conservative public pension accounting practices could have been handled in a less sensational manner through negotiations with the Government Accounting Standards Board, which “has been moving in that direction already.” But Kra said that the GASB has been very slow to act, and that is plagued by conflicts of interest, because some of its members are actively employed as public pension administrators.

Objective analysis

The Pew Center on the States recently produced a study of the public pension crisis, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform.” It criticized state pension administrators for:

Failing to make annual payments for pension systems at the levels recommended by their own actuaries;
Expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
Providing retiree health care without adequately funding it.

In their own defense, state pension fund managers describe themselves as whipsawed by the markets. They felt pressure to abandon conservatism and seek higher returns in the equities markets during the 1990s boom, only to pay for it in the busts of the 2000s. The Pew study noted that:

In 2000, just over half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four—Florida, New York, Washington and Wisconsin—could make that claim.
In eight states—Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia—more than one-third of the total pension liability was unfunded. Two states—Illinois and Kansas—had less than 60 percent of the necessary assets on hand.
Nine states were deemed solid performers, having enough assets to cover at least 7.1 percent—the 50-state average—of their non-pension liabilities. Only two states—Alaska and Arizona—had 50 percent or more of the assets needed.
Forty states were classified as needing improvement, having set aside less than 7.1 percent of the funds required. Twenty of these have no assets on hand to cover their obligations.

A report issued in October by the American Academy of Actuaries, “Risk Management and Public Plan Retirement Systems,” provided some background and perspective on the plight of public pensions. It said:

“State and local workers were excluded from Social Security, at its inception, and thus, subsequently, many states and local governments endeavored to establish plans. Over half of the large public retirement systems that exist today were established between 1931 and 1950, and by 1961, 45 states had established defined benefit plans.

“U.S. Census Bureau data showed that, in 2008, public plans covered almost 26 million active workers and retirees. Size and coverage of public plans vary widely; Table 1 shows that, in general, the very large state systems, which only comprise 9% of the total number of systems, cover 88% of the membership of public employee systems.

“For fiscal year 2008, public sector plans reported holding $3.2 trillion in assets, with $180 billion in payments to plan participants (mostly in payments to retirees and beneficiaries), and $119 billion in contributions ($37 billion from employees and $82 billion from state and local governments).”

Do FIAs Need Income Riders?

Posted on December 15, 2010 by Garth Bernard -

Almost 90% of new variable annuities (VAs) are sold with a living benefit, according to LIMRA. Two-thirds of these benefits are lifetime income riders. That the VA market is a $120 billion-a-year market attests to the popularity of lifetime income riders, which appear to satisfy the public’s hunger for long-term financial safety in retirement.

The $30 billion-a-year fixed indexed annuity (FIA) market has also embraced living benefits. While there are no statistics regarding the percentage of these contracts that are issued with an income rider, anecdotal evidence suggests that the FIA market is following in the VA market’s footsteps.

Does an income rider make sense on an FIA? Some observers raise the following questions, which suggest that an income rider on an FIA does not make as much sense as an income rider on a VA:

The income rider on a VA provides guaranteed income that wouldn’t otherwise be available at the time of purchase. An FIA, as a fixed annuity, already provides guaranteed income at the time of purchase (via guaranteed minimum annuitization rates), so an income rider is redundant.
An FIA is a fixed annuity, so its long-term average rate return won’t be much higher than a CD’s—perhaps one to three percentage points higher, depending on the competitiveness of an insurer’s interest crediting mechanism on the FIA—and significantly less than a VA might earn.
The account values in an FIA with an income rider are not likely to be depleted by withdrawals unless the clients reach a very advanced age. Most people will be paying for a benefit they don’t receive.

1. Is an FIA income rider redundant?

Regarding the first question, it’s instructive to ask why consumers should add a guaranteed income rider to a fixed annuity (which also guarantees most of the principal and adds interest credits) when they could very well annuitize the contract.

They do it for the same reason they would purchase it on a VA. It gives them a lifetime income guarantee while still allowing access to underlying account values. And because the FIA (unlike the VA) already guarantees principal, the income rider costs less on an FIA than on a VA. One could argue that an income rider on an FIA is better suited to a conservative purchaser who wants an income guarantee (with liquidity) and principal protection.

Some investors in VAs with guaranteed income riders may believe that their principal is protected. They may very well mistake the guarantee on the “benefit base” for a guarantee on the principal or the account value. It isn’t. The benefit base is simply a mechanism for determining the dollar amount of the guaranteed withdrawals. Judging from the descriptions of the benefits base by the popular media, however, the nature of the benefit base may not be clearly understood—by journalists or the public.

2. Will an FIA offer competitive performance?

A seller of FIAs might argue, why buy an income rider on a VA when you could get it cheaper on an FIA? The answer given by the seller of a VA is that you can’t expect FIAs to return much more than a CD over the long term. Fees aside, VAs have much more upside potential than FIAs, and can thus generate higher withdrawal guarantees via the commonly offered “step up” or “ratchet features.

On an after-fee basis, VAs may not actually be able to earn significantly more than an FIA. Think about it. VA contract fees including the cost of an income rider range from 200 to 400 bps or more per year. Equity funds aren’t expected to earn the 10.5% of yesteryear. Reasonable expectations for equities might be 8.0 to 8.5% a year going forward. Long-term bonds may return as much as 6% a year.

And even these lower estimates may be more aspirations rather than expectations (See John West’s “Hope Is Not A Strategy” in Research Associates, October 26, 2010). If that’s true, a VA with a balanced allocation might net an average of only about 4.5% a year over the long term.

Not surprisingly, that’s not very different from a fixed annuity. At the end of the day, financial vehicles that provide exactly the same type of financial guarantee should deliver about the same expected result over the long term. If they didn’t, there’s a massive undiscovered arbitrage opportunity somewhere.

To be fair, the fact that FIAs provide principal protection, separately from the income guarantee, suggests that their return should be slightly less than that of the VA with a balanced asset allocation. The difference should be roughly equal the annual cost of long-term put options protecting principal.

3. Do FIAs need another layer of insurance?

What about the assertion that an income rider on an FIA is unnecessary because assets in an FIA are unlikely to be depleted by guaranteed withdrawals within the purchaser’s average life expectancy?.

It’s also likely that if you removed all of the insurance fees from a VA and took the same withdrawals from an uninsured portfolio with the same asset allocation, you probably wouldn’t run out of money either. The VA fees exacerbate the very risk that the income rider mitigates. Ultimately, the likelihood of depletion will be reflected in the price of the rider, regardless of whether the rider is on a VA or FIA.

Five takeaways

A guaranteed income rider makes as much sense on an FIA as it does on a VA and should not be dismissed out of hand.
The income riders on VAs and FIAs are equivalent financial constructs delivered on different platforms. If there’s a performance difference, the FIA’s principal guarantee should explain it.
In practice, no two companies price their products the same because no two have the same capacity or resources to manage the risks. Whatever the product, producers must exercise due diligence to decide if the benefits justify the fees.
In an open market, free of collusion, competition should drive out excess profits or exorbitant fees. By the same token, losses will eventually eliminate companies that under-price or fail to hedge appropriately.
Producers and distribution stakeholders need tools to assess the value of income riders on FIA and VA platforms, so that they can be properly compared.

Garth Bernard is president and CEO of the Sharper Financial Group. He can be reached at [email protected].

The Bucket

Posted on December 8, 2010 by Editorial Staff -

Sun Life executive writes about retirement income planning

Stephen L. Deschenes, Senior Vice President and General Manager, U.S. Annuities, Sun Life Financial Inc. has written a new article in which he discusses the significant challenges that would-be retirees need to be aware of as they begin to plan for a financially secure retirement.

In the paper, Deschenes demonstrates that in order to overcome the risks and obstacles to funding a successful retirement, it is crucial investors and their advisors must first understand what they face.

According to “What is Retirement Income Success,” a strong retirement income plan must adapt to changing lifestyle needs, withstand up and down markets and last for more than 30 years or more now that people are living longer lives. Deschenes spells out the risks as well as the components that investors should understand and the solutions advisors should be discussing with their clients.

Genworth’s ClearCourse adopted by BB&T

BB&T Corp., the Winston-Salem, NC-based financial services company, announced that it would add ClearCourse, the guaranteed lifetime income investment option from Genworth Financial, to its retirement plan investment options.

ClearCourse is a group variable annuity issued by Genworth Life and Annuity Insurance Company and is available to BB&T’s Institutional Services client companies that elect it as an investment choice for their employees.

ClearCourse is designed to protect 401(k) plan participants from retirement risks such as outliving assets, retiring during a down market, and the effects of inflation. ClearCourse provides a guaranteed source of lifetime income.

BB&T is a holding company that operates some 1,800 financial centers in the U.S., with about $157.2 billion in assets and market capitalization of $16.7 billion, as of Sept. 30, 2010.

New J.P. Morgan share class let plan sponsors report investment and administrative fees separately

J.P. Morgan Asset Management today announced that new Class R6 Shares will be available on 18 of its funds. The new shares, formerly called Ultra Shares for certain funds, allow plan sponsors to report their investment management expenses and their recordkeeping, administrative and marketing expenses separately.

The Class R6 Shares will have an investment advisory fee and other traditional fund expenses, but not 12b-1 or shareholder servicing fees. “Plan sponsors will have the ability to simplify participant communication through separate disclosure of the applicable fees,” said David Musto, head of J.P. Morgan’s Defined Contribution Investment Solutions business.

Defined contribution and defined benefit retirement plans, 529 plans, and certain direct investors and discretionary investment management accounts within J.P. Morgan Investment Management and its affiliates will be eligible for Class R6 Shares if they meet minimum and eligibility requirements.

The Class R6 Shares include 18 funds across the spectrum of J.P. Morgan investment capabilities. J.P. Morgan Asset Management has approximately $51 billion in defined contribution assets under management as of September 30, 2010.

MetLife forecasts financial results for 2010 and 2011

MetLife expects its operating earnings to increase 38% in 2011, to between $5.1 billion and $5.5 billion ($4.75 to $5.15 per share),” chairman, president & chief executive officer C. Robert Henrikson said this week.

“We plan to grow premiums, fees and other revenues 30% next year to between $45.8 billion and $47.0 billion,” he added. He predicted “an improved operating return on equity (ROE) of approximately 11% for 2011 and further ROE improvements in the years that follow.”

Premiums, fees and other revenues for 2010 are expected to be between $35.6 billion and $36.0 billion, up approximately 5% from $34.0 billion in 2009. Operating earnings for 2010 are expected to be $3.8 billion to $3.9 billion ($4.26 to $4.36 per share) compared with $2.4 billion ($2.87 per share) in 2009.

Book value per share at year-end 2010 is expected to be between $44.50 and $45.85, up 19% from $37.96 at year-end 2009. The company expects a 62% increase in operating earnings compared with 2009.

MetLife expects full year 2010 net income to be between $2.8 billion and $3.2 billion ($3.13 to $3.57 per share), reflecting net investment and net derivative gains and losses. For 2009, MetLife reported a net loss of $2.4 billion ($2.89 per share), including $3.3 billion, after tax, in derivative losses. MetLife uses derivatives to hedge a number of risks, including changes in interest rates and fluctuations in foreign currencies. Movement in interest rates, foreign currencies and MetLife’s own credit spread – which impacts the valuation of certain insurance liabilities – can generate derivative gains or losses.

Premiums, fees and other revenues for the fourth quarter of 2010 are expected to be between $9.5 billion and $9.9 billion, up 4% from $9.3 billion in the fourth quarter of 2009. Operating earnings for the fourth quarter of 2010 are expected to be between $1.1 billion and $1.2 billion ($1.04 to $1.14 per share), up 39% from $793 million ($0.96 per share) in the fourth quarter of 2009.

For the fourth quarter of 2010, MetLife expects net income to be between $170 million and $570 million ($0.17 to $0.56 per share), compared with $289 million ($0.35 per share) in the fourth quarter of 2009.

Per share calculations for full year and fourth quarter 2010 are based on 890.2 million and 1,014.2 million shares outstanding, respectively. Per share calculations for 2011 are based on 1,066.3 million average shares outstanding.

Hedge Funds Receive $16.0 Billion in October

The hedge fund industry posted an estimated inflow of $16.0 billion (1.0% of assets) in October 2010, the fourth straight inflow as well as the heaviest since November 2009, TrimTabs Investment Research and BarclayHedge reported.

“Flows are doubtless following performance,” said Sol Waksman, founder and President of BarclayHedge. “Hedge funds returned 1.95% in October and 7.10% in the four months following the May-June skid. Also, our preliminary data shows that hedge funds are outperforming the S&P 500 by about 21 basis points through November.

Distressed securities funds hauled in $3.8 billion (3.3% of assets) in October, the heaviest inflow of any hedge fund strategy, while emerging markets funds posted an inflow of $2.2 billion (1.0% of assets). Meanwhile, fixed income funds received only $506 million (0.3% of assets), the lightest inflow since April.

“Hedge fund investors are exhibiting a healthier appetite for risk,” noted Waksman. “They are finally venturing into areas like distressed securities after embracing conservative strategies for most of the year.”

Commodity trading advisors (CTAs) received $7.9 billion (2.8% of assets) in October, the eighth straight inflow, while funds of hedge funds took in $3.3 billion (0.6% of assets), the fourth straight inflow. Meanwhile, hedge fund managers are capitalizing on kind conditions heading into 2011.

“Borrowing money to buy assets is virtually costless, investors handed hedge fund managers $32.1 billion in the past four months, and margin debt is soaring,” explained Vincent Deluard, executive vice president of research at TrimTabs. “At the same time, the rolling 12-month beta of hedge fund returns sits below the long-term average, and that of equity long-short funds is dipping below zero. Managers should be especially eager to book fat profits through year-end, but they remain very reluctant to make directional bets on equities.”

Managers are also extremely bearish on the 10-year Treasury note, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers. Bearish sentiment soared to 49% in November from 28% in October, while bullish sentiment sank to 13%, the lowest level since the inception of the survey in May.

“Retail investors and pension funds have been pouring money into high-flying fixed income for nearly two years,” noted Deluard. “But now hedge fund as well as retail bond inflows have ground to a halt, and mom and pop are ditching munis and junk. The more the infatuation with bond funds fades the more we fear the fallout will prove particularly ugly.”

Broad adoption of lifetime income recordkeeping standards seen

In a recent SPARK Institute survey, more than 85% of the large retirement plan recordkeepers said they plan to use the Institute’s information sharing standards and data records for the lifetime income solutions in retirement plans, according to Larry Goldbrum, the organization’s general counsel.

More than half of the firms that plan to use the standards expect their record keeping systems to be ready to support them within the next 12 months.

The standards allow customer-facing record keepers to offer one or more products from unaffiliated insurance carriers; will facilitate portability of products when a plan sponsor changes plan record keepers (record keeper portability); and will support portability of guaranteed income when a participant has a distributable event in the form of a rollover to a Rollover IRA or as a qualified plan-distributed annuity (participant portability).

The information sharing standards document, “Data Layouts for Retirement Income Solutions (Version 1.0),” is posted on The SPARK Institute website < http://www.sparkinstitute.org/comments-and-materials.php>, Goldbrum said The SPARK Institute will also maintain a Q&A section on its website to address technical questions that may arise as the standards achieve increased utilization.

The SPARK Institute represents retirement plan service providers and investment managers, including banks, mutual fund companies, insurance companies, third party administrators, trade clearing firms and benefits consultants. Its members serve over 62 million participants in 401(k) and other defined contribution plans.

Guidance offered to plan fiduciaries on revenue-sharing

A new whitepaper from ERISA attorneys Fred Reish, Bruce Ashton and Summer Conley analyzes the obligation of fiduciaries with respect to the proper allocation of revenue sharing among participants and the obligation to disclose information about that allocation to the participants. It is entitled “Allocating Fees Among Participant-Directed Plan Participants.”

“While ERISA does not specify how plan expenses or the revenue sharing that helps pay those expenses should be allocated, it does require fiduciaries to act prudently in making the decision,” the attorneys said in a release.

“There are a number of workable and acceptable approaches, from pro rata based on account value, to per capita, to an emerging possibility that allocates revenue sharing to the accounts of the participants invested in the funds that make those payments.

“We are beginning to see the latter approach be used in larger plans using service providers with the resources to develop these sophisticated systems. The specific allocation method that fiduciaries choose may depend on which methods the service provider can accommodate.

“Whatever allocation method is used, fiduciaries must engage in a prudent process to consider an equitable method of allocation to avoid a breach of fiduciary duty. This likely means fiduciaries have an obligation to consider all available allocation methods when deciding how to properly allocate revenue sharing amounts.”

The whitepaper analyzes the issues related to the decision on how to allocate costs and the offsetting of revenue sharing, and discusses the obligation of fiduciaries to disclose the methodology to plan participants. The disclosure issue has come into sharper focus in light of the DOL’s proposed participant disclosure regulation.

Latest troubles in the Balkans involve pensions

Creating a “second pillar” retirement plan is no longer part of the pension reform plans for Bosnia and Herzegovina, the country’s government told the International Monetary Fund (IMF).

“Costs and complexity” were cited as major reasons for the change in the initial plan for the Republika Srpska, which with the Federation of Bosnia and Herzegovina makes up the country of Bosnia and Herzegovina.

Expenditure on public pensions has been one of the fastest-growing components of public expenditure in the two entities. In the Federation, it rose to 10% of GDP in 2009 from 7.7% in 2005; and in the Republika Srpska, to 9% of GDP from 7.8% over the same period.

“The transition to the second pillar has been ruled out as too costly and difficult in the near term,“ the government said. A third pillar had been created over the last few years and the country will see a major overhaul of the first pillar.

The first pillar overhaul will include a “further increase in the effective retirement age of men and women,” a system of awarding points for every year of employment, and an indexation “in line with the Swiss model,” where increases are pegged to an average of CPI and the wage indexes.

The pension reform strategy for the other part of the divided country, which was approved in summer, “still needs to incorporate an overhaul of privileged pensions” (such as allowing certain types of workers to retire early without loss of privileges), the IMF said.

UK pensioners brace for new retirement drawdown rules

Posted on December 8, 2010 by Editor Test -

The UK pensions industry waits in suspense this week for the publication of a new set of annuitization and drawdown rules. Any changes could immediately affect the 12 million people who hold a “money purchase pension,” the British version of a 401(k) plan.

Retirees will probably be allowed to spend their savings at the rate they wish as long as they can demonstrate that they have enough guaranteed income from state pensions, private pensions, and annuities to keep themselves from needing public support in retirement.

That is, they would be eligible for this method, called “flexible drawdown,” if they could assure the government that they could provide themselves a lifetime income of at least £10,000-£15,000 a year, the equivalent of $15,800 to $23,600 at current rates.

Those with less savings would be required to ration their savings to some extent in retirement, in a process known as “capped drawdown.” At age 75, they would have to purchase a life annuity with their remaining tax-deferred savings, as they would have in the past.

The British Treasury has proposed a new flat rate estate tax of 55%, instead of the current 82% for those dying after their 75^th birthday and 35% for those younger than 75. These changes were scheduled to go into effect in April 2011 under the Treasury’s original proposals, but some insurance companies have been lobbying for a delay, arguing that they would be unable to update their systems in time.

Treasury to sell last of its stake in Citigroup

Posted on December 8, 2010 by Editor Test -

Two years after bailing out Citigroup, the U.S. Treasury is selling its remaining shares in the company. The move, announced Monday, effectively ends the federal rescue of the giant bank and frees the bank from modest federal pay restrictions.

The Treasury said that it would start selling 2.4 billion shares of Citigroup common stock. A person briefed on the transaction said it would be priced at $4.35 a share, a 2% percent discount. At that price, taxpayers could profit by $12 billion on the Treasury’s investment in Citigroup.

Proceeds from the Citigroup sale would be the single biggest profit yet from the government bailout programs. Two years ago, many doubted the wisdom of using taxpayers’ money to rescue Citigroup, which became the biggest user of several of emergency support programs that the Federal Reserve put in place during the crisis.

But federal officials, worried that the failure of Citigroup might bring down other firms, injected $45 billion into the company in the autumn of 2008, and creating an enormous insurance policy covering potential losses on more than $301 billion of real estate assets.

In return, the government assumed ownership of nearly a third of Citigroup. It also secured a small piece of potential profits through securities known as warrants.

After several other big banks repaid their bailout funds, Citigroup officials pressed for permission to do the same. Last December, Citigroup was allowed to return $20 billion of its bailout funds, and the government announced plans to unwind its remaining $25 billion common stock investment.

Last April, the government began to sell its nearly 7.7 billion shares. Through October, the government had sold about 5.3 billion shares to private investors, at an average price of just over $4 apiece. With dividends and other payments, that meant the government had fully recouped its initial $45 billion investment.

This Monday, the Treasury informed Citigroup that it planned to sell the remaining 2.4 billion shares all at once. Morgan Stanley, which had handled the previous stock sales, is leading the offering.

St. Louis Fed president rebuts criticisms of QE2

Posted on December 8, 2010 by Editor Test -

At a recent meeting of the National Economists Club in Washington, St. Louis Fed president James Bullard said the benefits of the Federal Open Market Committee’s decision to pursue additional quantitative easing outweighed its risks.

On November 3, the FOMC announced it would purchase about $75 billion worth of Treasury securities per month through the first half of 2011. Bullard addressed some of the risks and criticisms raised about this policy, known as QE2:

On criticisms that the program may not be effective, Bullard said that the financial market effects of the program have been about what one would expect from an easing of monetary policy.
On concerns that QE2 depreciates the dollar, Bullard noted that dollar depreciation is a normal by-product of an easier monetary policy, provided all else is held constant in the rest of the world, and that the U.S. has long maintained an independent monetary policy, a flexible exchange rate, and open capital markets. He stated that other countries need to have systems in place that can adjust to modest changes in U.S. monetary policy.
Regarding the rise in nominal interest rates, Bullard said that QE2 puts downward pressure on nominal rates through securities purchases but that the effects of successful policy would put upward pressure on nominal rates. Therefore, Bullard argued, looking at the level of nominal rates alone is insufficient to judge the success of QE2.
On inflationary concerns, Bullard said that while too much inflation is a legitimate concern, the 2010 disinflationary trend is worrisome right now. He emphasized that keeping inflation near the implicit inflation target is very important for maintaining the FOMC’s credibility.
Regarding arguments for using a commodity money standard, Bullard stated that although this approach was widely discussed in previous decades when inflation was high and variable, the volatility of commodity prices in recent years has made this approach problematic. He argued that inflation targeting can be seen as the intellectual descendant of commodity money standards. “Inflation targeting forces accountability for inflation outcomes onto the central bank,” he said.
On fears that the Fed is monetizing the debt, Bullard said the FOMC has often stated its intention to return the Fed balance sheet to pre-crisis levels over time. Once the FOMC returns the Fed balance sheet to its normal size, Bullard noted, the Treasury will be left with just as much debt held by the public as before the Fed took any of these actions. On claims that QE mitigates fiscal problems, Bullard argued that QE has no impact on the longer-run U.S. fiscal outlook and that this outlook remains very poor no matter what the Fed does.

Investment fees represent bulk of plan fees

Posted on December 8, 2010 by Editor Test -

The average total annual expense ratio for a small (100 participants) retirement plan is 1.33%, while the average total plan cost for a large (1,000 participants) plan is 1.11%, according to the 11th edition of the 401k Averages Book. The average investment expense ratio is 1.26% for a small plan and 1.09% for a large plan.

Investment expenses account for 95% of a small plan’s total expenses and 98% of a large plan’s. “If an employer really wants to cut their 401(k) costs they need to examine their investment related expenses,” says David Huntley, the book’s co-author. Costs on a 100-participant plan with a $50,000 average account balance range from .57% to 1.76%.

The 11th Edition provides sixteen quartile charts to help plan sponsors and their advisors see whether their costs fit in the first, second, third or fourth quartile. The range between the 25th percentile and 75th percentile for the small plan universe is 1.18% to 1.49%. “If you’re monitoring plan fees, it will help to understand the difference of being in the first or fourth quartile,” says Huntley.

Published since 1995, the 401k Averages Book (www.401ksource.com) is the only resource book available for non-biased, comparative 401k average cost information. The 11th edition is available for $95.

Details of the tax compromise revealed

Posted on December 8, 2010 by Editor Test -

“This compromise is an essential step on the road to recovery. It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs, and add momentum that our economy badly needs,” said President Obama this week, describing his tax compromise with Republican legislators.

The package would cost about $900 billion over the next two years, to be financed entirely by adding to the national debt, at a time when both parties are professing a desire to begin addressing long-term fiscal imbalances, according to a report in The New York Times.

Payroll taxes. It would reduce the 6.2 percent Social Security payroll tax on all wage earners by two percentage points for one year, putting more money in the paychecks of workers. For a family earning $50,000 a year, it would amount to a savings of $1,000. A worker slated to pay the maximum tax, $6,621.60 on income of $106,800 or more in 2011, would save $2,136.

Tax on capital gains and dividends. The top rate of 15% on capital gains and dividends would remain in place for two years, and the alternative minimum tax would be adjusted so that as many as 21 million households would not be hit by it.

Unemployment benefits. The agreement provides for a 13-month extension of jobless aid for the long-term unemployed. Benefits have already started to run out for some people, and as many as seven million people would potentially lose assistance within the next year, officials said.

Estate tax. The White House did not give details about treatment of the estate tax, but many publications have published the $5 million exemption and 35% rate figures, citing unnamed White House sources, National Underwriter reported.

Prices Rise, Benefits Shrink for America’s Most Popular VA

Posted on December 8, 2010 by Editor Test -

Prudential Annuities will scale back the benefits of three of the guaranteed lifetime withdrawal benefits on its industry-leading variable annuity contracts, according to SEC filings yesterday by its insurance units, PRUCO Life and PRUCO Life of New Jersey. The change is effective January 24, 2011.

Insurers are not permitted to comment on new filings prior to SEC approval.

Prudential is the top seller of variable annuities in the U.S., with $15.55 billion in sales through the first three quarters of 2010. It is the only VA issuer that uses the CPPI method of risk management, which automatically reallocates account assets to a safe investment when equities markets fall. (See this week’s cover story.)

The riders in question are the Highest Daily Lifetime Income Benefit (formerly the Highest Daily Lifetime 6), its joint-and-survivor version, the Spousal Highest Daily Lifetime Income Benefit, and the version called Highest Daily Lifetime Income Benefit with Lifetime Income Accelerator, which doubles the lifetime withdrawal payout if the owner requires certain types of long-term care (not available in New York).

The new filing put the cost of the Lifetime Income riders, single and joint, at 95 basis points, up from 85 bps, with an allowed maximum of 1.50%, to be levied on the greater of the account value or the benefit base. On the Advisor version of the contract, which has a combined mortality and expense risk and administrative fee of only 55 bps (leaving room for an advisors 1% or 1.5% fee), the current cost of the contract and rider would rise to 1.50% from 1.40%. The expense ratios of the investment options under the existing contract ranged from 0.62% to 2.59%. The cost of the accelerated version will rise to 1.30% from 1.20%.

Assuming an average investment charge of 1.50%, the sum of all the charges, including a 1% advisor’s fee, could easily reach 4% a year or more on a product that yields a guaranteed annual income of, in most cases, 5% of the benefit base.

After January 24, 2011, the payout rates at various age bands will be 3% (for those ages 45 to 54), 4% (for those 55 to 59½), 5% (for those 59½ to 84), and 6% (for those over 84). In each band, the spousal version of the product pays out a half-percent less per year. For most people who choose to begin taking guaranteed payments in their 60s and 70s, the payout rate was and will remain 5%.

Prudential will also stop discontinue new sales of two Guaranteed Minimum Accumulation Benefit (GMAB) riders, GRO Plus II and Highest Daily GRO, on January 24.

The annual compounding rollup on all versions of the GLWB rider will be just 5%–down from the previous 6%, which was reduced after the financial crisis. The product’s original pre-crisis, “arm’s race” era rollup was 7%. The rider promises that the benefit base of the contract will rise every business day at an annual rate of 5%, or to the daily account value, if higher.

The contract promises that the benefit base will at least double in 12 years, as long as no non-permitted withdrawals are taken. In the past, the benefit base could double in 10 years and quadruple in 20 years. The 20-year quadrupling guarantee has been eliminated.

As an example, an investor who put $100,000 into the Prudential HD Lifetime Income VA at age 55 and didn’t touch the money until he or she reached age 67, could then draw $10,000 a year for life (5% of two times $100,000).

Under the previous iteration of the contract, he or she could have taken out at least $10,000 a year starting at age 65 and at least $20,000 a year starting at age 75, provided he or she hadn’t taken any unapproved withdrawals before then.

The Tax Deal Feels Wrong

Posted on December 8, 2010 by Editor Test -

The long-predicted generational war has begun. The retirees lost the first battle over the weekend when it became apparent that President Obama would agree to extend the Bush tax cuts to 2012 and probably beyond.

This opening skirmish pitted two familiar opponents. One side calls for diverting resources from the private sector to the public sector (i.e., through higher taxes). The goal: to lower the deficit and, beyond that, to bolster Social Security and Medicare and ensure that most Boomers won’t live in fear of poverty or illness during retirement.

The other position calls for diverting money from the public sector to the private sector by lowering taxes. The theory is that the private sector (and its wealthiest members, especially) can use the money more creatively and efficiently than the federal government can. The country, through its Republican legislators, seems to have endorsed this approach.

That’s politically expedient but shortsighted. Tax cuts will simply drive up the deficit and the debt to the point where we have no choice but to take a blunt hatchet to Social Security and Medicare later on, under duress. Will that help us all in the long run? I don’t think so.

Big cuts will only require citizens to save more while working in order to offset the new shortfalls in social insurance. Pundits wonder why the Chinese don’t consume more. It’s because their government has largely rescinded its social safety net since 1997. Do we really want to be more like China and less like France?

We could be headed back to the pre-1937 world of self-insurance. By definition, that means a loss of utility. Families will have to choose between spending money on a child’s tuition and a grandparent’s rent, food and medical care. There may be no such thing as a free lunch, but there’s also no such thing as free starvation. Somehow, someone will pay.

Many sophisticated people will insist that tax cuts can stimulate the economy and thereby lower the deficit and even rescue Social Security indirectly. But David Stockman himself admitted in 1981 (to the journalist William Greider) that supply-side economics was a convenient lie. It still is.

So the country must choose. It can face the demographically driven economics of an aging society by sharing wealth in a civilized way, with respect for all and special concern for the growing numbers of elderly.

Or it can split into mutually demonizing camps and engage in a zero-sum battle where the strong shift sacrifices onto the old and politically weak. Over the weekend, we took the first step down the second path. Something feels very wrong about this tax deal.

Why Prudential Sells the Most VAs

Posted on December 8, 2010 by Kerry Pechter -

When Prudential Financial introduced its Highest Daily variable annuity design in 2007, not a few annuity industry insiders scoffed that Prudential was just repackaging a familiar structured product idea called constant proportion portfolio insurance, or CPPI.

A CPPI product typically combines upside exposure to a risky asset with a principal guarantee. By definition, it’s conservative. During a market downturn, the issuer shifts money from the risky asset to the safe asset to protect the guarantee. That deprives the owner or his advisor of control.

Financial advisors would never go for that, skeptics said. The conventional wisdom was that advisors were buying variable annuities only because they offered control over investment choices and lifetime income guarantees. Why would they want a product that took away their control?

“In all honesty, prior to the financial crisis it was a tough sell, and it was easy for others to sell against it,” said Harvey Blake, vice president, Market Risk Management, at Prudential.

Then came the financial crisis. While other popular VA contracts lost up to 35% of their account values, exposing their issuers to huge potential losses, HD7 accounts fell by only about half as much. The perceived weakness of the Prudential product suddenly became a source of strength. (Yesterday, however, Prudential filed to reduce the product’s benefits. See accompanying article.)

Having survived the crisis in relatively good shape, Prudential didn’t have to cut back as much on contract benefits or sales capacity after the crash. Along with MetLife and Jackson National, it benefited from the flight to quality and security that occurred in the market rebound of the past 18 months.

In the first three quarters of 2010, Prudential sold $15.55 billion worth of variable annuities. That success has sparked new interest in CPPI. Indeed, at the Society of Actuaries’ annual conference on equity-linked insurance guarantees in New York at the beginning of November, CPPI was the star of the show.

“At the SoA conference, [CPPI] was a topic that got a lot of attention,” Deutsche Bank’s Cornelia Spiegel, who spoke about CPPI at the conference, told RIJ. “Most of the conversation in the past has been around hedging techniques. This was the first year where the product design was the highlighted topic. Issuers are trying to find ways to offer these products without incurring too much risk. It’s a tempting environment for CPPI.”

Indeed, the SoA stacked the conference in CPPI’s favor. “Our meeting planners thought it would be useful for the program to offer content on this issue and designed the program to reflect so,” noted the SoA’s Kim McKeown. “[We] intentionally offered more content on CPPI-type products because they are becoming popular with insurance companies.”

How CPPI works

Different types of CPPI-driven products have reported been around since the 1980s. Principal-protected, bank-issued savings products in Europe use a form of it as a risk management technique. In perhaps CPPI’s simplest form, the issuer will put 80% of the assets in a zero-coupon bond and the rest in risky assets. At worst, a client’s principal is guaranteed. In the U.S., fixed indexed annuities, an insurance product, does much the same thing.

The version of CPPI that was discussed at the recent Society of Actuaries meeting works a bit differently. Instead of putting 80% of the assets in the risk-free investment, the issuer might put as much as 80% of the money in the risky asset. If the risky asset loses value, the issuer moves money to the safe asset. The amount in the risky asset, added to the value of the safe asset at maturity, will always equal the principal.

Here’s a simplified example. Suppose someone bought a principal-guaranteed investment for $100. Suppose it would take $80 worth of zero-coupon bonds to return $100 at maturity. The client could then afford to lose $20 of his or her investment and still break even. By definition, the “cushion” is 20%.

To decide how much of the assets to risk, the issuer selects a factor, called the “multiplier,” which is based on the riskiness of the desired risky asset and the prevailing interest rates. Suppose that the multiplier is 4. Four times 20% equals 80%. So $80 goes into the risky asset and $20 goes into the safe asset.

If the value of the risky asset drops 10% (to $72), the account value is now $92. The cushion narrows to 13% (92 – 80/92). The new risky allocation will be 52% (4 x 13%). Of the remaining $92 account value, only 52% ($48) will stays in the risky asset. The rest ($44) will be in the safe asset. To rebalance, the issuer moves $24 from the risky asset to the safe asset.

This technique has a couple of vulnerabilities, however. In a market panic, the value of the risky asset could fall through its floor ($80) before the issuer could get sell it all. To honor the guarantee, the issuer would take a loss.

“One of the main risks for the manager of a CPPI strategy is “gap risk” when the price of the risky asset drops through the bond floor without enough time for the portfolio manager to reallocate enough funds into the riskless asset to maintain the guaranteed value of the strategy,” said Deutsche Bank’s Spiegel.

For the investor, there’s the danger of “knockout” or “lock-in.” If all the money goes into the safe asset during a downturn, it can’t easily get out. The investor can’t take advantage of an ensuing market upswing, and ends up with the equivalent of a very expensive bond or money market investment.

How Prudential uses CPPI

Prudential’s VA/GLWB embeds a version of CPPI inside a variable annuity. The margin of safety provided by the CPPI, along with hedging strategies, enables the insurer to offer the product’s seductive features at competitive prices. Those include as many as 16 different investment options, a potential daily mark-up in the benefit base, and the ability for those who avoid withdrawals for 10 years to double their minimum retirement payout, regardless of market performance.

“It’s not pure CPPI,” said Santosh Nabar of Barclays Capital, which works with insurance companies on managing variable annuity risk. “It’s approximately CPPI.”

When the contract’s mutual funds lose value, an automated process reallocates money to the safe asset. The mechanism puts no more than 90% of the account value in the safe asset, leaving 10% exposed to risky assets. The 10% exposure is a critical feature that protects clients from knock-out. But it isn’t necessarily enough to let them fully participate in a market rebound or for their account value or reach a new high water mark.

Prudential concedes that there’s nothing revolutionary about their technique, which it inherited, along with a platform for administering it, when it acquired American Skandia. “CPPI is a broad concept that’s been used for decades,” said Harvey Blake. “We use an algorithmic solution on a policy-by-policy basis. We’ve been doing it since 2001. It was an American Skandia product at the time. There’s no one single CPPI out there. If there are others similar to what we do, we’re not aware of it.”

“Part of the execution of our product involves lower control over asset allocation,” Blake said. “You’re giving up some control in return for downside protection.” That’s a drawback in a bull market, but an advantage in volatile markets. “Since the crisis, that aspect of the product has resonated in the retail space. People put a high value or premium on loss aversion, and that has played very well with our design.”

Offering CPPI inside a variable annuity isn’t necessarily easy. Prudential has to treat every one of its 80,000 or so in-force HD7 or HD6 contracts as a separate, micro-CPPI product, automatically fine-tuning the allocation to each client’s choice of risky assets and the safe asset every day.

To copy Prudential or not

Insurers who have pulled back from the VA market since the financial crisis are now wondering how they might safely reenter the game. CPPI would be one route to take.

Prudential thinks it would be difficult for other VA issuers, especially those whose wholesalers sold against CPPI in the past, to follow its example.

“Our algorithm is in our prospectus, people have easily replicated it just for fun to see how it works,” said Tom Diemer, Prudential’s head of annuities financial management. “It’s not the ‘Coke secret formula.’ But from what I’ve heard, there’s still a philosophical objection to it around the issue of control. Folks who have sold against this in the past might be able to pivot, but it would be a big change.”

“Companies have sold against it for years and for the distribution it would be difficult to turn around and try to promote it,” added Blake. “And it would take time to build even if you wrote the check today. We’ve estimated that it would take 18 months to two years.”

Deficit Commission’s ‘Moment of Truth’

Posted on December 1, 2010 by Editor Test -

Here’s a headline summary of the final report of the NCFRR:

•    Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history.
•    Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP).2
•    Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code.
•    Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%.
•    Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.
•    Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.

Here’s a table that summarizes proposed changes in the tax code to reduce the deficit and debt:

The Bucket

Posted on December 1, 2010 by Editorial Staff -

IRI Releases Third Quarter Product Trend Update for U.S. Variable Annuity Market

The Insured Retirement Institute (IRI) today released a report on product trend updates within the U.S. variable annuity market for the third quarter. Compiled by Morningstar, the report found a pick-up in new benefits for the third quarter, tripling the new number of issued lifetime benefits when compared to second quarter data. Nineteen new benefits were issued this quarter versus six in the previous quarter.

Overall, carriers filed more than 60 changes in the third quarter, compared to 76 in the previous quarter. In addition, year-to-year quarterly product changes decreased by 31%, dropping from a pace of 87 filed changes in the third quarter in 2009. Of note, fee changes dropped by half, from 20 in the second quarter to 10 in the third quarter, indicating that the majority of carriers have made their pricing adjustments in response to the new market realities.

The report also found that the popularity of living benefits remained strong, especially the Lifetime GMWB. Nine out of the 11 new living benefits released this quarter were lifetime withdrawal benefits. Additionally, the number of new contracts for the quarter was 20, compared to 15 filed in the second quarter.

Securian Retirement and 401(k) Advisors in Pact

Securian Retirement has teamed with 401(k) Advisors to offer a 3(38) investment management fiduciary service that allows employers to transfer the responsibility for selecting and monitoring funds to 401(k) Advisors, a nationally recognized investment advisory firm.

401(k) Advisors accepts responsibility and discretion for the investment due diligence process under section 3(38) of ERISA. The new service also provides timely support to retirement plan advisors as the industry prepares for new rules regarding fiduciary roles. The rules are scheduled to go into effect July 2011 and will, in part, require service providers to disclose whether they act as a fiduciary to a plan and in what capacity.

“This 3(38) approach gives broker-dealers a way to support their retirement plan advisors by offering a means of addressing key aspects of new federal regulations,” said Bruce Shay, executive vice president, Securian Financial Group, Inc.

Shay said many employers exhibit a “do it for me” behavior when it comes to retirement plan investment selection. The new 3(38) service will help to bring clarity to this important fiduciary task for plan sponsors and for retirement plan advisors.

“3(38) investment advisory services will appeal to many plan sponsors who do not have the time, resources, or expertise to select and monitor funds,” said Jeffrey Elvander, CFA, CIO, 401(k) Advisors. “They will embrace the simplicity and efficiency of having an outside investment expert accept this pivotal role in the investment due diligence process.”

Hedge Fund Managers: Yes on QE2, No on U.S. Equities

Most hedge fund managers remain downbeat on U.S. equities, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers for November. About 39% of the 83 hedge fund managers the firms surveyed in the past two weeks are bearish on the S&P 500, and bullish sentiment sank to 31% from 36% in October.

“Moods are still somewhat sour, but hedge funds returned 7.0% in the four months ended October following a rough patch in May and June,” said Sol Waksman, CEO of BarclayHedge. “About 80% of the funds that reported returns for the January-October period are profitable in 2010.”

On QE2, or the second round of “quantitative easing” by the Federal Reserve, almost half of hedge fund managers thought it would help asset prices, but four in 10 said it will ultimately hurt the economy. Only 9% of managers plan to decrease leverage in the coming weeks, the smallest share since May, while 16% are inclined to increase it.

“It is telling that some managers aim to lever up even though they are predominantly downbeat on stocks,” explained Vincent Deluard, executive vice president at TrimTabs.

“The Fed is begging firms, consumers, and market participants to take risks, and hedge fund managers are capitalizing on kind conditions.

“They view QE as an asset-price gift horse—one they are not looking in the mouth—and hedge fund investors have handed them $33 billion in recent months. Also, it certainly doesn’t hurt that managers can borrow to buy assets for virtually nothing courtesy of historically low short rates,” he added.

Bearish sentiment on the U.S. Dollar Index surged to 44% in November, the highest level in six months, from 30% in October. Meanwhile, bond sentiment has been hammered as long-term interest rates have spiked. Bearish sentiment on the 10-year Treasury note vaulted to 49%, the highest level since May, while bullish sentiment dove to 13%, the lowest level in six months.

“Market participants have no interest in fighting the Fed in the belly of the curve, where its Treasury purchases are concentrated,” noted Deluard. “But hedge fund managers are very bearish on the 10-year, and futures traders have been dumping the 30-year bond contract.

“Also, mom and pop ditched bond mutual funds in the past fortnight after pouring money into them for 100 straight weeks, and TIPS funds have raked in assets in 2010. The more the market feels the Fed’s reflation strategy will succeed, the more powerless policymakers become to prevent long yields from grinding higher.”

Keating to Lead American Bankers Association

Frank Keating, a former governor of Oklahoma who served as president of the American Council of Life Insurers from 2003 until the end of October 2010, will be the next president of the American Bankers Association, effective January 1, 2011.

Keating, who will succeed Ed Yingling, worked as an assistant secretary and general counsel at the U.S. Treasury Department and later as acting deputy secretary at the U.S. Department of Housing and Urban Development. From 1995 to 2003, he was governor of Oklahoma.

Keating has served on the board of a savings bank, and his experience at HUD should be helpful when questions about housing finance and the federal mortgage guarantee agencies come up, according to ABA Chairman Stephen Wilson.

At the ACLI, Keating helped to keep the new Consumer Financial Protection Bureau from regulating the business of insurance. The same bureau will have jurisdiction over the big banks that belong to the ABA and over nonbank consumer finance operations.

LifeYield Integrates with Fidelity’s National Financial

LifeYield, LLC, a provider of tax-focused retirement income planning software, has integrated with Fidelity’s National Financial custodian platform. Advisors who use National Financial’s custodian services now can use LifeYield’s retirement income software with no additional data integration.

“NFS is one of the leading custodians for the financial advisory marketplace, including for many advisors at Cambridge Investment Research, LifeYield’s newest client,” said Mark Hoffman, LifeYield’s CEO and co-founder. “Integrating with NFS makes it easy for advisors to use LifeYield, so it makes perfect sense.” LifeYield is a retirement income generation software solution that helps advisors minimize the tax consequences of decumulation.

LifeYield is also integrated with Pershing’s custodian platform and with Albridge’s account aggregation services. Any advisor using one or all of these services now can have client tax lot data imported directly into LifeYield’s retirement income software.

MassMutual Offers Document Management Solution for TPAs

MassMutual’s Retirement Services Division has introduced a new document management system for third-party administrators (TPAs) of employer-sponsored retirement plans. The system is available to all TPAs and offers unlimited use for one rate, MassMutual said in a release.

The new system includes:

Plan amendment processing.
Ability to create customized templates and designs at the TPA level so that many provisions can be pre-populated.
Tracking, monitoring and review of plan documents and amendment histories.
Batch processing of regulatory amendments and required participant notices.
Conversion from DC prototype to volume-submitter documents and vice versa.
Software upgrades coordinated by MassMutual independently from a TPA’s system.
Technical support by MassMutual’s ERISA Advisory Services Team.

The service is available to all TPAs regardless of whether they have retirement plans on MassMutual’s platform. For more information or a demonstration of the system, call Steve Witkun at (413) 744-0744.

NPRF to contribute up to €10bn toward Ireland’s EU bailout, government confirms

Ireland’s National Pensions Reserve Fund (NPRF) contribute as much as €10bn toward the €85bn package under its bailout agreement with the European Union and its state pension will be frozen at 2010 rates for three years, with no COLA, IPE.com reported.

NPRF assets will be used to buy Irish bonds, according to the three-year National Recovery Plan anncounced by Taoiseach [prime minister] Brian Cowen and finance minister Brian Lenihan. The total domestic contribution to the bailout was said to be €17.5bn.

He said any decisions about how soon and how fast the deinvestment would occur would be a decision for the National Treasury Management Agency. The spokesman added that further details would be released later in the week, when a Memorandum of Understanding would be published.

Jerry Moriarty, head of policy at the Irish Association of Pension Funds, said the NPRF’s funds would have never been sufficient to cover the estimated €116bn in liabilities of the public sector and the state pension.

“The €25bn in the NPRF was the only pre-funding to cover that – that was never going to be enough anyway,” he said. “Now that’s reduced to €7bn means they are in a much worse place than they have been.” Moriarty said legislation existed to avoid any early draw down of assets prior to the 2025 payout date, simply because the country hit a rocky patch.

“Unfortunately, we’ve hit more than a rocky patch,” he added.

According to its third-quarter results, the NPRF holds €24.5bn in assets, with €6.6bn invested in bank shares of Allied Irish Bank and the Bank of Ireland. The remaining €17.9bn are held in its discretionary portfolio, which returned 6% for the nine months to September, compared with 1.9% returns over the same period for its holdings in the Irish lenders.

Putnam Lowers Fees on Absolute Return Funds

Posted on December 1, 2010 by Editor Test -

Putnam Investments said it would lower total expense ratios of its four Absolute Return Funds, which have $2.6 billion in assets, by up to 54%. The reduction will reduce the expenses for Putnam’s 10 RetirementReady target date funds of funds, which include Absolute Return Funds, by up to 24%, the company said in a release.

The new total expense caps, which limit recurring costs such as management and service fees, were implemented retroactive to November 1, 2010, to align with the beginning of the new fiscal year of the Absolute Return Funds. The percentage reductions in the expenses of the Funds’ Class Y shares are as follows:

Absolute Return Fund	New total expense cap*	Expense change (in bps)	Expense change (%)**
100 Fund	0.40%	-47 bps	-54%
300 Fund	0.60%	-35 bps	-37%
500 Fund	0.90%	-29 bps	-24%
700 Fund	1.10%	-24 bps	-18

* Total expense caps are before any performance fees and exclude certain expenses, such as distribution and service (12b-1) fees (if applicable for a share class). Please see the Absolute Return Funds’ prospectuses for additional details.
** Expense reductions are shown as compared to the expense ratios shown in the Absolute Return Funds’ prospectuses dated 2/28/2010.
The total expense caps represent a contractual obligation of Putnam to limit the Funds’ total expenses through at least February 28, 2012.

The Putnam RetirementReady Funds also saw significant reductions in their expense ratios as a result of the new total expense caps for the Absolute Return Funds. The percentage reductions in the expenses of the RetirementReady Funds’ Class Y shares are projected to be as follows:

Retirement Ready Fund	New projected expense ratio	Expense reduction (in bps)*	Expense reduction (%)*
Maturity 2010	0.74%	-24 bps	-24%
Maturity 2015	0.79%	-20 bps	-20%
Maturity 2020	0.83%	-16 bps	-16%
Maturity 2025	0.88%	-12 bps	-12%
Maturity 2030	0.92%	-9 bps	-8%
Maturity 2035	0.96%	-6 bps	-6%
Maturity 2040	0.99%	-6 bps	-6%
Maturity 2045	1.02%	-5 bps	-4%
Maturity 2050	1.04%	-4 bps	-4%
Maturity 2055**	1.04%	–**	–**

* Expense reductions are shown as compared to the expense ratios shown in the RetirementReady Funds’ prospectuses dated 11/30/2009.
** Putnam RetirementReady® 2055 Fund will be launched on 11/30/2010.

This initiative follows the re-pricing of nearly all of Putnam’s other retail mutual funds announced in July 2009. At that time, management fees were significantly reduced or eliminated on fixed income, asset allocation and RetirementReady funds.

In addition, Putnam obtained shareholder approval of “fund family breakpoints” (under which asset-level discounts for management fee determinations are based on the growth of all Putnam mutual fund assets, rather than the growth of an individual Putnam mutual fund’s assets) for all funds and performance fees for U.S. growth funds, international funds and the Putnam Global Equity Fund.

Putnam Investments and Absolute Return Strategies

Putnam Investments launched the mutual fund industry’s first suite of Absolute Return Funds in January 2009 with four funds:

Putnam Absolute Return 100 Fund seeks to outperform inflation, as measured by T-bills, by 1%, net of all fund expenses, over periods of three years or more, and can be an alternative to short-term securities.

Putnam Absolute Return 300 Fund seeks to outperform inflation, as measured by T-bills, by 3%, net of all fund expenses, over periods of three years or more, and can be an alternative to bond funds.

Putnam Absolute Return 500 Fund seeks to outperform inflation, as measured by T-bills, by 5%, net of all fund expenses, over periods of three years or more, and can be an alternative to balanced funds.

Putnam Absolute Return 700 Fund seeks to outperform inflation, as measured by T-bills, by 7%, net of all fund expenses, over periods of three years or more, and can be an alternative to stock funds.

Absolute return strategies seek to earn a positive total return over a full market cycle with less volatility than traditional funds and largely independent of market conditions. Absolute return strategies also seek to outperform broad market indexes during periods of flat or negative market performance.

EBSA Proposes Broader Fiduciary Definition for Plan Advisors

Posted on December 1, 2010 by Editor Test -

The Labor Department’s Employee Benefits Security Administration (EBSA) posted a proposed rule in the Federal Register yesterday that would broaden the definition of a “fiduciary” of an ERISA retirement plan and protect “participants from conflicts of interest and self-dealing.”

Public comments are invited until January 20, 2011.

The proposed rule defines certain advisers as plan fiduciaries even if they do not provide advice “on a regular basis” to an employee benefit plan or to plan participants, according to the posting. Fiduciaries, by definition, must place their clients’ interest ahead of their own and may be held personally liable for lapses in duty.

“Upon adoption, the proposed rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice related services to such plans and accounts,” the posting said.

“The proposal amends a thirty-five year old rule that may inappropriately limit the types of investment advice relationships that give rise to fiduciary duties on the part of the investment advisor. The proposed rule takes account of significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice.”

Sun Life executive writes about retirement income planning

Genworth’s ClearCourse adopted by BB&T

New J.P. Morgan share class let plan sponsors report investment and administrative fees separately

MetLife forecasts financial results for 2010 and 2011

Hedge Funds Receive $16.0 Billion in October

Broad adoption of lifetime income recordkeeping standards seen

Guidance offered to plan fiduciaries on revenue-sharing

Latest troubles in the Balkans involve pensions

IRI Releases Third Quarter Product Trend Update for U.S. Variable Annuity Market

Securian Retirement and 401(k) Advisors in Pact

Hedge Fund Managers: Yes on QE2, No on U.S. Equities

Keating to Lead American Bankers Association

LifeYield Integrates with Fidelity’s National Financial

MassMutual Offers Document Management Solution for TPAs

NPRF to contribute up to €10bn toward Ireland’s EU bailout, government confirms

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