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Reaching HNW clients in the pandemic era: Cerulli

Posted on March 10, 2021 by -

In light of COVID-19, providers of services to high-net-worth (HNW) families are relying on asset management partners more heavily for strategic solutions and capital markets guidance.

Since the pandemic began, however, HNW advisors and home offices have been working with an even tighter circle of asset managers, according to the latest Cerulli Edge—US Asset and Wealth Management Edition. 

Firms who want to grow their business therefore “need to understand that every engagement with a HNW practice is critical and requires distribution efforts to be more intentional and strategic,” Cerulli said.

According to surveyed HNW practices, access to portfolio managers/product specialists (57%), economic/market commentary (46%), and portfolio construction tools (44%) rank among the most valuable resources that asset managers provide. Firms that effectively serve HNW channels should continue to gain momentum. HNW advisors are proactively approaching asset managers for capital markets insights, innovative products, and portfolio construction support.

Many asset managers have shifted to a channel-agnostic approach distribution model from a channel-specific model. Sales coverage has become a function of how practices are structured and their level of investment complexity, instead of structuring sales teams solely on location and firm.

The pandemic has further accelerated this team-based approach. “Sales teams do not always need to be an expert on every strategy the firm offers, but they should be able to bring all the pieces together by navigating the firm to bring in the right person or specialist when necessary,” said Asher Cheses, senior analyst Cerulli.

Ultimately, the right distribution strategy will depend on a range of factors, but the most critical aspect for asset managers is to ensure they bring the right resources to the right advisor or firm, he added.

The virtual model will likely have a lasting impact on the way business is conducted for asset managers. Coverage models have become more dependent on technology and virtual engagements. More firms will implement virtual engagement on a wider scale to increase efficiencies.

“Personal engagement and technology can be a powerful combination for distribution teams to enhance efficiency and build scale, although success truly comes down to providing access, differentiated product, and intellectual capital when working with these key HNW relationships,” Cheses said.

© 2021 RIJ Publishing LLC. All rights reserved.

Pandemic Hurt Annuity Sales in 2020

Posted on March 10, 2021 by -

Overall US annuity sales volumes fell nine percent in 2020, to $219 billion in 2019, according to the Secure Retirement Institute (SRI) US Individual Annuity Sales Survey. But fourth-quarter 2020 sales were three percent higher than in the same period in 2019, at $58.6 billion.

At $55.5 billion, fixed indexed annuities (FIAs) were the top-selling annuity product category. In a sign of the growing clout of asset managers like Blackstone, KKR and Apollo in the FIA business, eight of the top 12 issuers of FIAs in 2020 have partnered or merged with such firms since about 2010. 

Those eight issuers are (in order of sales volume): Athene, Fidelity & Guaranty Life, Global Atlantic, Security Benefit Life, Great American, American Equity Investment, EquiTrust Life, and Delaware Life. Together these firms now account for about 42% of the FIA market.

All charts below are for year-end 2020 sales, and are provided by LIMRA SRI. For a detailed year-over-year sales break-out by product category, click here.

AIG, New York Life, and Lincoln Financial are the three companies with the most equal balance between sales of variable annuities and sales of fixed annuities. In overall annuity sales, they are #2, #3, and #4 after Jackson National. Almost all of Jackson’s nearly $18 billion in sales came from traditional VAs. New York Life is the top issuer of fixed annuities and Lincoln is the top issuer of registered index-linked annuities (RILAs).

RILAs are in a league all their own, with an appeal that probably has nothing to do with the fact that they are annuities. They continued their decade-long climb in sales with a 38% increase in 2020. The other bright spot in 2020 was fixed-rate deferred annuities, with sales up 10% in response to investor jitters.  

Just four companies account for about 80% of the $24 billion RILA market. They are (in order of sales volume): Lincoln Financial, Equitable, Allianz Life and Brighthouse Financial, each with over $4 billion in sales. This peloton is followed by Prudential Annuities, RiverSource Life and CMFG (Cuna Mutual), each with between $1 million and $2 million in 2020 sales.

Jackson National, partly on the strength of its Perspective II contract, continues to dominate the sale of conventional variable annuities, where contract owners directly hold tax-deferred versions of mutual funds in separate accounts. (RILA returns are based on the performance of options on the movement of indexes.)

With more than $16.5 billion in VA sales for the year, Jackson National has more than 20% of the traditional VA market. Jackson National has 24% of the individual conventional VA market, since TIAA’s $8.62 billion in VA sales consist mainly of group annuities. Jackson National is in the process of de-coupling from its long-time Asia-focused foreign owner, Prudential plc (no relation to Prudential Financial in the US).

Sales of income-focused annuities—the only annuities that pool longevity risk and offer so-called survivorship benefits—fell 28% because low interest rates raise their prices relative to the amount of retirement income they pay out. Combined sales of single premium immediate annuities and deferred income annuities fell more than 30% each for the year.

A year ago, “The yield on the 10-year treasury fell to 56 basis points and the equities market contracted 32%,” said Todd Giesing, senior annuity research director, SRI, in a release. “Worried investors turned to RILAs and fixed-rate deferred annuities for protection and growth. Protection-focused products represented more than half of all retail annuity sales in 2020.

“The cost of guaranteed income was very expensive under the economic conditions in 2020,” he added. “Investors who would have been in the market for guaranteed income products are likely turning to other annuity contracts—like short-duration fixed-rate deferred products — to wait for interest rates to normalize.”

Part of the growth in RILAs comes at the expense of the variable annuity products with guarantee lifetime income riders, an income-focused product, according to LIMRA SRI. Low interest rates have forced life insurers to lower the payout rates of income riders, which makes the products less attractive. 

Despite the year-long bull market in equities, volatility and uncertainty has dampened growth in accumulation-focused products — primarily VA contracts without income riders. Sales of these products, though stable in 2020, have dropped more than 30% since 2015.

© 2021 RIJ Publishing LLC. All rights reserved.

For Higher Yield, Consider Emerging Market Debt

Posted on March 9, 2021 by -

Historically, bonds have been essential to diversified portfolios—for both individual and institutional investors. Steady bond income reduces volatility and preserves capital to balance the risk of stocks, particularly during bouts of market stress. Bond coupons also provide liquidity for making incremental portfolio changes without the cost of selling assets.

But US investors, as well as those in Europe and Japan, have seen both government and corporate bonds yields collapse in both relative and absolute terms in the last dozen years. Zero Interest Rate Policy (ZIRP), Quantitative Easing (QE), and Negative Interest Rate Policy (NIRP) have left investors with slim pickings in the bond space.

Peter Marber

These central bank policy tools have become more common since the Global Financial Crisis in 2008. They helped push rates lower during the pandemic-induced economic contraction last year. In December 2020, Bloomberg reported that 27% of the world’s investment grade debt was yielding below zero. Rates are so low that investors can no longer consider global government bonds “risk free;” some call them “return free risk.”

Indeed, the recent backup in 10-year US government bond rates (from a low of 0.51% in August 2020 to 1.40% in February 2021) cost investors more than 8% in capital losses. Longer-dated US Treasuries sank even more during this period.

While rates have rebounded from their summer 2020 lows, bonds worldwide still suffer from a yield shortage. To make up for this loss, many investors have (1) extended duration to pick-up additional return; (2) flocked to lesser liquid alternatives such as bank loans and private credit; or (3) switched to stocks. In total, these strategies are forcing investors to assume considerably more portfolio risk than they would with traditional bonds. Academics say that’s how finance works: the Capital Asset Pricing Model says investors need to take more risk to get more return. But maybe practice tops theory.

One exception worth exploring is the US dollar-denominated bond space of Emerging Market (EM) issuers in Asia, Latin America, the MidEast, Africa, and the former Soviet Union. This $3.7 trillion universe (roughly twice the US high yield market) includes more than 3,000 different bonds from more than 75 countries with credit ratings from AAA down to CCC. They offer higher yields than comparable American corporate bonds, on average, and help diversify a traditional US bond portfolio. A pool of bonds from dozens of economies helps reduce country risk. Like global equity portfolios, some Emerging Markets zig when others zag; that reduces overall portfolio risk.

More Than Meets the Eye

As Figure 1 shows, EM credit offers considerably more yield than US corporate bonds with comparable ratings:

The risk premium offered by EM dollar-bonds has fluctuated but generally offers greater yields, and often with shorter durations. Most investors assume that they will have to take on higher default risk to get that extra return, but EM dollar-bonds have actually defaulted less than US equivalents. According to JP Morgan, the average annual default rate from 2008 through 2020 was 3.56% for US bonds but only 3.38% for EM bonds. 

This may represent a missed opportunity. EM bonds have generated higher returns in US-dollar terms than their US equivalents, and could have offered even more return for modest increases in risk (see Figure 2) when blended with a traditional US bond portfolio.

Why haven’t more investors embraced EM dollar bonds? Maybe they misperceive the nature of an “emerging market.” The term, coined by the World Bank in 1989, is tied to a country’s per capita national income figures. The current threshold is $12,536 or less.

Oddly, dozens of EM countries have income above this threshold yet they are arbitrarily included in many EM investment indices. Several benchmarks lump South Korea, the world’s ninth largest economy with a per capita income level of nearly $32,000, with countries where annual income is less than $5,000. Many EMs also have better credit ratings than developed countries. Poland has higher ratings than Italy, South Korea than Japan, and Chile than Portugal. Singapore, which can be found in several EM indices, is among the ten AAA-rated countries in the world.

Investors’ misperceptions of EM countries may also be anchored by memories of crises in Mexico, Asia, and Russia during the 1990s. But EMs demand a reappraisal. Many, including China and India, are among the most dynamic and fastest-growing economies in the world. And the EM universe’s default and return statistics clearly show that the sector performs better than most investors imagine.

Still growing, still attractive

The EM bond universe is broadening and deepening, with more than $500 billion new issues last year. In January 2021 alone, more than $100 billion of EM dollar-bonds were floated from governments and corporations.  Their yields still look attractive:

While institutional investors typically build diversified portfolios of EM bonds from scratch, individuals can get tailored exposure from mutual funds and ETFs. Either way, investors can choose investment grade or high yield, specific regions, and a range of maturities. Given the large coupons earned annually from such bonds, individual investors might consider adding them to tax-deferred retirement accounts to optimize their long-term compounded returns.    

Investors don’t need to shoulder additional credit, duration, liquidity, or equity risk when seeking substitutes for traditional low-yielding US government and corporate debt.  Armed with new data and a fresh perspective, investors will find that a blend of EM dollar bonds from dozens of countries can help diversify their portfolios and improve their outcomes.

Peter Marber, PhD, is a 30-year Wall Street veteran. He heads emerging markets at Aperture Investors, LLC and lectures at Harvard and Johns Hopkins. He would like to thank Yardley Peresman of Aperture Investors, LLC for her contributions to the article. Retirement Income Journal was not compensated for hosting this article.

‘Income America’ Offers ‘5ForLife’

Posted on March 4, 2021 by -

The idea for Income America 5ForLife, the latest in a wave of new methods to add lifetime income options to 401(k) plans, was born on a flight from Houston to Kansas City in late October 2014.

Scott Colangelo, the founder of Qualified Plan Advisors, and his ERISA attorney, Matthew Eickman, were parsing an internal letter from a Labor Department official to a Treasury official. The DOL had given its blessing to auto-enrollment of plan participants into target date funds with annuities tucked inside.

For Colangelo, whose companies serve as fiduciaries and advisers to some 700 retirement plans, and that letter was a green light to the future. Yesterday, he unveiled his concept for making defined contribution more pension-like was unveiled to the world.

He came up with the name, “Income America.” If that sounds too much like a Marvel Comics team of heroes, especially for a new venture in an unproven market, consider Colangelo’s collaborators:

Prime Capital Investment Advisors (Colangelo’s registered investment adviser or RIA); Lincoln Financial and Nationwide (as co-guarantors of the 5ForLife group annuity); American Century (as TDF glide-path designer); Vanguard, Fidelity and Prudential (as fund providers); Wilmington Trust and Wilshire (as fiduciaries); and SS&C, whose “middleware” would wire it all together and ensure portability when participants change jobs.

In a nutshell: Income America is a series of target date funds with a novel type of guaranteed lifetime withdrawal benefit (GLWB) rider attached. The rider, called “5ForLife,” promises to pay plan participants 5% of their benefit base (the greater of the account value or net contributions at age 65) every year for the rest of their life. It doesn’t guarantee accumulation. The all-in expense ratio: 1.3% per year.

“We got some of the bigger competitors in the industry to come together, and 99% of it was positive,” Colangelo told RIJ yesterday, in a party mood.  “We’re having 70 people on a virtual happy hour tonight.”

Since last fall, several firms have brought new retirement plan solutions to the 401(k) market. They’ve responded to provisions in the Secure Act of 2019 (effective January 1, 2021) that, among other things, aimed to make plan sponsors less nervous about offering annuities to their participants.

These companies all believe that plan sponsors and participants want income solutions, and are willing to pay for them. That remains unproven. But the $5 trillion 401(k) market is much too big to ignore—especially when so much of those assets are escaping (irrevocably) into brokerage rollover IRAs.

‘We’re so past’ proprietary solutions

In the years since Colangelo began developing Income America, Prudential, Great-West and others have tried yoking TDFs with lifetime withdrawal benefits, without notable success. We asked Colangelo why he thinks Income America can succeed where those pioneers didn’t.

One reason, he said, is Income America’s flexibility. Previous products tended to come from a single life insurer, single record keeper and single fund provider. When Income America is sold by Colangelo’s advisers, they can offer the plan sponsor either a Lincoln or Nationwide guarantee, and act as fiduciaries or recordkeepers themselves. Lincoln Financial or Nationwide or American Century representatives can sell Income America, and offer their own recordkeeping services and services of other members of the consortium. A plan sponsor can choose to start the commencement date of the guarantee at age 45, 50 or 55, depending on what they think suits their participants. 

Scott Colangelo

“Our clients are so past proprietary solutions,” Colangelo told RIJ.“This won’t be anybody’s single product. It will be a consortium product. No one has ever done that before.”

The other appeal is expected to be the simplicity of the guarantee. When participants reach age 65, they can start taking their 5% each year. There are no ratchets to lock in a participant’s account gains from one year to the next, and no incentives for the client to delay taking income. 

Behind the scenes, of course, there’s considerable financial engineering. “This is neither a general account product nor a separate account structure, nor are they fixed annuities,” Eickman told RIJ. “The insurance companies provide a GLWB rider, assess an annualized fee, then buy hedging mechanisms (such as 20-year swaps and other vehicles) to allow them to insure the risk.”

At first glance, Income America, with its two life insurers, looks comparable to the three-life-insurer GLWB system that United Technologies uses. Every month, three companies bid for rights to insure incoming participant contributions, and the high bidder gets the lion’s share of that month’s contributions.

Bids at United Technology would fluctuate from month to month, depending on interest rates. In Income America, there is no bidding process. Lincoln and Nationwide levy their fee on half of the account balances.

As for the danger of Income America carving market share out of Lincoln or Nationwide’s existing 401(k) business, Eric Henderson, president of annuities at Nationwide, dismissed that concern.

Eric Henderson

“We have a number of efforts in in-plan space, but in this case we’re working with several different partners on something unique,” he told RIJ. “Each of our offerings work a little differently. Plan sponsors might prefer one design over another. We’ll let the employers choose which makes the most sense for them.

“This is a situation where a rising tide lifts all boats,” he added. “We welcome the competition. Increasing the number of providers who make this type of solution available will raise its visibility. Employers will see it regularly. As they see more of their peers offering it, they’ll feel pressure to do the same.”

‘Cost is a major factor’

To embrace Income America, or any similar program, plan sponsors will have to be comfortable with cost. Income America charges 1.3% per year of the participant’s account value. If the 5ForLife rider were applied when the participant was 50, he or she might pay the fee for decades.

If they outlive their own money, the annuity issuers keeps paying them until they die. If they die before spending all their own money, their beneficiaries receive any remaining account value. Participants can drop the coverage any time, or take withdrawals from their account with no penalty. But, as with other GLWBs, withdrawals reduce the income stream.

“For plan sponsors, fees are their number one concern. Complexity and fiduciary risk is number two. The average passive fund costs in the single digits. You’re asking a fiduciary to spend over 100 basis points [1%],” said Mark Fortier, one of the architects of the United Technologies plan.

Some look at the number of companies partnering on Income America and wonder how all of them can get paid. “I’m all for innovation, but cost is really a major factor.” said Kelli Hueler, whose IncomeSolutions platform allows retirees to roll over their DC savings into a fixed immediate or deferred income annuity, in an environment where the annuity issuers competitively bid for their business. Her program requires participants to take the initiative, and the employers she works with seem to like that. “Plan sponsors tell us that they don’t want to ‘hard default’ somebody into a benefit they may never take advantage of,” Hueler told RIJ.

Today’s low interest rates make it more expensive for annuity issuers to buy options to hedge their income guarantees, so Lincoln and Nationwide needed sharp pencils get the cost of a 5ForLife guarantee down to 0.975% within a total expense ratio of 1.3%. They did it by removing any promises to ratchet up the benefit base if the account value reached new high-water marks. The 45% equity allocation of the TDF during retirement presumably helps the support the guarantee as well, and the use of a CIT (collective investment trust) instead of a mutual fund as the product chassis helps keep costs and regulatory burdens low.

What happens if interest rates go up in the future? In that case, either the expense ratio of the product could go down or the payout at retirement could go up. Henderson said it was more likely that the cost could go down than that the payout would go up. 

Matthew Eickman

Under US pension law, plan sponsors don’t have to use the least expensive income solution. “The safe harbor provision [in the SECURE Act] doesn’t say it has to be cheap. “It requires that the cost be reasonable in relation to the value provided by the solution’s benefits and features, which inherently implicates an emphasis on value—not just low cost,” said Matthew Eickman, the ERISA attorney and head of Prime Capital’s retirement business.

“Strong, proactive fiduciaries start the inquiry from a different perspective. They ask, ‘We know there will be cost; is [Income America] the best way to solve the income problem?’ Informed fiduciaries certainly may justify a solution for the betterment of participants. In some plans, you can find good actively managed growth or foreign funds that alone cost 1.3%. The Income America solution provides much more value.”

Given the potential for lawsuits over fees, plan sponsors are going to need help evaluating these income proposals, said Michelle Richter, founder of Fiduciary Insurance Services. “This is yet another really creative solution entering the marketplace,” she told RIJ. “Plan sponsors are not experts in annuities per se. So it’s important that there are quantitative and qualitative services that help them analyze these new solutions quickly and clearly.” 

No one really knows yet if there’s a market for income solutions in 401(k) plans. The federal government would like to see retirees keep their money in low-cost qualified plans, and not to run out of money. The annuity issuers and the fund companies who distribute funds primarily through 401(k) plans have arguably stronger incentives to pursue this business and make it work.

There are some $5 trillion in 401(k) plans, which makes them an irresistibly large target. But it’s also a shrinking target. Retirees roll over hundreds of billions of dollars from 401(k) plans to individual brokerage IRAs every year. Annuity issuers and fund companies can make those assets much stickier by binding them into lifelong income contracts. 

Eickman gave a piece of the credit for Income America to his friend Mark Iwry, who as deputy secretary of the US Treasury for retirement policy in 2014, was trying to tear down regulatory barriers to lifetime income products.

“It was all part of Mark’s hope to stimulate interest and relax fiduciary fears. What Income America is doing is an indication that he succeeded in stimulating product development,” said Eickman.

Iwry created the Qualified Longevity Annuity Contract, which removes an obstacle to buying a deferred income annuity with pre-tax savings. In 2014, RIJ and the Retirement Income Industry Association gave Iwry its annual Innovation Award for the effort.

© 2021 RIJ Publishing LLC. All rights reserved.

How the pandemic affected indexed annuity owner behavior

Posted on March 4, 2021 by -

A study of the impact on fixed indexed annuity (FiA) policyholder behavior by the COVID-19 pandemic, including surrender activity, income utilization and partial withdrawals, was released this week by Ruark Consulting LLC. Ruark’s FIA studies cover products both with and without a guaranteed lifetime income benefit (GLIB).

The new study, which covered product with and without a guaranteed lifetime income benefit (GLIB), “gave us our first look at the effects of COVID-19 on FIA policyholder behavior,” said Timothy Paris, Ruark’s CEO.

“Given record low interest rates, and disruptions to sales channels, there was no way to know whether past patterns would continue. We’re intrigued by how some changed—and others didn’t.”

The study data comprised nearly 4 million policyholders from 16 participating companies spanning the 13-year period from 2007-2020, with $264 billion in account value as of the end of the period. GLIB exposure constituted 43% of exposure overall, and 47% of exposure in the last 12 study months. GLIB exposure beyond the end of the surrender charge period increased 83% over 2020 study exposure.

Highlights of the study include:

Extreme market activity, and COVID-related disruption to policyholders’ usual communication patterns with advisors and agents, had mixed effects on 2020 surrender activity. Record low interest rates led to more positive market value adjustment, and contracts in the surrender charge period with a positive MVA surrendered at higher rates. For contracts beyond the surrender charge period, surrender rates declined.

Contracts with a guaranteed lifetime income benefit have much better persistency than those without, and among contracts that have begun taking income withdrawals, surrender rates are even lower. Persistency appears insensitive to nominal money-ness (the relationship of account value to the benefit base), but when an actuarial money-ness basis which discounts guaranteed income for interest and mortality rates is applied, we see that persistency is greater when the economic value is higher.

Surrenders are sensitive to external market forces as well as the absolute level of credited interest rates. Contracts earning less than 2% exhibit sharply higher surrenders than those earning more.

Lifetime income commencement rates are low: 7% overall in the first year following the end of the waiting period and then falling to approximately 3% in years 3 and later. There is evidence of a spike in utilization after year 10, particularly where the benefit is structured as an optional rider rather an embedded product feature. Age, tax status, and contract size all influence commencement rates.

Lifetime income utilization increases sharply when policies are in the money, that is, when the benefit base exceeds the account value. After normalizing for age, tax status, and contract duration, contracts that are 25% in the money or more exercise at a 12% rate.

In contrast, when contracts with lifetime withdrawal benefits are out of the money, at the money, or modestly in the money, policyholders exercise at a base rate of about 2%. Income commencement rates are most sensitive to money-ness following the end of the rollup period.

Detailed study results, including company-level analytics, benchmarking, and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.

Ruark Consulting, LLC, based in Simsbury, CT. is an actuarial consulting firm that provides principles-based insurance data analytics and risk management, and offers expertise on topics of longevity, policyholder behavior, product guarantees, and reinsurance. 

© 2021 RIJ Publishing LLC. All rights reserved.

Comfort with CITs has grown: Cerulli

Posted on March 2, 2021 by -

ETF assets grew more than 1% during January, surpassing $5.5 trillion thanks to $55 billion in net flows. Mutual fund assets fell 0.2%, ending the month with just below $18.2 trillion. Mutual funds experienced positive net flows ($38.3 billion) for the third consecutive month.

That’s from the latest issue of The Cerulli Edge—US Monthly Product Trends. The report analyzes mutual fund and exchange-traded fund (ETF) product trends as of January 2021, explores the attributes of collective investment trusts (CITs), and covers the growth of outsourced chief investment officer (OCIO) assets managed in separate accounts.

Driven by plan sponsors’ pursuit of lower-cost alternatives, CITs have captured marketshare from mutual funds, Cerulli found. Unlike mutual fund, CITs need a seed investor. To build out a CIT business, managers must have a strategy for acquiring seed investors; they must incentivize an existing mutual fund client through favorable terms, or enlist consultants to serve as matchmaker.

Results from Cerulli’s 2020 partnership survey with the Coalition of Collective Investment Trusts show that, in addition to drawing upon existing relationships to source seed investors, CIT sponsors report finding new clients to seed CITs, suggesting that comfort with the vehicle has grown.

Cerulli observes a trend of larger clients (greater than $100 million in AUM) turning to the OCIO model and bringing new demands to OCIO providers, such as fully customized portfolios. Responding to this demand, almost all OCIO providers (90%) offer a service model that includes a fully customized portfolio using separate accounts.

Cerulli expects that as the typical client size of an OCIO provider grows, the use of separate accounts will increase. Growth in the use of separate accounts is not only driven by the demand for customization, but also by the demand for lower fees.

© 2021 RIJ Publishing LLC. All rights reserved.

Big 4Q rally for US pension risk transfer deals: LIMRA SRI

Posted on March 2, 2021 by -

The US single premium buy-out sales totaled $13.7 billion in the fourth quarter, up 21% from fourth quarter 2019, according to the Secure Retirement Institute (SRI) US Group Annuity Risk Transfer Sales Survey. For the full year of 2020, buy-out sales were $25 billion, down 10% from 2019 results due to sluggish sales in the second and third quarters.

A group annuity risk transfer product, such as a pension buy-out product, allows an employer to transfer all or a portion of its pension liability to an insurer. In doing so, an employer can remove the liability from its balance sheet and reduce the volatility of the funded status.

Under a buy-out, the insurer would go further and take legal responsibility for paying monthly pensions directly to each individual plan member. A buy-in is an investment contract and the fiduciaries of the plan retain the legal responsibility to pay members’ benefits.

“After a quick start to the year, pension risk transfer sales slowed in the second and third quarters as employers addressed the impact of COVID-19 on their businesses,” said Mark Paracer, assistant research director, SRI, in a release. “This disruption was temporary and sales picked up by year-end.

“Low interest rates, market volatility and rising administration costs continue to challenge defined benefit plan sponsors and drive them towards de-risking opportunities like pension risk transfer. We expect this trend to continue in 2021,” he added.

“Historically, fourth quarter sales results tend to be higher than in other quarters. Fourth quarter 2020 buy-out sales continue this trend and represented the highest quarterly sales total recorded since fourth quarter 2012. For the year, more than 60% of carriers reported year-over-year growth.”

There were 177 new buy-out contracts sold covering 259,342 participants in the fourth quarter. For the full year, there were 432 buy-out contracts sold, representing 408,277 participants. 

In the fourth quarter 2020, there were two “buy-in” contracts totaling $1.6 billion. This is the highest quarterly total for buy-in products ever reported. For the year, buy-in product sales totaled $1.8 billion, 4% below 2019 sales results.

The overall group annuity risk transfer sales were $15.3 billion for the quarter, 24% higher than fourth quarter 2019. In 2020, total group annuity risk transfer sales were $26.8 billion, down 10% from prior year results.

Total single premium buy-out assets were $168.4 billion and total buy-in assets were $3.4 billion. Together, they totaled $171.9 billion in single premium assets, 10% over last year.

Nineteen companies participated in this survey, representing 100% of the U.S. pension risk transfer market. Breakouts of pension buy-out sales by quarter and pension buy-in sales by quarter since 2015 are available in the LIMRA Fact Tank.

Honorable Mention

Posted on March 2, 2021 by -

SEC suspends trading of securities hyped in social media

The Securities and Exchange Commission (SEC) this week suspended trading in the securities of 15 companies because of questionable trading and social media activity.

The action follows the recent suspensions of the securities of numerous other issuers, many of which may also have been “targets of apparent social media attempts to artificially inflate their stock price,” the SEC said in a release. The order also states that none of the issuers has filed any information with the SEC or OTC Markets, where the companies’ securities are quoted, for over a year. 

The SEC also recently issued orders temporarily suspending trading in: Bangi Inc. (BNGI); Sylios Corp. (UNGS); Marathon Group Corp. (PDPR); Affinity Beverage Group Inc. (ABVG); All Grade Mining Inc. (HYII); and SpectraScience Inc. (SCIE).

Each of these orders stated that the suspensions were due at least in part to questions about whether social media accounts have been attempting to artificially increase the companies’ share price. The SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.

Mutual of Omaha aims to get ‘Retirement Right’

The Retirement Services division of Mutual of Omaha Insurance Company has enhanced its employer-sponsored retirement product and rebranded it as “Retirement Right.” The upgrade adds more pricing options for small to large plans and provides investment options, service flexibility and participant tools at any level, a company release said.

The launch will include national advertising, social media, digital and print media, with tactics kicking off in this month. “We’re here to help our plan sponsors and their employees get retirement right.” said Michelle Gibilisco, director of Business Development at the insurer.

“We are engaged in many new plan opportunities and our increased pricing flexibility allows us to be more competitive on plans of all sizes,” said Bob Woods, 401(k) National Sales Director at Mutual of Omaha, in the release.

Mutual of Omaha has been a retirement plan provider for 45 years, offering flexible product design, investment co-fiduciary services, 3(16) administrative fiduciary services, and participant engagement tools, the release said.

Americans feel more financial damage from pandemic than in 2008: Allianz Life

Nearly seven in 10 (69%) Americans (age 21+ in 2007) said they believe the COVID-19 pandemic will have a greater overall economic impact than the Great Recession (2007-2009),  according to the new 2021 Retirement Risk Readiness Study from Allianz Life Insurance Co. of North America.

More than half (56%) of respondents said the pandemic will also have a greater impact than the Great Recession on their personal finances. The results were based on a

December 2020 online survey of 1,000 people ages 25 and older in the lower 48 states. Singles with household incomes over $50,000, couples with incomes over $75,000, and those with investable assets of at least $150,000 were included. In other results:

68% of respondents (68%) said they retired earlier than expected, up from the 50% who acknowledged earlier-than-expected retirement in last year’s study. Similar to 2020, the majority said they retired involuntarily, for healthcare issues (33%, up from 25% in 2020) and unexpected job loss (22%, down from 34% in 2020); 43%  said they couldn’t save for retirement right now (up from 37% in 2020), and 42% felt too far behind on their retirement goals to catch up (up from 31% in 2020).

Americans still have unrealistic expectations about working in retirement. A full 70% of non-retirees think it is likely they will work at least part time in retirement, up from 65% in 2020. Yet, only 6% (versus 7% in 2020) of retired respondents were doing so.

The closer people are to retirement, the less they want to keep working. When asked if they would rather retire at age 55 with their basic expenses covered or work until age 75 and spend more in retirement, only 23% of retirees preferred to work longer (versus 32% of near-retirees and 48% of pre-retirees).

Near-retirees are more active in saving enough in a retirement account (29% versus 23% in 2020); diversifying their savings (42% versus 27% in 2020); researching expenses and risks associated with retirement (43% versus 35% in 2020); making a formal plan with a financial professional (37% versus 29% in 2020); and purchasing a product that provides guaranteed retirement income (38% versus 30% in 2020).

MetLife unit reinsures $5 billion in UK pension liabilities

Metropolitan Tower Life Insurance Co., a unit of MetLife, has closed its second and third longevity reinsurance transactions with Rothesay Life Plc, reinsuring approximately $5 billion of pension liabilities associated with two UK bulk annuity transactions completed in the fourth quarter of 2020.

Jay Wang, senior vice president and head of Risk Solutions for MetLife’s Retirement & Income Solutions business, said his company would continue to “expand our footprint within the U.K. longevity reinsurance market. Despite the pandemic, the UK pension and longevity risk transfer market remains resilient and robust.”

David Cox, co-head of Pricing and Reinsurance at Rothesay, said in a release, “We are pleased to continue to grow our relationship with MetLife.” 

Midland National FIA, offered at RetireOne, will include BlackRock ESG index

Midland National Life has added the BlackRock ESG US 5% Index ER (ticker: BESGUVCX) as a third index available to investors in its IndexMax fixed index annuity product, which is available to fee-based advisers on the RetireOne platform. The ESG index may include companies focused, for example, on lowering carbon emissions, emphasizing workforce diversity, and strengthening data privacy and security.

Demand for socially responsible financial products increased rose 42% in the past two years, said David Stone, founder and CEO of RetireOne, citing the United States Forum for Sustainable and Responsible Investment. ESG strategies currently comprise roughly 33% of US assets under professional management. The Deloitte Center for Financial Services (DCFS) estimates that ESG-mandates assets will account for half of all professionally managed investments in the US by 2025.

The IndexMax ADV “layers in potential annual performance credits with additional 5- or 7-year term participation credits to provide rates guaranteed for the term,” according to a Midland National release. In addition to the ESG index, IndexMax ADV offers the Fidelity Multifactor Yield Index 5% ER (ticker: FIDMFYDN), and the S&P 500 Low Volatility Daily Risk Control 5% Index ER (ticker: SPLV5UE).

RetireOne, a service of Aria Retirement Solutions since 2011, serves over 900 RIAs and fee-based advisors with offerings from multiple “A” rated companies. RIAs may access this fiduciary marketplace at no additional cost to them or their clients.

(c) 2021 RIJ Publishing LLC. All rights reserved.

                          

‘COVID-19 is not a retirement story’: CRR

Posted on February 25, 2021 by -

The COVID-19 pandemic hasn’t changed Americans’ overall retirement funding picture—mainly because the people who lost the most in the pandemic were those who already at greater risk for an insecure retirement, according to a new report from the Center for Retirement Research (CRR) at Boston College.

“The problems confronting the retirement system before the pandemic remain. Social Security continues to face a 75-year deficit and the depletion of the trust fund in the mid-2030s,” write Alicia Munnell, director of the CRR, and Anqi Chen, assistant director of savings research. “Employer plans continue to face inadequate balances, a major coverage gap, no decumulation mechanism, and low interest rates. And older workers continue to face difficulties in finding new jobs, causing many to retire too early,” they write.

“On the benefit side, Social Security payments continue to go out each month, and 401(k) balances appear relatively unaffected. On the income side, the impact on Social Security’s finances has been minimal, and employee and employer 401(k) contributions remain relatively steady.”

“While older workers have suffered, they have not been hurt disproportionately and appear as able to work from home as their younger counterparts. On the other hand, those with the least education—workers least likely to have a 401(k)—have borne the brunt of the recession,” the paper said.

Regarding the health of the Social Security system, the authors note, “The [Social Security] actuaries characterize the impact of the pandemic and recession as ‘significant’ and, indeed, a number of important assumptions look quite different in the next few years. Mortality is up, fertility and immigration are down, disability incidence is down in 2020 and then up for the next three years, unemployment is up, real wages are down then up, and real interest rates are down.

“But the impact on Social Security finances appears to be modest. Most of the pandemic/recession effects are projected to end by 2025, and the effects on the long-term deficit and on the depletion of the trust fund are negligible. In terms of the long-term outlook, the average income rate did not change at all and the cost rate rose only a tiny bit, leading to a slight increase in the 75-year deficit from 3.21 to 3.28 percent of taxable payrolls.”

© 2021 RIJ Publishing LLC. All rights reserved.

Beware the ‘Specialized’ ETFs

Posted on February 25, 2021 by -

When exchange-traded index funds (ETFs) first appeared, Vanguard employees heard through the office grapevine that Jack Bogle didn’t see the point. He didn’t object to index mutual funds—they were his passion. He didn’t see the sense of trading index funds throughout the day.

Maybe Bogle foresaw the complications described in the recent research paper, “Competition for Attention in the ETF Space.” In it, four economists assert that the first ETFs were solid; but too many new ones are faddish, opaque, expensive and a trap for investment duffers.

That’s the first of four papers in our latest Research Roundup. The others try to answer, respectively, these questions: Does the national debt matter? Does the average person expect deficit spending to cause inflation? And, will changes in the RMD (required minimum distribution) rules change how Americans use tax-deferred savings accounts?

Beware the ‘Specialized’ ETFs

Exchange-traded funds (ETFs) came to market in two distinct waves. First there were the ultra-low-cost index funds that revolutionized the fund industry. More recently there’s been a wave of bright, shiny, higher-fee “specialized ETFs” designed to exploit passing investment fads, a new academic paper asserts. 

“The original ETFs, which are broad-based products, are beneficial investment platforms, as they reduce transaction costs and provide diversification,” write Itzhak Ben-David and Byungwook Kim of Ohio State University, Francesco Franzoni of the Swiss Finance Institute, and Rabih Moussawi of Villanova University in “Competition for Attention in the ETF Space” (NBER WP No. 28369).

“Specialized ETFs ride the same wave of financial innovation,” they add. “However, these products compete for the attention of unsophisticated investors who chase past performance and neglect the risks arising from the under-diversified portfolios. Specialized ETFs, on average, have generated disappointing performance for their investors.”

The authors suggest that “the most important financial innovation of the last three decades, originally designed to promote cost-efficiency and diversification, has also provided a platform to cater to investors’ irrational expectations.

“The investor clientele of specialized ETFs has a greater fraction of retail investors, who are typically considered less sophisticated. Relatedly, specialized ETFs are very popular among sentiment-driven investors, i.e., those that trade through the online platform Robinhood, which has become famous in recent years for hosting investment frenzies.”

With a market value of more than $5 trillion, ETFs now account for about 17% of the total assets in US investment companies, according to the paper. More than 3,400 ETFs have been launched, covering broad-based indexes like the S&P 500 to niche investment themes, such as a trade war, cannabis, vegan products, work from home, and COVID-19 vaccines.

“Specialized ETFs fail to create value for investors,” the authors conclude. “These ETFs tend to hold attention-grabbing and overvalued stocks and therefore underperform significantly: They deliver a negative alpha of about −4% a year. This underperformance persists for at least five years following launch.”

Does The National Debt Matter?

Stocks climb a wall of worry, they say. So does the national debt. It grew steadily after the US left the gold standard in 1971, and the federal bailouts of 2008 and 2020 have pushed it into the nose-bleed zone. If you try to forget it for a minute, somebody shows you the National Debt Clock.

In their new paper, “Does the National Debt Matter,” Randall Wray of the Levy Institute at Bard College and Yeva Nersisyan of Franklin and Marshall College propose a different way to look at the debt. It doesn’t come from out-of-control government spending, they say. Instead it reflects the enormous US trade deficit and debt remaining from fiscal responses to past recessions.

When Americans buy electronics from Asia or cars from Germany, dollars pile up overseas. A chunk of that money necessarily comes back to the US through purchases of US debt by foreign banks. [Technically, no physical dollars “pile up.” Digits change in foreign accounts at the Fed.] When the US suffers recessions, tax receipts fall, social welfare payments rise, and/or the Treasury engages in debt-financed spending. 

Wray and Nersisyan are both proponents of Modern Monetary Theory. MMT reveals the integration and interdependency of the public, private, and foreign sectors of the US economy. Given that a sovereign country is never short of its own currency, MMT holds that no level of federal debt or deficit stops the US Treasury from paying its bills or prevents the Federal Reserve from supplying the private banking system with enough reserves to ensure that all good checks clear (including Treasury checks). In MMT, the public sector serves as a risk-free counter-party to the private sector, not its competitor for limited finances. “Mainstream economists look at government debt as a liability of the government, forgetting that it represents an asset for the holder,” they write.

In a country issuing its own currency, economic growth never has to stall for lack of money or credit per se. It stalls when there aren’t enough real resources to mobilize with money. In the current COVID-19 pandemic, they write, “The problem has not been lack of finance, but lack of the real output we need: hospital beds, masks, testing kits, safe places to quarantine those who are infected, and maybe even food, shelter, and clothing to support the population. Focusing on resource availability and resource distribution… rather than government budgetary impacts would have been a good first step.”

Do Most People Expect Deficit Spending to be Inflationary?

How does the average person, living in his or her tiny microeconomic universe, respond to macroeconomic trends? When the media reports that government debt has soared to a record high, or that it will reach a stratospheric level in 10 or 20 years, how does an individual’s expectations of future inflation change?

In their recent research paper, “Fiscal Policy and Household Inflation Expectations: Evidence from a Randomized Trial” (NBER Working Paper No. 28485), three economists report their analysis of the responses to the questionnaires they sent in December 2018 to about 92,000 American households covered by the famed AC Nielsen. About 30,000 people responded.

Most people respond to predictions of towering future national debt levels with increased expectations about inflation, but not to reports of current levels of debt, according to authors Olivier Coibion of the University of Texas at Austin, Yuriy Gorodnichenko of University of California–Berkeley, and Michael Weber of the Chicago Booth School of Business at the University of Chicago.

“Our results suggest that most households do not perceive current high deficits or current debt as inflationary nor as being indicative of significant changes in the fiscal outlook. In that sense, our results are not out of line with Dick Cheney’s famous quip that ‘deficits don’t matter,’” they write.

“Telling households that the US budget balance will deteriorate so that the national debt will increase by ten trillion dollars by 2028 leads to an increase in short-run inflation expectations of 25 basis points and a rise in the cumulative inflation expectations of about one percentage-point over ten years.”

The economist Robert Barro suggested in the 1970s that government borrowing today to boost the economy would be self-defeating, because rational investors would foresee higher taxes in the future and make offsetting preparations for them. (Barro’s idea was based on the Ricardian Equivalence, which holds that it doesn’t matter in the long run whether a government funds itself through borrowing or taxes.) This new paper didn’t support that idea.

How Will Changes in RMD Rules Change Behavior? 

Taking required minimum distributions (RMD) from tax-deferred accounts like IRAs and 401(k) plans can be painful for retirees, especially if they don’t need the money for current expenses or if they planned to leave the assets to their beneficiaries. The withdrawal doesn’t add much to their enjoyment of life; it just triggers a tax bill.

New legislation has begun to shake up the sleepy RMD world. The age at which Americans must start taking annual required minimum distributions (“RMDs”) from their pre-tax IRA, 401(k), or 403(b) savings accounts was lifted to 72 from 70-1/2 by the SECURE Act of 2019. Proposals are also afoot to raise the age to 75, to exempt accounts of less than $100,000 from RMDs, or even to eliminate the RMD altogether.

What would be the consequences of any or all of those changes? Economic researchers looked into that question and concluded that none of them would have much affect on retirees who use their tax-deferred accounts for current income, but it might affect the behavior of retirees who intend to bestow those pre-tax assets on their heirs.

“If RMD rules were applied only to retirement assets in excess of $100,000… or were completely suspended, this would result in notably lower lifetime tax payments by high-income individuals having a bequest motive,” write Olivia Mitchell of the Wharton School and Vanya Horneff and Raimond Maurer of Goethe University in Frankfurt, Germany, in “Do Required Minimum Distribution 401(k) Rules Matter, And For Whom? Insights from a  Lifecycle Model” (NBER Working Paper 28490).

“Financial institutions such as insurance companies and mutual funds offering retirement plans and investment advice would benefit from ascertaining their clients’ bequest intentions, before advising them about RMD strategies,” the authors point out. “Our conclusions will also interest professional financial planners guiding clients as they make retirement payout choices.”

© 2021 RIJ Publishing LLC. All rights reserved.

‘Bermuda Triangle’ Deal for Principal Financial?

Posted on February 25, 2021 by -

There was just the right combination of vagueness and specifics in the “settlement agreement” between the Principal Financial Group and one of its major shareholders, Elliott Investment Management, to raise eyebrows—and questions—this week.

Are Principal and Elliott headed for the type of restructuring deal that other big asset managers and annuity issuers have struck in recent years? These deals have released big chunks of capital that had been tied to blocks of in-force annuity contracts. RIJ has called these “Bermuda Triangle” deals, since they sometimes involve a Bermuda-based reinsurer.  

The ingredients appear to be present. In 2019, Elliott (founded in 1977 by billionaire Paul Singer) got into the life/annuity business by buying Prosperity Life, which issues fixed and fixed index annuities. Prosperity Life’s parent, Prosperity Holdings, is a Bermuda company whose executive officer, Mark Cicirelli, is also US head of insurance at Elliott and chairman of Prosperity Life. A Bermuda Triangle scenario might involve reinsurance of Principal annuity liabilities in Bermuda by Prosperity Life and management of the annuity assets by Elliott… but that’s purely my speculation. 

In a conference call this morning, Principal CEO, chairman and president Dan Houston confirmed to a panel of equity analysts that Principal’s upcoming strategic review was taking place against a “backdrop of transactions” that had been successful in “liberating capital” and that Principal “wants to make sure that we’re looking at the potential of those.” He was presumably referring to last year’s reinsurance deals between Jackson National and Athene and between Equitable and Venerable Holdings.

Houston fended off a question about whether Principal leaned toward divestiture or reinsurance of any of its businesses. He said it was “way too early on to provide insights on what we might do.” He promised more details at Principal’s Investor Day in June.

One slide in today’s presentation showed that Principal plans to redeploy $1.4 to $1.6 billion in capital in 2021, including $600 million to $800 million in share repurchases. Principal ended 2020 with a reported $2.9 billion in excess and available capital; it doesn’t appear to need a reinsurance deal to provide more.

Here’s what happened so far this week:

A Principal release on February 22 said:

Principal Financial Group (Nasdaq: PFG) today announced steps to enhance shareholder value by initiating a strategic review of its business mix, capital management, and capital deployment options. Principal will be adding two new independent directors to its Board of Directors, Maliz Beams and a second director to be named at a later date. These actions, which follow a constructive dialogue with one of Principal’s largest investors, Elliott Investment Management, LP (“Elliott”), build on Principal’s ongoing efforts to drive growth and create value.

Beams was CEO of retirement solutions at Voya Financial Inc. from 2011 to 2014, and helped guide Voya’s separation from ING. In 2017, Voya sold its insurance and annuity business to Athene Holding Ltd. In 2020, Athene reinsured $26.7 billion in Jackson National annuity business. 

Elliott, which manages about $40 billion and owns a reported 2% of Principal stock (total market cap: $16.65 billion, based on a share price of $61, February 25, 2021), “has been pushing the company to explore selling or spinning off its more capital-intensive life insurance business to focus on its more profitable wealth management operations,” according to Bloomberg, which cited unnamed sources.

Based on those figures, the market value of Elliott’s investment in Principal has increased by about $33 million. About three-quarters of Principal’s $10.3 billion in variable annuity (VA) account value is covered by a guaranteed minimum withdrawal benefit (GMWB) rider. Such guarantees have created risk exposure for other life/annuity companies with large books of VA business. 

Last Monday, Principal filed a Form Schedule 14A with the Securities and Exchange Commission disclosing that it had reached a “customary cooperation agreement as well as an information sharing agreement” with Elliott.

For its part, Elliott agreed to “standstill.” According to Principal’s latest 10-K:

Elliott has agreed to abide by customary standstill restrictions (subject certain exceptions relating to private communications to the Company) until thirty (30) days prior to the deadline for the submission  of stockholder nominations for non proxy-access director candidates for the Company’s 2022 annual meeting of stockholders (the “Cooperation Period”),   including that Elliott will not, among other things, (A) engage in transactions resulting in Elliott’s beneficial ownership exceeding 5% of the Company’s common stock, or its aggregate economic exposure exceeding 9.9% of the Company’s common stock, (B) seek any additional representation on the Board, (C) make any requests for stock list materials or other books and records of the Company, (D) engage in any solicitation of proxies or (E) make certain proposals relating to extraordinary transactions publicly or in a manner that would require public disclosure.

Principal posted just under $300 million in individual VA sales in the first three-quarters of 2020, according to LIMRA SRI, for 18th place, out of total VA sales of $70.3 billion. It was not among the top 20 issuers of fixed annuities or of total annuity sales. For comparison, its total individual annuity sales were $3.2 billion in 2015, for 20th place.

According to Principal’s current 10-K report, filed Monday:

“As of December 31, 2020, excluding the Acquired Business that has not migrated, we provided full service accumulation products to (a) over 39,100 defined contribution plans including $280.3 billion in assets and covering over 6.0 million eligible plan participants, and (b) to over 1,900 defined benefit plans, including $23.3 billion in assets and covering over 344,000 eligible plan participants.

“As of December 31, 2020, approximately 46% of our full service accumulation account values were managed by our Principal Global Investors segment, 43% were managed entirely by the third party asset managers that were not under contract to sub-advise a PFG product, 4% were sub-advised and 7% represented employer securities. As of December 31, 2020, 93% of our $10.7 billion in variable annuity account balances was allocated to mutual funds managed by the Principal Global Investor. As of December 31, 2020, $7.4 billion of the $10.3 billion of variable annuity separate account values had the GMWB rider.”

© 2021 RIJ Publishing LLC. All rights reserved.

Meet Laurence Black, Interpreter of Indexes

Posted on February 25, 2021 by -

In these videos, Tamiko Toland, director of annuity research at CANNEX, the annuity data firm, interviews Laurence Black, founder of The Index Standard, an independent startup based in Manhattan. The firm “provides index ratings and forecasts that aim to make index and ETF screening simpler and easier.”

Here’s a link to the full-length, 50-minute video. Here’s a link to a three-minute sample.

A former head of indexes at Barclays and ABN MMRO, Black has now created tools for helping others understand and evaluate the indexes that power exchange-traded funds (ETFs), fixed index annuities (FIAs) and registered index-linked annuities, or RILAs.

The Index Standard aims to help self-directed investors, financial advisers, and Registered Investment Advisor platforms answer questions such as:

  • How do you know which index or ETF to buy?
  • How do you assess the best one?
  • Other than performance, what other factors do you need to consider?

With trillions of dollars invested in ETFs, with combined sales of index-based FIAs and RILAs close to $80 billion in 2020, and with many more intermediaries selling or recommending those products, the financial industry’s need for an index-rating tool is greater than ever. 

Before founding The Index Standard, Black was a managing director and head of Quantitative Indices and Strategies at Barclays. He led Barclays’ index partnerships with Yale economist Robert Shiller and Nouriel Roubini, as well as with Novus Partners. Before Barclays, Black was Head of Indices at ABN AMRO for seven years in London. He holds an MBA from the University of Warwick, and a Bachelor’s degree from the University of Cape Town.

(c) 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on February 24, 2021 by -

Pacific Life offers fee-only, investment-only VA

Expanding its product offerings for RIAs (registered investment advisors) Pacific Life has issued a no-commission, no surrender charge, investment-only variable annuity (IOVA) that “can be integrated into the technologies RIAs currently use,” according to a release this week.

As an IOVA, the contract offers tax-deferred growth but no living benefit option, such as a guaranteed lifetime withdrawal benefit or GLWB. But, as with any annuity contract, the owner can choose to convert the account value to a guaranteed lifetime income stream by annuitizing it. 

https://www.pacificlife.com/content/dam/paclife/rsd/annuities/public/ria/pdfs/brochure-flyer/pacific-advisory-variable-annuity-brochure.pdf

According to the product brochure, the Pacific Advisory Variable Annuity features include:

  • A contract fee of 45 basis points per year, including a mortality and expense risk fee of 15 basis points, a platform fee of 15 basis points, and an administrative fee of 15 basis points.
  • A minimum investment of $25,000 for either qualified or non-qualified premiums
  • An optional return-of-premium death benefit for a fee of 15 basis points
  • Investment option fees ranging from three basis points for a Schwab S&P 500 Index to 1% for an Invesco Oppenheimer International Growth Fund.

Other fund families on offer include Vanguard, Fidelity, American, Templeton, DFA, BlackRock, Franklin, T. Rowe Price, MFS, Western Asset Management, PIMCO, JPMorgan, Goldman Sachs and Janus Henderson. Several providers also offer a variety of model asset allocation options.

The contract allows RIAs “to manage and bill directly on their clients’ assets without creating a taxable event or reducing clients’ benefits.” According to the product brochure: 

  • Withdrawals for advisory fees will not be considered a withdrawal if the amount of advisory fees withdrawn is equal to or less than 1.50% of the total account value for the calendar year.
  • Withdrawals for advisory fees that exceed an annual rate of 1.50% of the account value during the calendar year may reduce the death benefit amount by more than the actual excess withdrawal amount.
  • Withdrawals from the contract to pay advisory fees reduce the account value by the withdrawal amount.
  • Withdrawals for advisory fees may impact guarantees under the contract and the benefits provided by optional benefits.
Wells Fargo to sell its asset management business

Wells Fargo & Company has agreed to sell its Wells Fargo Asset Management unit to (WFAM) to private equity firms GTCR LLC and Reverence Capital Partners, L.P., for $2l1 billion. The sale includes Wells Fargo Bank N.A.’s business of acting as trustee to its collective investment trusts and all related WFAM legal entities, according to a release.

Upon closing of the transaction in the second half of 2021, the new, independent company will be rebranded. “As part of the transaction, Wells Fargo will own a 9.9% equity interest and will continue to serve as an important client and distribution partner,” the release said.

Nico Marais, WFAM’s CEO since June 2019, will remain CEO; he and his leadership team will continue to oversee the business. Joseph A. Sullivan, former chairman and CEO of Legg Mason, will be appointed as executive chairman of the board of the new company following the closing of the transaction.

WFAM has $603 billion in assets under management, 24 offices globally, and specialized investment teams with 450 advisers. WFAM will operate independently as portfolio company of GTCR and Reverence Capital.

“This transaction reflects Wells Fargo’s strategy to focus on businesses that serve our core consumer and corporate clients, and… on growing our wealth and brokerage businesses,” said Barry Sommers, CEO of Wells Fargo’s Wealth & Investment Management division, in. a release.

Wells Fargo & Company has approximately $1.9 trillion in assets and serves an estimated one in three U.S. households and more than 10% of middle market companies in the US.

Philips, MetLife and Principal Financial seal $1.2 bn pension risk transfer deal

Philips North America LLC has agreed to transfer about $1.2 billion in pension plan obligations to Principal Financial Group and the Metropolitan Tower Life Insurance Company subsidiary of MetLife.  of Philips North America Pension Plan obligations to Principal and MetLife.

The agreement, signed in the fourth quarter of 2020, provides guaranteed retirement income solutions for approximately 11,000 retirees, beneficiaries and deferred participants in the Philips North America Pension Plan.

MetLife will act as the lead administrator for the monthly benefits for approximately 9,000 retirees and their beneficiaries in the Philips North America Pension Plan. Principal will have financial responsibility for a portion of these monthly benefits and will settle such obligations directly with MetLife. Principal will have sole responsibility for the approximately 2,000 deferred participants.

The transaction will not change the amount of monthly pension benefits received by the Philips’ pension plan participants and participants will continue to receive a single payment each month. MetLife and Principal, rather than Philips, will be responsible for making these monthly payments.

Security Benefit receives IRS approval of annuity fee arrangements

Security Benefit has received a favorable private letter ruling (PLR) from the Internal Revenue Service (IRS) that payment of certain investment advisory fees from an annuity contract are not treated as a taxable event by the contract owner. This allows financial professionals and their clients to incorporate non-qualified fee-based annuities in their portfolios more easily.

Financial professionals can deduct client fees from the cash value of certain non-qualified Security Benefit annuities, without tax consequences for their clients. The advisory fees must only be for ongoing investment advice and cannot exceed an annual rate of 1.5% of the advisor contract’s cash value. The fees must be related only to the annuity and paid directly to the registered investment advisor.

Currently, Security Benefit offers a fixed index annuity, ClearLine, and the Elite Designs variable product on DPL’s platform. 

An Eldridge business, Security Benefit and its affiliates offer products in retirement markets and wealth segments for employers and individuals and held $41.1 billion in assets under management as of December 31, 2019. 

© 2021 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on February 18, 2021 by -

Women are skeptical of advisers: Cerulli

One of the most notable gender-based differences between investors is the desire to be actively involved in day-to-day management of their portfolios, according to Cerulli Associates. Women express less interest in both managing their own accounts and in hiring advisers.

As reported in the latest Cerulli Edge—U.S. Retail Investor Edition, only 41% of female respondents want this depth of engagement in their financial affairs, compared with 57% of men. One in four men “strongly agreed” to wanting day-to-day involvement, versus 15% of women.

Women also expressed more reluctant to pay for financial advice. About half (51%) of female respondents said they are willing to do so, compared with 58% of men. This provides both a challenge and an opportunity to providers in the advice segment,” says Scott Smith, director of advice relationships, in a release.

Advisers will need to make their value clear to women, Smith said. “As regulators are consistently elevating the role of transparency and disclosure in client relationships, investors are more likely to ask questions about advice fees and commission charges.”

As the industry edges toward a greater emphasis on planning-based fiduciary relationships, the benefits of employing trusted advisors are becoming more material. Instead of simply recommending the “best” stocks or funds, advisors are increasingly adopting process-based planning, which creates an implementation timeline.

By dividing this timeline into tangible milestones, advisors can convey the value they add with each step more effectively than if they merely assess an ambiguous “wealth management” fee, according to Cerulli.

“When they connect their remuneration to specific responsibilities and outcomes, advisors will allay the skepticism of many female investors,” said Smith. “That will create millions of  mutually beneficial client relationships.”

Equitable announces $1 billion share buyback

Equitable Holdings, Inc. (NYSE: EQH) announced this week that its board of directors has authorized a $1 billion share repurchase program.

“The uninterrupted execution of our capital management program highlights the strength and resiliency of our balance sheet. Combined with our strong performance amidst a challenging year, we remain confident in our ability to generate sustainable cash flows and return capital to shareholders,” said Anders Malmström, Chief Financial Officer of Equitable Holdings, in a release.

“The announcement of a new $1 billion share repurchase authorization further evidences our commitment to delivering attractive capital returns and generating value for our shareholders.”

Under this authorization, the Company may, from time to time, purchase shares of its common stock through various means including open market transactions, privately negotiated transactions, forward, derivative, accelerated repurchase, or automatic share repurchase transactions, or tender offers. The authorization for the share repurchase program may be terminated, increased or decreased by the board of directors at any time.

Comprised of Equitable and AllianceBernstein, Equitable Holdings has approximately 12,000 employees and financial professionals, $746 billion in assets under management (as of 9/30/2020) and more than 5 million client relationships globally.

© 2021 RIJ Publishing LLC. All rights reserved.

January 2021 fund flows follow 2020 pattern: Morningstar

Posted on February 18, 2021 by -

Long-term mutual funds and ETFs collected $95 billion overall in January 2021, according to Morningstar’s latest fund flow report. US equity funds saw outflows of $38 billion during the month, with actively managed funds losing about $26 billion and passively managed funds losing about $12 billion.

Among U.S. category groups, taxable-bond funds dominated, with $79 billion of inflows in January and $459 billion of inflows over the trailing 12 months, the most by far for any group, the report said.

Investors continued to pour assets into intermediate core bond and intermediate core-plus bond funds, which each saw near-record inflows of more than $25 billion and $13 billion, respectively.

Municipal-bond funds saw a record of $15.9 billion of inflows, potentially in anticipation of increased federal support for cash-strapped municipalities. Sector-equity funds took in $18 billion for their fourth consecutive month of gains, powered by big flows into financial and clean-energy ETFs.

At the fund level, passive bond funds attracted the largest inflows in January. Vanguard Total Bond Market II Index led with $6.9 billion of inflows. Ark Innovation ETF joined the top 10 for the second month in a row with $3 billion of inflows.

Equity funds dominated the list of funds with the biggest outflows, with SPDR S&P 500 ETF seeing nearly $12 billion of outflows. Other large funds, such as Vanguard Institutional Index and iShares Core S&P 500 ETF, posted multibillion-dollar outflows.

Vanguard led all fund families with $38 billion of long-term fund inflows during January, with its taxable-bond funds taking in the most among major categories, with $27 billion. State Street Global Advisors had the month’s heaviest outflows at $5 billion.

© 2021 Morningstar, Inc. Used by permission.

Fear of longevity: A victim of COVID-19?

Posted on February 18, 2021 by -

Perhaps the coronavirus pandemic heightened Americans’ sense of mortality, and dulled their expectations of longevity.

No one knows why, but the perceived value of having guaranteed lifetime income (in addition to Social Security) declined between February and August, as the coronavirus pandemic spread throughout the United States and elsewhere around the globe, according to a new whitepaper.

Sponsored by CANNEX and based on the latest Guaranteed Lifetime Income Survey by Greenwald Research, 46% of US consumers feel less financially secure and 22% feel less comfortable with risk as the result of the pandemic.

But the percentage of consumers surveyed who rated lifetime income as highly valuable (6 or 7 on a scale of 7) fell to 63% from 71% between February and August 2020. “This also represents the lowest point this statistic has been in the last three years,” the report said.

“In addition, fewer consumers agreed with the idea that ‘it is especially important for people over 50 to have a strategy to protect their portfolio against significant investment loss,’” the whitepaper said. In February, 84% agreed with this; in August only 76% agreed. There was 84% agreement with that statement in 2019, 91% in 2018, and 81% in 2016/17.

The GLIS is conducted by Greenwald Research and CANNEX. The annual surveys were fielded in February 2020, days before the market fell dramatically in response to the global COVID-19 crisis. To examine the effects of the pandemic, the researchers conducted an additional mid-year update of both surveys between July 30 and August 13, 2020.

This included a survey of 1,000 Americans between the ages of 55 and 75 with at least $100,000 in investable assets, and a survey of 200 financial professionals with at least $15 million in assets under management.

The GLIS also tested the opinions of financial advisers. Between February and August, the percentage of financial professionals who reported themselves “highly confident in their knowledge of lifetime income products” feel to 59% from 71%. In 2019, 73% reported themselves as highly knowledgeable. self-reported confidence in their knowledge of GLI products decreased dramatically from 71% highly knowledgeable to 59%. The year before (2019), 73% felt highly knowledgeable.

Only 35% of financial professionals felt highly knowledgeable about the CARES Act, which was signed into law at the end of March, long before the August study. Furthermore, the CARES Act contains retirement-related measures that could be important for many clients.

© 2021 RIJ Publishing LLC. All rights reserved.

Jackson National Puts Its Future in Veteran Hands

Posted on February 18, 2021 by -

As it prepares to de-merge from UK-based Prudential plc after 35 years and begin trading on the New York Stock Exchange (as JXN), Jackson National Life—the leading issuer of variable annuity contracts in the US—has named new top management.

Laura Prieskorn, most recently Jackson’s Chief Operating Officer, was named CEO. Marcia Wadsten, who joined Jackson 29 years ago and had been Chief Actuary, was named Chief Financial Officer. They replace Michael Falcon and Axel Andre, respectively.

A 31-year Jackson veteran, Prieskorn was responsible for developing the company’s operating platform and has been a member of its executive, investment and product committees, according to a February 10 SEC filing. Wadsten has been a leader in product design, pricing and risk management.

Falcon, whom Prudential plc hired in January 2019, had been CEO of JP Morgan Asset Management in Asia. He had no previous life/annuity company experience. Steve Kandarian, the former chairman and CEO of MetLife, who helped engineer the spin-off of Brighthouse Financial from MetLife in 2017, will be Jackson’s chairman.

Rather than hold a conventional initial public offering, Prudential plc will use a demerger, “whereby shares in Jackson would be distributed to Prudential shareholders,” the ratings agency AM Best said on January 28. Pending regulatory approval, this “would lead to a significantly earlier separation of Jackson than would have been possible through a minority IPO and future sell-downs,” the release said. Prudential plc will retain a 19.9% share of Jackson.

Jackson had about $205 billion in fee-earning variable annuity (VA) assets on Sept. 30, 2020, according to Morningstar. That’s more than any other US individual annuity issuer. (Only TIAA has more VA assets, with $500 billion, but primarily in its group annuities.) Full-year 2020 financial results will be announced on March 3, 2021, the company said. The spin-off is expected to be completed in the second quarter of this year.

Jackson sold $11.7 billion in VAs in the first three-quarters of 2020. Of that, its top-selling Perspective II contract accounted for about $8.6 billion. Among distribution channels, Jackson is currently the top seller of VAs in the independent broker-dealer channel, the bank/credit union channel and the wirehouse channel.

The context

The US life/annuity industry has seen waves of reconfiguration and consolidation since the 2008-2009 financial crisis. Foreign owners like AXA, ING, and Aviva divested their US annuity businesses, as did MetLife and The Hartford domestically. Opportunistic private equity and buyout firms like Apollo, Blackstone, KKR and others have picked up the pieces and used their esoteric investing skills to raise yields on the assets backing the annuity contracts.

The drivers behind all this creative destruction have been ultra-low interest rates. Starved for yield and seeing the assets behind their liabilities weaken, annuity issuers have derisked, either by divesting, raising prices, switching their product mix or reinsuring distressed blocks of in-force contracts. European owners of US insurers are affected by the implications of Solvency II, a new regulatory regime that is changing the economics of the global life/annuity industry.

Changing strategies

Over the past several decades, Jackson has charted its own distinct path through industry turbulence. Started in 1961 in Jackson, Michigan, Jackson National was a regional life company that sold fixed-rate annuities and term life issuer directly through insurance agents, bypassing big distributors. It was purchased by Prudential plc in 1986.

In 1994, new CEO Bob Saltzman changed Jackson’s business strategy. The company started selling variable annuities, beefed up its wholesaling force, and began courting the distributors it once bypassed. In 2008, the year of the Great Recession, Jackson sold about $6 billion worth of VAs and $4 billion worth of fixed annuities.

Not having sold as many VAs with generous lifetime income riders as firms like MetLife, Prudential and then-AXA Equitable did, Jackson’s VA book wasn’t as vulnerable to the subsequent decline in interest rates. Instead of switching its emphasis to indexed products or reducing its VA sales, Jackson doubled down on VA sales and gave advisers lots of flexibility.

“They were the only carrier that didn’t require investment restrictions on contracts with lifetime income riders, and that gave them half the RIA (Registered Investment Advisor) business,” said Scott Stolz, a former Jackson executive who until recently was head of annuity product distribution at Raymond James.

“I think they made a bet after the financial crisis that the market would revert to the mean, and that VA account values would go up faster if they weren’t volatility controlled.” With the huge bull market since 2010, that bet paid off. They also charged 30 to 40 basis points more for their income riders, while other VA issuers found they hadn’t been charging enough to survive a long interest-rate drought, Stolz told RIJ.

Enter Athene

One challenge for Prudential plc in spinning off Jackson National, Stolz said, was the danger of a ratings downgrade when the newly independent US company no longer has the direct financial support of the British company. In August 2020, A.M. Best downgraded Jackson’s financial strength ratings to “a” from a+” and changed its outlook to negative to reflect “the removal of the rating enhancement previously afforded by Prudential plc.”

Last summer’s deals with Athene, the life insurance subsidiary of Apollo Global Management, may give Jackson the capital reinforcement it needs. Bermuda-based Athene Life Re is reinsuring Jackson National’s $27.6 billion book of fixed annuity business, added a $1 billion to Jackson National’s surplus (via a reinsurance ceding commission).

At the same time, Athene Holding, the parent of Athene Life Re, invested $500 million in Jackson, acquiring 9.9% of voting shares and 11.1% of economic shares. Whether Apollo will take over some of Jackson National’s asset management chores has not been made clear.

Besides Jackson, since 2009 Athene Life Re has reinsured blocks of life or annuity or business for American Equity Investment Life, Western United Life Assurance, Universal American, Jefferson National, Liberty Life, Transamerica, Presidential Life, Aviva USA, Sammons Financial Group, Lincoln National, Voya, MassMutual, Brighthouse Financial and Life Insurance Company of the Southwest.

Other personnel moves

Aside from appointing a new CEO and CFO, Jackson made additional updates to its leadership team. Dev Ganguly will assume the role of Chief Operating Officer. Julia Goatley will return to Jackson and assume an interim role as General Counsel effective February 16, 2021, replacing Andrew Bowden, who is leaving Jackson. Goatley previously served as Senior Vice President, Insurance Legal before departing Jackson in early 2019.

Continuing in current roles will be Aimee DeCamillo, Chief Commercial Officer and President, Jackson National Life Distributors LLC (JNLD); Brad Harris, Executive Vice President, Chief Risk Officer; Chad Myers, Vice Chair of Jackson Holdings LLC; Dana Rapier, Senior Vice President, Chief Human Resources Officer; Stacey Schabel, Senior Vice President, Chief Audit Executive.

Myers will assume Investor Relations and Government Relations responsibilities while leading asset management and institutional product teams, including JNAM (Jackson National Asset Management, LLC, and PPM (PPM America, Inc.).

In Jackson’s finance team, Steve Binioris will continue to lead Asset Liability Management and assume responsibility for the Actuarial team, serving as Chief Actuary for Jackson. Mike Costello will remain Treasurer of Jackson and lead Jackson’s Institutional Products and Financial Planning and Analysis teams. Don Cummings, who joined Jackson in December of 2020, will lead the Controller’s Office, serving as Chief Accounting Officer responsible for Financial Reporting.

© 2021 RIJ Publishing LLC. All rights reserved.