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Should Annuity Firms Care About Social Media?

Posted on October 28, 2009 by Ben Pousty, Corporate Insight -

“Progressive” is not a word typically associated with the annuity industry’s online efforts. The annuity account opening process continues to be arduous and efforts to fully automate and streamline the online process have stalled. Additionally, annuity client and advisor websites lag behind other segments of the financial services industry, such as banking and brokerage, in terms of online account management and client servicing functionalities.

While some of these shortcomings can be attributed to stringent regulatory policies, much of it also has to do with the average age of annuity customers. Annuity contract holders are generally older than most investors, a result of the products’ retirement-focused payout structure. The recommended age to purchase a variable annuity is 55 and recent surveys show the average age of annuity owners is currently 70, up from 66 in 2005.

This brings us to annuity firms’ reluctance to implement social media capabilities on their consumer and advisor websites. A look at the average age of users shows why annuity providers may still be hesitant to get on board: recent surveys conducted by HitWise have found that 59% of the users on social networking sites are between the ages of 18-34 — not exactly the target audience for annuity firms. While the number of users 55 or older has increased by 77% over the last year, this group still accounts for only 5% of the total user base. Moreover, the main draw for many 55+ users surveyed was reconnecting with old friends and staying in touch with family.

Despite the apparent age and lifestyle discrepancies between social media users and annuity investors, a few firms have introduced social media features to clients and prospective investors with varying degrees of success.

Over the last two years, AXA Equitable and TIAA-CREF have both taken a stab at customer-facing social media projects. Among the firms we cover, TIAA-CREF has been the most active and most successful to date. The firm recently launched the final version of myretirement.org, after first making a beta version available to select participants in February 2007.

Myretirement.org offers message boards that allow TIAA-CREF clients to discuss a broad range of financial and lifestyle topics, ranging from investment strategies to travel and leisure. Users create custom profiles with personal images and are able to view other member profiles. Myretirement.org also lets members connect directly via friend requests, a popular feature borrowed from larger social networking sites.

MyRetirement.org Home Page
MyRetirement.org Homepage

AXA Equitable introduced MyRetirementShop.com in July 2008. The sitelet combined investment education content and lifestyle resources (concierge service for purchasing event tickets, golf reservations, etc.) with open forums promoting discussion among community members on a variety of topics.

With nearly 10,000 members and several hundred posts, TIAA-CREF’s myretirement.org seems to have established a solid footing among TIAA-CREF plan participants. Conversely, while AXA’s MyRetirementShop.com remains publicly available, the open forums (the lone social networking aspect of the site) were removed in October 2008 due to a lack of participation.

The relative success of TIAA-CREF’s social network shows that annuity providers can do well in the social media space. But why did TIAA-CREF succeed while AXA languished?

The answer may lie in the phased roll-out and development of the TIAA site, the firm’s philosophy governing the end-user experience, and the unique nature of the firm’s customer base. With Myretirement.org, TIAA-CREF created an open social networking site that fostered a truly collegial atmosphere. By allowing members to communicate directly and building the site around user-driven message board content, TIAA ultimately allows the end-user to determine their experience. AXA’s MyRetirementShop, on the other hand, highlighted content provided largely by the firm, making the open forums feel secondary. The site also imposed significant barriers to entry, including a separate registration process.

TIAA-CREF had another advantage in that the firm’s clients tend to be drawn from certain professional backgrounds, specifically the academic, medical, research and cultural fields, i.e., those that “serve the greater good.” This shared experience provides a strong foundation for an online community.

TIAA-CREF’s decision to initially release a beta version of myretirement.org for select clients also contributed significantly to its success. During the roughly two plus years of the beta release, the firm was able to use feedback to improve site features and work out the kinks, while at the same time seeding the community with active users. Thus, when the final version went live, the site was already chock-full of user-generated content. AXA, on the other hand, launched MyRetirementShop.com without seeding the community, meaning that when users first accessed the site, they found an online ghost town.

Thus far, annuity firms’ general hesitancy to enter the realm of social media has been justified — the current crop of annuity clients has not taken to social networks in any truly meaningful way. But this will not be the case forever. After all, on networks like Facebook, the fastest growing demographic is users 35 years old and older.

Industry Views are special reports that are sponsored and independent from RIJ’s editorial content.

Which Insurance and Annuity Providers Do Retirement-Oriented Registered Reps Like Best?

Posted on October 28, 2009 by Editor Test -

Which Insurance and Annuity Providers Do Retirement-Oriented Registered Reps Like Best?

Source: Brightwork Partners, LLC
Based on phone interviews of 338 retail advisors, December 1, 2008 to January 8, 2009.

Taiwan Grapples With Retirement Finance

Posted on October 28, 2009 by Kerry Pechter -

TAIPEI—Jack Wu teaches economics at the National Chengchi University in Taiwan’s capital, and he’s had first-hand experience with the country’s evolving pension system. As a professor at a public university, for instance, the 43-year-old bachelor is covered by the public employees pension system.

The pension isn’t as generous as it used to be—those hired since 1995 don’t earn the guaranteed 18% on savings in retirement that some older civil servants still enjoy—so Wu has mutual funds with AEGON and ING and contributes $450 a month to a university-sponsored deferred income annuity from Taiwan Life.

“The 18% policy was said to have created a great burden on those outside the public sector, who thought it was unfair,” Wu told RIJ over a lunch of spicy chicken and noodles yesterday at the Sheraton Taipei on Zhong Xiao East Rd.

Wu, who has a Ph.D. from the University of Michigan, is also a first-hand participant in Taiwan’s response to the fact that, like the United States, it will soon have too few workers supporting too many retirees. He’s part of the international Aging Society 2030 project, serving on a team that is helping boost financial literacy in rural parts of this subtropical New Jersey-sized island nation of about 23 million.

“The savings rate is high in Taiwan, but only five or six percent of the population invests in securities,” he said. “The rest put their savings in the bank. That’s why I and two other colleagues from the Department of Social Work and Insurance are working on a project to educate the elderly people to make investments, prepare for their retirement, and not rely only on the social security system.”

New defined contribution plan

East Asian countries like Japan and Taiwan are faced with a demographic double whammy: their longevity is among the world’s highest and their birth rate is low. In Taiwan, married couples are producing only about 1.1 child each. And even as they lose manufacturing jobs to China, only 120 miles away across the Taiwan Strait, the Taiwanese are trying to establish a stronger social insurance safety net, including national health insurance and pension reforms.

“We had a new labor pension scheme launched in 2005,” Wu said. “In the past, if you worked in the private sector, your employer could deposit some money for your pension, but if you didn’t work there until retirement you lost it. Now we have the new individual account.

“Your employer deposits six percent, which is mandatory, and you can add another six percent voluntarily. The contributions can only receive about three percent interest, a time deposit, so we haven’t really had self-management. They collect the money, and invest in stocks and bonds, and give you three percent.

“About 30% of the Taiwanese are self-employed and in the past have been outside the official pension system, but we have a new national pension in October 2008 that covers them. They must contribute 675 Taiwanese dollars a month (about $20) and can receive a retirement benefit of about 7,000 Taiwan dollars a month (about $210). That’s only enough for basic needs. For low-income people the government subsidizes 100% of the contributions,” he said.

But not everyone likes the new plan. “Lots of people are refusing to pay into national pension for their children or spouses, because they think the benefit isn’t high enough and because they’re not sure whether the assistance will be there when they retire,” Wu told RIJ.

“Only about 60% of the people who are supposed to be covered by national pension are paying, and they represent about 20% of the whole population of Taiwan. The system is still trying to work and the government is pushing more people to participate in the pension,” he said.

“Most people in the rural areas don’t even know how to contribute to the national pension, even though the government has sponsored commercials about it. People in the rural areas think they can rely on themselves. We also have the Old Age Farmers Allowance. Farmers can get 6000 Taiwanese dollars a month, and they don’t have to contribute. Elderly people can also get about 3000 Taiwanese dollars a month, or about $180, without contributing anything.”

Reverse mortgages

To help Taiwanese families finance retirement, Wu said, the government has promoted reverse mortgages, financed through banks. But, if successful, such a program could clash with cultural norms. “In traditional Chinese society, the property is important, and parents would leave property to children,” he said. “But if they use the reverse mortgages, there might be issues.”

Rather than being able to look forward to selling their homes and living with their children in retirement, urban Taiwanese today are more likely to have their children and even grandchildren living with them, Wu said. That’s a reflection of declining wages among younger people. “In the cities in the 1980s and 1990s, the younger generation wanted to move out, but more and more people are living with parents again.”

Driving much of the change in Taiwan, as in Japan, is the shrinking number of young people relative to the elderly. Children 14 and younger account for only about one in five Taiwanese. In 2007, there were 7.2 Taiwanese workers for every retiree. By 2026, there will be only 3.2, according to a research paper, “Financial Sustainability of Taiwan’s Social Security System,” Wu published last year.

“It’s rare for a Taiwanese couple to have two children. A lot of Taiwanese women are more educated, and postpone marriage. In the economics department of my university, of the five or six female faculty members, only two are married, and they don’t have children.”

“Less-educated Taiwanese men sometimes have difficulty finding Taiwanese wives and often take brides from Southeast Asia,” he added. “Today, one in six Taiwanese births are now to such brides. Most babies in Taiwan are born to people who are not wealthy. In the rural areas people tend to have more babies. People who live in urban areas often feel that they cannot afford to have children.”

Gray Zone Strategies

Posted on October 27, 2009 by Jim Otar -

In Chapter 43 of “Unveiling the Retirement Myth,” Otar explains his approach to helping clients in the “Gray Zone,” who don’t have enough assets to self-insure against the major retirement risks, but not so little savings that they must transfer all or most of their risk to insurance companies by buying life annuities.

Gray Zone Strategies by Jim Otar

One-Third of Health Care Spending Wasted

Posted on October 27, 2009 by Editor Test -

Administrative inefficiency, unnecessary treatment, medical errors and fraud cost the U.S. health care system $600 billion to $850 billion each year, according to a Thomson Reuters review of published research and analyses of proprietary healthcare data.

Unnecessary care, some of it associated with “defensive medicine,” accounted for 40% of the wasted expenditures, the news agency found. Fraud accounted for almost 20%.

“An estimated $700 billion is wasted annually. That’s one-third of the nation’s healthcare bill,” said Robert Kelley, vice president of healthcare analytics at Thomson Reuters. “By attacking waste, healthcare costs can be reduced without adversely affecting the quality of care or access to care.”

The study identified these sources of avoidable spending:

Unnecessary Care (40% of healthcare waste): Treatments such as the over-use of antibiotics and the use of diagnostic lab tests to protect against malpractice exposure cost $250 billion to $325 billion each year.

Fraud (19% of healthcare waste): Phony Medicare claims, kickbacks for referrals for unnecessary services and other healthcare fraud cost $125 billion to $175 billion each year.

Administrative Inefficiency (17% of healthcare waste): Redundant paperwork in the U.S. healthcare system accounts for $100 billion to $150 billion in spending annually.

Healthcare Provider Errors (12% of healthcare waste): Medical mistakes cost $75 billion to $100 billion each year.

Preventable Conditions (6% of healthcare waste): Hospitalizations for conditions like uncontrolled diabetes, which could be managed on an outpatient basis, cost $25 billion to $50 billion each year.

Lack of Care Coordination (6% of healthcare waste): Inefficient communication between providers leads to duplication of tests and inappropriate treatments that cost $25 billion to $50 billion annually.

Neapolitan Annuity

Posted on October 27, 2009 by Editor Test -

After the VA arms race ended in armageddon last winter, the big annuity manufacturers tasked their actuaries and product developers to engineer a new breed of income products that wouldn’t backfire like GLWBs.

Life insurance companies have largely decided that stocks are too risky to guarantee, despite the sentiments of Jeremy Siegel’s famous book, “Stocks for the Long Run.”

One of the newest designs is Hartford Life’s Personal Retirement Manager, which the Simsbury, CT insurer calls “a way to combine long-term investment growth and guaranteed lifetime income potential in a single, user-friendly, tax-deferred retirement planning vehicle.”

The Personal Retirement Manager is like Neapolitan ice cream: it’s three flavors in one. Contract owners can allocate their assets bucket-style among mutual funds in a variable account, a fixed return account, and a “Personal Pension Account” or PPA that’s actually a deferred income annuity.

There’s also a process baked into the product. It lets retirees gradually transfer money ($10,000 initial minimum) whenever appropriate from their variable and fixed accounts into the PPA—perhaps between ages 60 and 70—before turning on lifetime income.

“For years, everybody knew that if you wanted income, the SPIA was the most efficient way to deliver it,” said John Diehl, CFP, senior vice president with The Hartford’s Investment & Retirement Division. “So we looked at the basic concept of the SPIA, and we looked at the reasons those products don’t sell, including the fact that the advisor loses track of the assets. We thought that if we offset that, we could get a more successful product than a SPIA and a cheaper, more effective product than a GLWB.”

More appealing

From a marketing perspective, the Personal Retirement Manager is meant to disarm all the usual client objections to income annuities by giving them almost complete access to their money. The unspent income stream can even be refunded. The product is also vastly less risky to the issuer than a GLWB.

“We tried to take away all the negatives that get in the way of the annuity decision,” Diehl said. “And by packaging investment and income in one product, we let people bite off as much as they can chew at any one time. We said, ‘Let’s make income delivery appealing.’”

You can’t make an income annuity more liquid without hurting the payout rate, however, and the income stream from the PPA is lower than the rate from a fixed life-only income annuity. It’s hard to make apples-to-apples comparisons, however.

For instance, according to Diehl, a 60-year-old man would pay $100,000 today to lock in a $9,348-a-year commutable income from the PPA starting at age 70. For comparison, Vanguard would charge a 70-year-old man $110,355 for a life-only immediate income annuity (or about $126,000 for a cash refund income annuity) paying $9,348 a year starting today. Bear in mind that the PPA’s $100,000 would grow at a guaranteed annual rate of three percent during the 10-year waiting period.

As envisioned by Hartford Life, the contract owner would transfer money in steps from the variable account and/or the fixed account to the PPA, until the PPA has enough money in it to buy a life annuity that pays a suitable guaranteed rate of income at a pre-selected start date.

“You can imagine a scenario where people are dollar cost averaging into an income stream,” Diehl said. “With SPIAs (single-premium immediate annuities), you’d have to add contract after contract in a ladder. He could in theory turn on part of the PPA. If he had $150,000 in PPA, he could turn on 25% and let the rest ride.”

Contract owners can lock in an annuity payout rate at the time of purchase by setting an income date. But, for flexibility, the contract owner can decide to switch on income up to three years before or after the pre-selected start date and receive the same payout rate, adjusted for age.

“It’s like Social Security, where you can claim a different level of benefits over a range of years,” Diehl said. If you say you want to retire at 67, we’ll be able to quote you an income level if you retire anytime between age 64 and 70. If you go outside the window, you’ll have to take a payout based on current interest rates.”

To resolve the usual objections to income annuities—their irrevocability, lack of liquidity, and lack of a death benefit—Hartford Life has added liquidity back in. The owner can access the money in the variable account at any time; he can also access the fixed account, subject to a market value adjustment if interest rates have change.

When the owner dies, his beneficiaries can receive not just the assets in the variable and fixed accounts, but also the unspent PPA contributions, grown at a compounded rate of (currently) three percent per year.

The product comes in four share classes, A, B, C, and I. The A share has a maximum front-end load of 5.5% and ongoing insurance costs of 50 basis points a year. The B shares have ongoing costs of 50 basis points, including M&E and administrative charges, and an eight-year CDSC period with an initial surrender fee of seven percent. The C shares cost 135 basis points a year. The I shares, designed for fee-based advisors, cost only 30 basis points a year.

Total annual fund operating expenses for all classes range from 44 basis points to 237 basis points. Fund providers include AIM, Alliance Bernstein, Fidelity, Franklin Templeton, American, Hartford, MFS, Lord Abbett, Putnam and Wellington Management.

The product is designed to be friendly to fee-based advisors. Before the client switches on income, the advisor can earn management fees on the assets in all three accounts—the variable, fixed, and the PPA.

Even after income begins, in contrast to a SPIA, the advisor can continue to earn a management fee on the unpaid balance of the PPA. “So for the advisor who says, ‘I’m still providing services, but the asset is gone from the books,’ we’ve made it attractive,” Diehl said.

It’s the Year of the Un-COLA for Social Security

Posted on October 27, 2009 by Editor Test -

With consumer prices down over the past year, monthly Social Security and Supplemental Security Income benefits for more than 57 million Americans will not automatically increase in 2010. This will be the first year without an automatic Cost-of-Living Adjustment (COLA) since they went into effect in 1975.

“Social Security is doing its job helping Americans maintain their standard of living,” Michael J. Astrue, Commissioner of Social Security said. “Last year when consumer prices spiked, largely as a result of higher gas prices, beneficiaries received a 5.8% COLA, the largest increase since 1982. This year, in light of the human need, we need to support President Obama’s call for us to make another $250 recovery payment for 57 million Americans.”

This year there was no increase in the Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2008 to the third quarter of 2009. The Social Security Act provides that benefits increase automatically each year if there is an increase in the CPI-W from the third quarter of the last year to the third quarter of the current year.

In addition, because there was no increase in the CPI-W this year, under the law the starting point for determinations regarding a possible 2011 COLA will remain the third quarter of 2008.

Since there is no COLA, the statute prohibits an increase in the maximum amount of earnings subject to the Social Security tax as well as the retirement earnings test exempt amounts. These amounts will remain unchanged in 2010. The attached fact sheet provides more information on 2010 Social Security changes.

The Department of Health and Human Services has not yet announced if there will be any Medicare premium changes for 2010. Should there be an increase in the Medicare Part B premium, the law contains a “hold harmless” provision that protects about 93% of Social Security beneficiaries from paying a higher Part B premium, in order to avoid reducing their net Social Security benefit.

Life Insurance and Annuities Excluded from CFPA Jurisdiction

Posted on October 27, 2009 by Editor Test -

Rep. Gwen Moore (D-WI) and Rep. Erik Paulsen (R-MN) successfully added language to the bill that will exclude life insurance and annuities in the final committee legislation, the Insured Retirement Institute reported last week.

By clarifying the definition of the “business of insurance,” the Committee ensured that clear that Consumer Financial Protection Agency will not have jurisdiction over life insurance and annuities.

Annuity products are currently and thoroughly regulated by the Security and Exchange Commission (SEC), FINRA and 50 state regulators, receiving oversight and monitoring. IRI is on record in support of enhanced consumer protections, strongly advocating for transparency, suitable sales and education and training within the industry.

“Today’s action brings us one step closer to protecting consumers while allowing the industry to provide the best products in the most timely fashion,” said Cathy Weatherford, President and CEO of IRI.

This past summer, in testimony provided to the House Financial Services Committee addressing the CFPA and the need to increase consumer protection, IRI testified that given the current regulatory protections, adding yet another layer of regulation to the insurance industry is unnecessary.

Labor Secretary Links Health Care Reform, Retirement Security

Posted on October 27, 2009 by Editor Test -

At the Retirement USA conference in Washington D.C. last week, U.S. Secretary of Labor Hilda Solis argued that health insurance reform is essential for a financially secure retirement, RTT News reported.

“For retirees and their families, employer-sponsored health care is rapidly disappearing,” Solis said. “And, outside the unionized and public employee settings, individuals retiring before Medicare-eligibility age are all too often left on their own to find coverage. And what they can find is often too limited and too expensive.

“Even families with health insurance are getting crushed by the rising costs,” she added. “My own father, who had a stroke last year, has seen his prescription drug costs skyrocket. Every family has a story. We can and we must turn this around.”

She also announced that the Labor Department will soon ask retirement plan providers to submit ideas for encouraging more employers to offer guaranteed income options to 401(k) plan participants.

“We also hope to educate participants on the value of selecting a lifetime income stream or annuity product when they retire, so that they will not outlive their retirement benefits,” Solis said. “It’s time to think of new ways to encourage employers to provide pensions for their workers and new types of pensions that do not put the full investment responsibility on workers.”

Fed To Review Compensation at Banks—Confidentially

Posted on October 27, 2009 by Editor Test -

The Federal Reserve announced a plan last week to have federal examiners review pay packages at the nation’s largest banks. But the periodic reviews and any discussions between regulators and the companies over pay issues would be confidential.

Rather than impose caps on pay or prohibit multi-million dollar pay packages, the Fed’s plan would try to eliminate compensation packages that encourage risky business practices and a focus on short-term term performance.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability, Federal Reserve chairman Ben S. Bernanke said.

“The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”

The Fed also revealed details of its decision to cut in half the pay of the highest earning executives at Citigroup, Bank of America, the American International Group, General Motors, Chrysler and the financing arms of the two automakers, all of which received federal bailouts.

The Fed’s plan, which will be subject to a 30-day comment period, will create a two-tier system of supervising pay, using one approach for the 28 biggest bank holding companies and another for smaller banks.

Bank holding companies like JPMorgan Chase and Goldman Sachs would have to present their compensation plans to bank regulators, who could demand changes in the pay packages. The plan would apply to senior executives as well as to traders and loan officers.

In other legislative news, the House Financial Services Committee voted on Thursday to create an agency to protect consumers from predatory lending, deceptive credit card terms and other abuses.

But it will be weeks before both houses of Congress can act on a final bill to regulate the financial services industry, according to Rep. Barney Frank, D-MA, who heads the Financial Services Committee.

A measure to regulate derivatives was passed by the House Agriculture Committee last Thursday, and the Financial Services Committee approved a similar measure the prior week.

The Lions’ Share

Posted on October 21, 2009 by Editor Test -

Bank Holding Company Annuity Index Drops 15% in 2nd Quarter

Posted on October 21, 2009 by Editor Test -

The BISA-Singer’s Bank Holding Company (BHC) Annuity Index fell 15% in the second quarter of 2009, the Bank Insurance and Securities Association announced this week.

The Index is an average based on quarterly annuity (both fixed and variable) revenues (not sales) at 10 large bank holding companies as reported to the Federal Reserve Board. The index fell from125 in the first quarter to 106 in the second quarter.

Aggregate annuity revenue at the 10 bank companies covered declined 11%—from $330.76 million to $293.08 million. BISA and Singer’s Annuity & Funds Report produce the index jointly.

During the same period, sales (not revenues) of the subset of fixed annuities across all depository institutions were an estimated $8.7 billion, according to the Beacon Research Fixed Annuity Premium Study. Its findings are based on the results of insurance companies representing an estimated 86% of the U.S. market.

This was a decrease of 20% from the prior quarter and one percent compared to second quarter 2008. The change was primarily due to falling fixed annuity credited rates and a declining rate advantage over bank certificates of deposit, said Beacon.

The quarter was characterized by substantial declines in annuity production at the nation’s largest BHCs. “This marks the largest slump in the Index since we began tracking annuity revenues in the first quarter of 2007,” said Andrew Singer, editor of the Index. “In the second quarter, all ten bank companies experienced annuity declines compared with the previous quarter.”

No Health Insurance? You Court Financial Catastrophe

Posted on October 21, 2009 by Editor Test -

Americans without health insurance are one major illness away from financial catastrophe, according to a new study by the Kellogg School of Management at Northwestern University.

The study, “Does Major Illness Cause Financial Catastrophe?”, suggests that uninsured individuals near retirement age who experience heart disease, cancer or a stroke, can lose up to half of their household assets to medical bills.

The research will be published in an upcoming issue of Health Services Research Journal. The research was conducted by professors David Dranove and Andrew Sfekas at the Kellogg School of Management at Northwestern University, and Keziah Cook, Ph.D. candidate in economics at Northwestern University.

Dranove and his co-authors discovered that the assets of uninsured households declined between 30 and 50 percent among those ages 51 to 64 who experienced a major illness. Similar individuals with private health insurance did not experience a financial loss.

“Lack of insurance is at the heart of the healthcare debate with 4.2 million uninsured Americans over 55. Our research provides compelling evidence of the financial damage for these families,” said Dranove. “Despite a person’s income, the uninsured face the risk of losing their retirement savings.”

The researchers focused on households with baseline assets between $1,000 and $200,000 and who reported one of six major illnesses. The illnesses included diabetes, cancer, lung disease, heart problems, stroke, and emotional or psychiatric problems.

From Down Under, A Novel Income Product

Posted on October 21, 2009 by Editor Test -

Challenger Financial Services, Australia’s biggest seller of annuities, has launched a “unit-ised annuity product” specifically designed for inclusion on investment platforms, the Investor Daily in Sydney reported.

The Challenger Guaranteed Income Fund (GIF) aims to provide investors with a monthly income stream and a return on capital at a specified maturity date. It will invest in Challenger Life annuities with different units available to be purchased with different maturity terms attached. Investment terms on offer are for three, five and seven years.

“The creation of an annuity investment option required significant product development because unlike most other platform products, annuities are flexible and bespoke policies sold to individuals. However, the high level of demand from financial advisers and their clients warranted the investment and we’re very pleased with the end result,” Challenger Life chief executive Richard Howes said.

The new product has already been included on the BT [Financial Group] Wrap platform and is available immediately.

“With BT Wrap being first to market with the GIF, the benefits of annuities are more accessible than ever before. The ‘original’ retirement product is now widely available to investors seeking access to guaranteed income streams,” Howes said.

The motivation for its inclusion on BT Wrap has been adviser demand for products that address longevity risk and market risk.

“There are significant reasons advisers are seeking more options for the fixed income allocation of their client’s retirement income portfolios: the wake of the GFC (global financial crisis), generally cautious investor sentiment, government tax reviews and the changing needs of the growing retiree customer group,” head of BT Wrap Chris Freeman said.

Retirement Opportunity Will Also Be Disruptive—Deloitte

Posted on October 21, 2009 by Editor Test -

Financial services companies are facing the risk that the retirement of the baby boomers will disrupt existing retirement businesses as retirees move assets from current retirement accounts and into new, income-generating products.

Companies hoping to capture “money in motion” must first address internal issues around operations and products, according to Deloitte’s “Mining the Retirement Income Market” report, released today.

The report reviewed the strengths of insurance companies, mutual fund companies and banks in the competition for Boomer retirement assets, saying:

• “Insurers face a critical decision about whether to unbundle insurance coverage from asset management offerings and how best to achieve this because their ability to assume these risks is a core strategic advantage over players in the other sectors,” said Rebecca Amoroso, head of Deloitte’s U.S. Insurance practice.

• “The largest mutual fund companies in the defined contribution planmarket have the greatest exposure to asset erosion as the baby boom generation retires. But they are also in a potentially good position to capture rollover assets. Still, mutual fund companies will likely need to reposition and broaden their brands for the retirement income market,” said Cary Stier, Deloitte’s U.S. head of Asset Management Services.

• “Because most people view their banks as their primary financial institution, the industry is uniquely positioned to capitalize on its extensive existing customer network and establish a role in planning and managing retirement income programs,” said Jim Reichbach, Deloitte’s U.S. head of Banking and Securities.

In the paper, which is also available at www.deloitte.com/us/insurance. Deloitte offers 10 key actions financial services companies should consider as part of a plan to potentially succeed in the retirement market.

Fed’s Anti-Inflation Fire Drills Employ ‘Reverse Repos’

Posted on October 21, 2009 by Editor Test -

The Federal Reserve Bank of New York said October 19 that it has been working on a market tool it could use to withdraw cash from the banking system but stressed that it was not about to use it.

The New York Fed, the operational arm of the Federal Reserve, said it had been working during the last year to ensure that “this tool will be ready when and if” the policy-setting Federal Open Market Committee decides to use it.

The tool—reverse repurchase agreements, or reverse repos—would be used to help drain excess reserves from the banks and help to avert the risk of inflation created by the central bank’s emergency bailouts and quantitative easing policies.

“This work is a matter of prudent advance planning by the Federal Reserve, and no inference should be drawn about the timing of monetary policy tightening,” the New York Fed said in a release.

In a reverse repurchase agreement, the Fed sells assets like Treasuries for cash with an agreement to buy them back later at a higher price, thus removing cash from the system.

The focus of the Fed’s recent discussions and tests was to put documentation and systems in place to conduct three-party reverse repos, the New York Fed said. The Fed has been conducting three-party repos with primary dealers since 1999.

In the three-party repo market, the clearing banks JPMorgan Chase and Bank of New York Mellon as intermediaries, which allows for a wider range of instruments to be used in a transaction.

The New York Fed said “it is likely that the Federal Reserve will engage in additional tests in the future,” and that no actual operations have been conducted as part of these tests.

Green Zone Strategies

Posted on October 21, 2009 by Jim Otar -

“One of the perpetual fads in the advisory business is to pursue high net worth clients,” Otar writes. “Keep in mind that what matters most is not the size of assets, but how fast those assets are drained. Being in the green zone is a good indication that the client will likely be a good source of revenue for you, as long as you can create the ‘normal’ index returns and as long as you can maintain his/her trust.”

Green Zone Strategies by Jim Otar

Get Smart

Posted on October 21, 2009 by Editor Test -

It’s never been dumb to call a product “Smart.” There are Smart Cars from Daimler AG, Smart Menus at McDonald’s, a Smart Payment Program at Fidelity, Smart Balance margarine, and even Smart Toilets that take your vital signs when you’re not looking.

Not to mention SmartMoney magazine. And who can forget the “Smart. Very Smart.” commercials that the Smothers Brothers made for Magnavox compact disc players in the late 1980s.

When Lincoln Financial Group introduced its SmartIncome single-premium immediate annuity (SPIA) in 2007, the campaign didn’t initially look very smart. With the Iraq War/real estate bull market near its dizzy peak, investors were chasing risk, not running from it.

But since the 2008-2009 crash, Boomers’ appetite—or curiosity, at least—regarding income annuities appears to have quickened. Hints of demand for products like SmartIncome inspired Lincoln to support it with a new marketing push this fall.

“Pockets of the market have started looking at the product,” said Kris Kattman, vice president and associate actuary at Lincoln, who helped design SmartIncome. “We still have a way to go to penetrate the wider market. But we’ve steadily seen more interest and more applications all year long.”

SmartIncome was designed to overcome the usual objections to income annuities. People don’t like the forfeiture inherent in life annuities, so SmartIncome pays a lump-sum death benefit equal to the unpaid premium, if any, when the owners die.

People don’t like the illiquidity of income annuities, or the level payments of fixed income annuities. SmartIncome lets the owners access up to 10% of their unspent premium each year without penalty. As for inflation, both the monthly payments and the death benefit are indexed to the Consumer Price Index-Urban.

“We recognize that people don’t like to give up control, so we said, you can take up to 10 percent with no surrender charge. Beyond 10% we charge the equivalent of a surrender charge,” Kattmann said. “If the owners want to liquidate the contract entirely, they can.”

Such flexibility inevitably comes at the expense of the payout rates, however, and the interest generated by all the new flexibility is likely to die when prospects find out how low the initial payments will be.

For instance, the current average payout for an inflexible, no-cash value SPIA is about $650 a month for a 65-year-old man with a $100,000 premium. Lincoln didn’t quote prices on SmartIncome, but the payout of a roughly comparable inflation-protected SPIA with a cash refund feature from Vanguard is currently only $436. Moreover, Kattmann said the payout from SmartIncome, with its 10% annual withdrawal feature, would probably pay about “10 to 15 basis points” less than the typical inflation-adjusted, cash refund SPIA.

SmartIncome is available through all of Lincoln’s distribution channels, Kattman said. “Not many broker dealers have added it to their lists, but we’re working on that,” she said. The product offers intermediaries a choice of compensation streams: three percent upfront commissions with a 0.25% annual trail or an annual one percent trail. Both are comparable to similar products offered by other issuers.

In recent years, other insurance companies have tried to achieve a compromise between liquidity and payout rates in income annuities. But that’s a tall order, since annuities are like Chinese finger puzzles—they tighten as the stretch. Like the bonds on which they are based, their yields are inversely related to their liquidity.

New York Life, the most prolific seller of immediate annuities, offers a cornucopia of options on its SPIAs, including one where the payout rate resets if the 10-year Treasury rate has risen by two percentage points or more by the fifth contract anniversary. Presidential Life recently introduced a two-tier joint-life SPIA that perks up payout rates by limiting the duration of the second annuitant’s payments to life or a period certain, whichever comes first.

There’s a market for such products, but not as large a one as many economists believe there should be, given the gradual disappearance of corporate defined benefit pensions. For the first half of 2009, SPIA premiums were only $3.8 billion, or about three percent of the annuity market, which itself is only a small fraction of the mutual fund market. Academics have a name for feeble SPIA sales. They call it “the annuity puzzle.”

Unsolved Mystery

Posted on October 21, 2009 by Kerry Pechter -

The “mystery shopper” is one of the oldest and most effective research tools. You can learn a lot simply by having someone pose as a naïve consumer and catch a seller off-guard.

Journalists use this trick. Industrial spies use it. The Drug Enforcement Agency, obviously, uses it. So do market researchers.

A couple of years ago, the Washington researcher and consultant Mathew Greenwald deployed mystery shoppers to help annuity manufacturers and marketers learn why more Americans don’t buy life annuities to finance their old age.

In a two-part experiment, Greenwald first asked a bunch of academic economists whether the typical Boomer retiree should buy an annuity. “We know that annuitization is rarely used, and all kinds of reasons have been given for that, but I wanted get some insights into the desirability of an annuity,” Greenwald told RIJ recently.

In other words, if no one at all vouches for annuities, further research would be pointless. “Game over,” as it were. But all of the academics recommended annuities.

Mathew Greenwald “I interviewed 11 economists and others who are not involved in selling annuities,” Greenwald continued. “They all had different opinions about the circumstances that call for annuities. Some thought you should buy one at retirement. Some thought you should wait until age 70 when the payouts are higher, or that you should buy longevity insurance that starts when you’re 85.”

But, small differences aside, the academics unanimously supported annuities.

In the second part of the experiment, Greenwald recruited eight mystery shoppers and assigned each of them to approach an investment advisor and ask for help in creating a financial plan for retirement. “They went to advisers and said, I’m close to retirement, and I’d like your advice on how I should manage money in retirement.”

The mystery shoppers were all real near-retirees with assets of roughly $600,000 to $3 million. The advisors were registered reps at large broker-dealers such as Wachovia, Morgan Stanley or Raymond James. The meetings between clients and advisors were not a sham. The shoppers presented real account statements and, in some cases, financial plans were drawn up and fees were paid.

Not one of the advisors mentioned annuities, the shoppers told Greenwald. Instead, every advisor suggested a systematic drawdown from a diversified portfolio of stock or bond mutual funds.

Most of the advisors assumed an average positive growth rate for stocks and bonds. Their calculations and projections showed, typically, that the retirees would grow increasingly rich over the next 30 years and leave a large bequest—in addition to receiving an income.

This type of evidence is more qualitative than quantitative, Greenwald said, but it can be enlightening when combined with other data. “It’s the juxtaposition that’s of interest,” he said. “Theorists come to a different conclusion than practitioners. It informs other work we’re doing.”

Similar findings
Advisor attitudes toward annuities were also part of a study conducted by Brightwork Partners LLC at the beginning of 2009. Most of the survey participants were advisors at wirehouses, insurance companies, and independent broker dealers. Together, they represented 20 to 25 percent of the active registered rep community.

The findings of the Brightwork study support the findings of Greenwald’s mystery shopping experiment. Only 53% of advisors (and 68% of insurance company advisors only) in the Brightwork study said they recommended a period-certain income annuity to their retirement clients “almost always or sometimes.”

Advisers were more likely to recommend systematic withdrawal plans, income-oriented mutual funds, bond or CD ladders, variable annuities with lifetime income riders, long-term care insurance or “working longer” as solutions to retirement income needs.

Only nine percent of the advisers said basic payout annuities were “very” attractive. An additional 42% said they were “somewhat” attractive. That percentage jumped to 80% or more, however if the annuity included coverage for a surviving spouse, a guaranteed return of premium, or a provision to pay long-term care costs.

Advisors apparently believe they can plan for retirement income without using annuities, which they consider to be a very expensive solution to the problem, Brightwork’s Ronald L. Bush told RIJ.

For a client with $800,000, for instance, they would tend to self-insure against longevity risk. They might set $200,000 aside in a “granny fund,” not to be opened until age 85, if necessary, and tap the other $600,000 between ages 65 and 85. Annuities are seen rather as “packaged solutions” for retirees with less money under management and a greater need for income.

A survey of 503 advisors nationwide conducted by Allianz Global Investors last August delved into the retirement income question but the word “annuities” didn’t come up.

Nearly nine of 10 (89%) of advisors think their clients would be receptive to the idea of products that provide guaranteed lifetime income, but just 50% of advisors have talked to their clients about such products, according to the survey.

Advisors were far less optimistic than their clients about the performance of equities in the years ahead. But 74% of advisors felt their clients could protect themselves by focusing on alternative investments like Treasury Inflation-Protected Securities or commodities.

Compensation factor
What explains the popularity of annuities among academics but not among advisors? Greenwald did not believe that the academics’ position reflects a belief that annuities represent the “greatest good for the greatest number.”

That is, nothing in his discussions with academics suggested that they recommended annuities because they believe that mortality pooling, on which annuity payouts are based, are a society’s most efficient way to avoid a future epidemic of impoverished old people.

Rather, he said, the academics have done the math and believe that income annuities—their illiquidity notwithstanding—actually give their owners more spending power in retirement than they can get by keeping all their money at risk in the financial markets.

“I don’t think these people were thinking about what is good societally,” Greenwald said. “I think they believed annuities were more effective for individuals. I did an experiment once where we compared income from annuities with income from bonds.

“A 70-year-old man with $235,000 could get an income of $1,000 a month by investing it in a bond paying five percent, or he could get the same income by putting $130,000 in a life annuity and investing the other $105,000 in a side fund.” If the man lived longer than 10 years and the side fund earned eight percent a year, the annuity would be the better solution.

Income annuities might sell better, some say, if advisors were better compensated for selling them. With three percent commissions and, in some cases, a 0.25% trail, income annuities don’t pay a transaction-oriented rep as well as mutual funds or a variable deferred annuities do. Fee-based advisors fare even worse: an income annuity reduces the level of assets under management.

Neither Bush nor Greenwald asked advisors directly about a link between low income annuity sales and compensation, in part because it’s a delicate topic. But they offered their insights into the issue.

“From the qualitative work we’ve done with advisors, even the insurance company affiliated advisor will say, ‘You know, annuities are fine for certain clients but I don’t use them because I want to continue to manage the money,’” Bush told RIJ.

“I think advisors are receptive to innovative products or new product solutions but they have to get paid,” he added. “They have a compensation goal in mind, and they’ll try to make their compensation goal with each client. It depends on their target market. If they’re seeing a high volume of clients without a lot of assets, they’ll look for a packaged solution that gets the job done quickly.”

Greenwald acknowledged the impact of compensation, noting that it makes a difference whether the advisor has a fiduciary responsibility or not. “Are there some people who are not doing what’s in the best interest of their clients because of compensation? That’s the direction this issue leads you in. If so, that would be unfortunate.”

Probability of Survival From the Age of 65 in 2045

Posted on October 14, 2009 by Editor Test -

Probability of Survival From the Age of 65 in 2045
	Female	Male	Both	One Only
To the age of 80	80.4%	77.8%	62.6%	95.6%
To the age of 90	45.3%	36.2%	16.4%	65.1%
To the age of 100	5.7%	2.5%	0.1%	8.1%
Note: Calculations in table are based on UP 1994 Tables projected.
Source: Longevity: The Underlying Driver of Retirement Risk, Society of Actuaries.

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