Archives: Articles

IssueM Articles

Proposal Would Require Ratings Agencies To Share Liability

Legislation that would hold the major credit rating agencies responsible for each other’s strength assessments has been drafted by the chairman of a House Financial Services subcommittee.

Rep. Paul Kanjorski (D-PA)’s bill could help resolve the conflicts of interest that arise when agencies receive fees from the companies whose bonds and financial strengths they rate.  He contends that establishing collective liability could spur the powerful rating agencies—Moody’s Investors Service, Standard & Poor’s and Fitch Rating—“to police one another and release reliable, high-quality ratings.”

But Moody’s chairman and CEO Raymond McDaniel testified that imposing collective liability could stimulate lawsuits against the agencies and create an unpredictable business environment.

The SEC recently proposed rules designed to address the inherent conflicts of interest in the current system. One SEC proposal would discourage “shopping” for favorable ratings by requiring issuers to disclose whether they had received preliminary ratings from other agencies.

A lot rides on those ratings. The agencies issue ratings on the creditworthiness of public companies, thereby determining their borrowing costs. The ratings also offer an opinion about the creditworthiness of securities, which can determine their prices. 

After giving positive ratings to exotic mortgage-backed securities a few years ago, the rating agencies downgraded many of them last year as home-loan delinquencies soared. The securities plummeted in value and became the untradeable “toxic” assets whose illiquidity created a credit crisis and resulted in hundreds of billions of losses for investment banks and their investors.

© 2009 RIJ Publishing. All rights reserved.

Presidential’s New Campaign

In a year when low interest rates are making single premium immediate annuities more expensive, tiny Presidential Life, which was born 44 years ago in a Nyack, NY storefront, has found a way to enhance a SPIA’s payout.

The $240 million NASDAQ-listed company, 40% of whose sales are income annuities, has engineered a joint and survivor contract where the first annuitant receives benefits for life but the survivor receives income for a period certain or for life, whichever is less

Contract owners can adjust their payments up or down by shortening or lengthening the period certain, from as few as five to as many as 20 years. Because the second income stream is life-contingent, the survivor receives an added dividend from mortality pooling. 

“Normally, adding a second annuitant can reduce the monthly payment,” the company said in a release. “But in [our] new contract, the second annuitant receives the full payment for a fixed, pre-elected period of five to 20 years or until death, if sooner. If the second annuitant predeceases the first annuitant, the first annuitant continues to receive a lifetime annuity at the same payment rate.”

According to Presidential’s Gary Mettler, this arrangement would be appropriate for intergenerational transfers from an 80-something parent to a 60-something child, perhaps as an alterative to a single life annuity with a premium refund feature.

“We take the beneficiary of a period certain income annuity and make that person a second annuitant,” Mettler, Presidential vice president, told RIJ.  “By making the contract a temporary life, we give ourselves some wiggle room to raise payouts.” 

“We generally make sure that the payment period is long enough to refund the premium. If there’s a $100,000 premium, for instance, we might issue a contract with full life and 13 years period certain,” whichever is shorter.

“The Achilles heel of a life with period certain contract is that the beneficiary may receive little or nothing,” Mettler said. To avoid that problem, agents and consumers sometimes choose contracts with long certain periods or refund provisions. But that strategy punishes the annuitants with lower incomes, without guaranteeing a legacy.

“The problem with a normal joint and survivor for a parent and child is that it drags the payment down,” Mettler said. “By limiting the duration of the unreduced payments to the second annuitant, we have more premium dollars to fund higher monthly payments to the first Annuitant, contract owner.”

This structure also protects the family in other ways, Mettler said. If there’s a Medicaid lien against the first annuitant, for instance, the state would be able to claim assets ahead of a beneficiary but not ahead of a second annuitant. “Life contingent payments and their legacies become consumer defensive financial arrangements without peer,” the company said in a release. 

While interest rates are low, interest in SPIAs among the elderly is high. “As a result of the economic debacle, we’re getting more life-contingent SPIAs at high ages. Our biggest age group is 75 to 85. Many are life only. If the bank is only paying one percent on CDs, and the clients find themselves invading other money to live on, this produces a lot more income,” Mettler said.

Aside from its small size and slim marketing budget, Presidential Life’s weakness is its B+ (Good) rating for financial strength from A.M. Best. Last April, the ratings firm noted the insurer’s vulnerability to low interest rates because of its concentration in SPIAs, but praised it for paying down its debt. The company lost $10.2 million in the first half of 2009, compared with net income of $22.4 in the first half of 2008.

One annuity industry observer calls Presidential Life “The Mouse that Roared”-referring to Leonard Wibberley’s 1955 comic novel after a tiny European country whose archers conquer Manhattan. “For such a small company, they’ve shown the greatest leadership in terms of product development and marketing of income annuities,” said Garth Bernard, CEO of Sharper Financial LLC.

“My hat is off to them,” he said. “More carriers should take a page out of their book. The industry would not be in the precarious position it is in today if they had followed the leadership of Presidential Life (at least for putting some of their eggs in the income annuity basket instead of entirely in the VA basket).”

“We do more things with SPIAs than anyone else,” Mettler said. “In the last year, for instance, almost everyone has dropped out of enhanced annuities because it’s a capital intensive tool. So now only we and Mutual of Omaha issue them. We’re picking up business from other carriers, and because the carrier pool has dropped, we can price accordingly.”

Presidential Life has a slim marketing budget-it relies on fixed annuity giant New York Life to generate buzz for SPIAs-but its SPIA commissions are competitive. “We pay [insurance marketing organizations] 4.5%, and they will usually reel out 3.5 points to the agents. We don’t adjust commissions for age, and we issue to age 100, “ he said.

But winning over insurance agents isn’t easy. “If you had 100 agents in the room and asked them if they had ever sold a SPIA, you might find five who would raise their hands. And if they actually sold one, it was probably a period certain, and usually sold in the context of selling a split annuity-a deferred annuity and an immediate annuity,” Mettler said.

“Why don’t agents like them? It’s a single transaction, and a one-time fee,” he added. “With a variable annuity, they can exchange it for a more advanced product when the surrender period expires and receive a new commission. So a lot of agents buy a deferred, then another deferred. They haven’t been trained to annuitize. They’re trained to transfer.”

© 2009 RIJ Publishing. All rights reserved.

Let’s Look at Your Telomeres

Will homo sapiens discover a way to live significantly longer? Perhaps. Elizabeth H. Blackman, Carol W. Greider, and Jack W. Szostak won the Nobel Prize in medicine this week for their work on telomeres, the tiny protective bumpers at each end of our chromosomes that wear away after our cells divide about 50 times.

If science can find a way to keep  telomeres from eroding, our cells may replicate in a normal way indefinitely, keeping us forever young. On the down side, cells that never lose their telomeres can turn cancerous.  

The limits of human longevity were, not surprisingly, a key topic of discussion at the Longevity 5 conference in New York in late September, where experts such as Joseph Coughlin of the MIT Aging Lab and John Iacovino of Fasano Associates, a Washington, D.C., underwriting firm, spoke at length. (See ‘Old People with Attitude and Expectations’.)

The two men painted a complex picture. Most of the gains in longevity in the last 40 years, for instance, have come from improvements in the treatment of cardiovascular diseases. The beneficial effect of those advances may have peaked—at least among people who have followed the recommended dietary, exercise and drug regimens.  The eradication of cancer might extend the average American’s life by six years—a tremendous boon, perhaps, but not immortality.  

Looking backward, of course, the gains have been impressive. In 1950, a 65-year-old American male could expect to live 13.9 years and a 75-year-old man could expect to live an average of 10.9 years. By 2000, a 65-year-old man could expect to live 18 years and a 75-year-old could expect to live 11.4 years. 

It’s a truism that women outlive men, but on average it’s becoming less so. Among 65-year-olds, an estimated three out of four men and four out of five women will reach age 75. The average 65-year-old couple can expect to live a combined 38.4 person years. But they will only spend 13.5 years of those years together, on average—even without taking separate vacations. Elderly women still spend more time alone than men. Married women on average spend 6.8 years as widows. Men spend 4.5 years as widowers. Women have a 57% chance of outliving their husbands. 

Just as there are income disparities in the U.S., there are also longevity disparities. There’s a widening gap between the lifespans of the more affluent 50% of the U.S. population and the less affluent 50%. Obesity raises the mortality rate of a growing segment of American society. As a result, Americans are not as long-lived as, say, the Japanese or Norwegians. From roughly the late 1970s to 2000, the obesity rate in the U.S. more than doubled, to 31% from 15%.

But even as some people have extended their lives and others shortened theirs, the end game has become increasingly expensive. Many Americans spend their final months, weeks, days or hours in cost-intensive care settings. To some extent, that’s probably to be expected. But it distorts the use of resources, in that 80% of the nation’s health care expenditures go to people during their final two years.

“I’m not so sure that’s sustainable long-term,” Dr. Iacovino said.

© 2009 RIJ Publishing. All rights reserved.

‘Old People with Attitude and Expectations’

Overweight Baby Boomers are digging their graves with their spoons. Skinny Boomers are obsessed with exercise and antioxidants. These counter-trends make life confusing for the experts who just want to know exactly when the average retiree will die.

On Sept. 25 and 26, a bunch of those experts convened on the 50th floor of the JP Morgan Building, where brilliant silk-screens of zoo animals by Andy Warhol adorn the interior walls and the glass outer walls reveal a 360-degree sky-view of New York City.

Fifty or so economists, actuaries, bankers, insurance executives and aging experts had traveled from as far as Taiwan and Germany to attend Longevity 5, the fifth in a series of international meetings, and to hash out responses to the global aging trend.

For many of them, global aging is as big a threat as global warming. Instead of rising sea levels and desertification, they foresee a tide of longevity risk that could bankrupt the social insurance programs, pension funds and annuity issuers whose obligations are linked to the length of people’s lives.

“Economists have not really understood this risk. Policymakers are not yet engaged,” said David Blake of the Pension Institute at the Cass Business School in London and the chairman of the conference. “This is a real, underestimated, slow-burning risk.”

Or, as Joseph Coughlin, the bow-tied director of the MIT Age Lab put it, “There are going to be a lot of old people with attitudes and expectations.

On the other side of the bet, financiers in suits are circling. JP Morgan Chase and Goldman Sachs have built longevity indices. A few pension funds have used swaps to off-load longevity risk. Life settlement companies are buying up life insurance policies and selling “death bonds.” But, relatively speaking, the response to the aging problem is in its infancy.

The case for longevity bonds
The dilemma boils down to this: who will bear the financial risk that billions of people might live too long?

In Finland and Germany, governments are pushing some of the longevity risk of their social insurance programs back onto individual participants by adjusting benefit levels to fit changing mortality rates and market performance.

Alternately, pension funds are looking to share their risks with investment banks. Last July, the Devonport Royal Dockyard pension fund became the first UK pension fund to enter into a longevity swap, in a deal with Credit Suisse.

Investment banks may buy the risk, securitize it, and sell it in the capital markets to investors who are looking for an asset class uncorrelated with stocks or bonds. Or a government could issue ultra-long-dated “longevity bonds” and spread the risk across generations.

A majority of those at the Longevity 5 conference seemed to favor the idea of the U.S. government issuing 50-year longevity bonds, pegged to a longevity index, that would mitigate longevity risk the way Treasury Inflation-Protected Securities mitigate inflation risk.

Guy Coughlan, managing director and global head of JP Morgan’s LifeMetrics and Pension Solutions business, said the U.S. government has a “responsibility” to issue longevity bonds because it encouraged the transition from defined benefit to defined contribution retirement plans and dumped longevity risk on the plans and participants.

“There’s a social need to pick up the risk borne by corporations,” Coughlan said. Longevity bonds “would help create an orderly market for annuities.” Peter Blake agreed, saying the “U.S. government has obligated companies to honor their pension liabilities, and now it says it has nothing to do with the government.”

The U.S. wouldn’t have to issue enough longevity bonds to pick up all of the risk, said Tom Boardman of Prudential plc, which issues about one-eighth of all individual income annuities in the world. “Private industry can handle 85% of the risk,” he said. “We’re just looking for protection of the tail.”

Coal mine canaries
The British are apparently the canaries in the longevity coal mine. Under recent pension reforms, those in the U.K. have to annuitize their tax-deferred savings by age 75, and millions buy life annuities at retirement. The British now buy about half of all life annuities in the world each year, making themselves a test case for coping with longevity risk.

The pipeline into annuities in Britain will get even bigger in 2012, when workers who don’t now have workplace pensions will be auto-enrolled in a defined contribution program to which they, their employers, and the government (through tax breaks) will contribute. That could eventually double the demand for annuities, to £30 billion a year.

“For a small country, those are significant numbers,” said Boardman. “Insurance companies don’t have the capacity to take on that kind of risk. But the capital markets do.”

The same capacity problem could occur in the U.S.-if large numbers of Americans were inclined to buy life annuities with their trillions of dollars in defined contribution savings. Theory dictates that that should happen-but it isn’t, said James Poterba, the MIT economics and president of the National Bureau of Economic Research.

“Our models tell us that people will see a role for annuities,” Poterba said. “But there’s very little activity in the annuity markets. That’s the so-called annuity puzzle, which has attracted a large percentage of the research community.”

Insurance companies might be able to offer more attractively priced annuities to U.S. retirees if they could lay off their longevity risk in the capital markets, he suggested. But he believes that, even with better pricing, selling individual annuities will “still be an uphill battle.” The existence of a public annuity-Social Security-probably crowds out some of the demand for private annuities, he said.

It all adds up to a gloomy picture-almost as gloomy as global warming. If there’s a silver lining, Poterba told some of the world’s top pension wonks, it’s that at least the 2008-2009 financial crisis gave us a warning to reform our retirement systems before it’s too late. By 2025, he said, much more savings will be at stake, and a similar crash would make last year’s $500 billion drop in retirement fund assets look mild.

© 2009 RIJ Publishing. All rights reserved.

Boston College Gets Financing for Financial Literacy Center

A Center for Financial Literacy (CFL), with first-year funding of $3 million from the U.S. Social Security Administration, will open at Boston College, the College’s Center for Retirement Research announced in a press release yesterday.

The new center, to be led by Center Director Alicia H. Munnell, Program Director Steven Sass, and Creative Director Ronn Campisi, will produce educational materials and programs that help people make reasonable financial decisions throughout their working lives and into retirement.

The Boston College team has extensive experience producing financial literacy materials using print, film, and interactive media. Active partners will include the National Bureau of Economic Research, the Brookings Institution, The College of William and Mary, Innovations for Poverty Action, Financial Engines, Knowledge Networks, and the National Endowment for Financial Education.

The Social Security grant calls for the CFL and its partners, in the first year of a five-year period, to:

  • Produce print and Web-based interactive guides to financial issues facing retirees.
  • Develop a Web-based interactive program to help older workers choose a target retirement age.
  • Field commitment programs to help low- and moderate-income households control their finances.
  • Design a plan for a comprehensive “go-to” financial website.
  • Review the effectiveness of existing financial literacy programs.
  • Create a financial literacy “food pyramid.”
  • Evaluate how 401(k) participants use target date funds.

 

“Given the turbulent economic climate and the shift of financial risk to individuals, people need help,” said Alicia Munnell. “The new Center will provide essential tools to improve decision-making.” She will continue to head the Center for Retirement Research at Boston College, which conducts and disseminates new research on retirement income issues.

© 2009 RIJ Publishing. All rights reserved.

Highlights of New Allianz/Harris Poll

Highlights of New Allianz/Harris Poll
  • 74% of investors say the “stock market will bounce back and restore any losses.”
  • 45% of advisors say most clients have a realistic retirement vision.
  • 62% of investors want help insuring they don’t outlive their assets.
  • 89% of advisors think clients would consider lifetime income products.
  • 50% of advisors have talked to clients about such products.
  • 12% and 9%, respectively, of retirement portfolios contain commodities or TIPS.
  • 55% of investors think it’s more important than ever to work with an advisor.
Source: Allianz Global Investors and Harris Interactive. Based on poll conducted in July and August of 1,013 pre-retiree household financial decision makers aged 30 or older with at least $250,000 in investable assets.

Pacific Life Applies For Possible In-Plan VA

Pacific Life has filed an application with the SEC for a Destinations variable annuity that offers an optional 0.10% increase in the lifetime payout rate for each year the owner delays taking a withdrawal during the first 10 years of the contract, if the owner is over age 59½ at issue.

The contract, which has a maximum front-end load of 5.5% (for initial premiums under $50,000) and 75 basis point M&E fee (or, alternately, an annual 1.75% M&E), also has a loan feature, suggesting that it may be intended for use as an in-plan distribution option for retirement plan participants.

The contract’s age-bands and annual lifetime payout rates begin at 4% for those under age 69, 5% for those ages 70 to 84 and 6% for those age 85 and older. During the accumulation period, there’s also an annual automatic step-up of the guaranteed base to the account balance, if higher, subject to fee increases.

The contract offers a range of living benefit riders with fees ranging from 75 basis points for a guaranteed minimum account balance-type rider to 1.75% for the joint-life version of a guaranteed lifetime withdrawal benefit with a 5% annual credit during the initial 10-year waiting period and a lifetime payout rate of 5% or 6%, depending on the contract owner’s age when income begins.

© 2009 RIJ Publishing. All rights reserved.

Jackson National Launches Bonus VA

Jackson National Life has launched Perspective Rewards, a new variable annuity product that pays a 6% automatic bonus on first-year contributions under $100,000 and 8% on contributions of $100,000 or more.

Rewards is the fourth contract offered within Jackson’s Perspective variable annuities series. Annual fees include a mortality and expense risk fee of 1.65%, a 0.15% administrative fee, and fund management fees ranging from 0.57% to 2.63%. The maximum surrender charge is 7.5% during a nine-year contingent deferred sales charge period.

Living benefits available under the Perspective Rewards contract, and their maximum annual expense ratios, are:

  • SafeGuard Max, a Guaranteed Minimum Withdrawal Benefit (GMWB) with a five-year step-up, 0.81%.
  • AutoGuard5, a 5% GMWB with annual step-up, 1.47%
  • AutoGuard6, a 6% GMWB with annual step-up, 1.62%
  • LifeGuard Freedom GMWB, a lifetime GMWB with bonus and annual step-up, 1.50%. (Joint contract, 1.86%)
  • LifeGuard Select, a lifetime GMWB with bonus and guaranteed withdrawal balance adjustment, 1.20%. (Joint contract, 1.50%).

 

© 2009 RIJ Publishing. All rights reserved.

Employers Expect Health Reform to Raise, Not Lower Costs

Most employers are resistant to changes in the health care status quo and worry that reform will raise rather than reduce overall costs, according to a new poll by Watson Wyatt.

The poll of 160 employers found that 73% believe health care costs will increase if health care reform legislation is enacted. Even more (86%) think the health care proposals being considered would weaken the role employer-sponsored plans play in providing health care coverage.

Fewer than three in 10 (29%) of employers said they would support a tax on high-income employees with high-cost plans. Fewer than one in five (19%) would support a tax on insurers that provide high-cost plans. Only 11% would support taxing employer-paid health insurance premiums.

The poll found that only 10% of employers would support an “employer mandate” that required them to provide health insurance, but 50% would support a mandate requiring individuals to buy health insurance. Ten percent would support both, and 30% would not support either.

“Escalating health costs have been top of mind for employers for years now, but the reform debate has pushed this issue to a critical point,” said Ted Nussbaum, North America director of group and health care consulting at Watson Wyatt.

“While the national debate centers on options for expanding coverage and ways to generate revenue to fund reform, employers are concerned that health care costs will rise even higher as a result of the new legislation,” he added.

© 2009 RIJ Publishing. All rights reserved.

Plan Sponsors Increasingly Turn to Investment Consultants—Cerulli

Investment consultants have become the gatekeepers for asset managers hoping to distribute through a 401(k) platform, especially as plan sponsors demand best-of-breed managers and custom target-date funds, according to the third quarter issue of The Cerulli Edge-Retirement Edition.

This trend toward investment consultants cannot be ignored, the report said, since they now control as 41% of DC assets, with the majority of these assets in large plans over $500 million in assets.

Over three-quarters of consultants said they want asset managers to demonstrate consistent investment performance track record without “surprises.”

“Consultants want stable investment organizations that have a repeatable process, and equally importantly, they want to know when something goes awry,” notes Scott Smith, senior analyst at Cerulli Associates.

Asset managers should develop the role of the portfolio specialist, he added. A good portfolio specialist takes relationship management burdens off of portfolio managers while using their investment knowledge to strengthen the relationship management team. Only 57% of consultants feel direct access to a portfolio manager is very important.

As the DC market increases in size and complexity, asset managers should be prepared for an institutional sale through investment consultants. By understanding how investment consultants operate and effectively meeting their demands, managers can be best poised to take part in custom target-date funds and open-architecture DC platforms.

Other findings from this issue of The Cerulli Edge-Retirement Edition include:

  • As plan sponsors try to meet to higher fiduciary standards, they will increasingly turn to investment consultants.
  • The best way for asset managers to reach the investment decision makers in a consulting firm is to understand the firm’s business structure and organization.
  • The shift of client assets into alternatives and long-duration fixed income will create opportunities for managers with proven track records in these asset classes.

 

© 2009 RIJ Publishing. All rights reserved.

SEC Moves To Bolster Oversight of Rating Agencies

In response to the failure of the major credit rating agencies to protect the public from flawed securities in recent years, the Securities & Exchange Commission voted on September 17 to adopt or propose measures to require greater disclosure, foster competition, address conflicts of interest, shed light on rating shopping, and promote accountability.

The Commission has proposed or decided on:

  • Giving competing credit rating agencies access to the necessary underlying data about structured finance products so they can offer unsolicited ratings.
  • Requiring greater disclosure of potential sources of revenue-related conflicts.
  • Determining the use of “ratings shopping” by requiring issuers to disclose any “preliminary ratings” obtained from other rating agencies.
  • Eliminating a current provision that exempts NRSROs from being held liable when their ratings are used in conjunction with a registered offering.
  • Changing the Commission’s rules and forms to remove certain references to credit ratings by nationally recognized statistical rating organizations (NRSRO).
  • Reopening the public comment period to allow further comment on Commission proposals to eliminate references to NRSRO credit ratings from certain other rules and forms.

 

In 2006, Congress passed the Credit Rating Agency Reform Act that provided the SEC with authority to impose registration, recordkeeping, and reporting rules on credit rating agencies registered as Nationally Recognized Statistical Rating Organizations (NRSRO). Currently, 10 credit rating agencies are registered with the Commission as NRSROs.

© 2009 RIJ Publishing. All rights reserved.

 

Americans Reveal Inertia, Self-Reliance in Principal Financial’s Latest Survey

Since the beginning of the equity rally last March, Americans have regained some of their characteristic optimism. Nor do they intend to seek professional financial advice, according to the latest quarterly edition of The Principal Financial Well-Being Index.

The survey covered 1,147 employees over age 18 at small and mid-sized companies and 558 retirees in all sections of the U.S. Subjects were selected from among those who have agreed to participate in Harris Interactive surveys. The data have been weighted to reflect the broader population.

Anecdotal reports have suggested that most 401(k) participants didn’t touch their accounts during last winter’s financial crisis. Given the steep stock market rally since mid-March 2009, their inertia seems to have served at least some of them well.

One in three participants either said their account balances have recovered to their January 1, 2009 levels or are expected to recover in two to five years, up from 20% in the second quarter. Only 12% said they expected to delay retirement.

Most don’t use advisors

While 44% of retirees said they began planning for retirement more than 10 years before they actually retired, only 17% of current workers surveyed said they’ve created a plan for converting their savings to a retirement income stream. Of those, only 43% have a written plan.

When they do get around to planning, they are unlikely to hire an advisor, the survey showed. Fifty-five percent of retirees and 38 percent of employees said they “do not want any services from a financial professional.”

Less than 10% of either group said their interest in professional advice had risen since the crisis. Fees, lack of trust, inertia, and confidence in their own planning skills were the most common reasons for not seeking out or consulting an advisor.

Retirees seem to have made up their minds about using advisors, while workers are still thinking it over. Asked what best describes how they manage or intend to manage their savings in retirement, 63% of retirees said they would manage on their own and 34% said they had advisors. Among employees, only 17% had advisors. Less than half (43%) said they would manage their own retirement finances; 26% were unsure what they would do.

Survey Results


On overall well-being

  • 66% of employees and 60% are concerned about their long-term financial future.
  • 35% of all respondents, but only 25% of retirees, say they worry most about not being able to pay for basic necessities.
  • 56% of retirees and 59% of employees have reduced spending in the past two months.

 

On workplace benefits

  • 93% of small to medium-sized employers provide include health insurance, 76% provide dental insurance, 68% provide life insurance, 63% provide defined contribution plans, 63% provide free parking and 46% provide disability insurance.
  • 23% of employees would most like to see a defined benefit plan added to their benefit package, 13% would like to see profit sharing or bonuses, and 12% would like flexible hours.
  • 43% of employees would like better health insurance and 15% would like an improved defined contribution plan. Health insurance (43%) and defined contribution plans (15%) top the list of benefits that employees most wish their company would improve upon.
  • 64% of employees are most satisfied with their defined benefit plan, 56% with their disability insurance, 55% with their defined contribution plan and 53% with their life insurance.
  • 87% of employees gave health insurance at least an “8” out of 10 rating for importance.

On defined contribution plans

  • 81% of employees participated in their employer’s defined contribution plans.
  • 24% of plan participants had made a change to their 401(k) plan in the past six months; 11% increased contributions, 8% decreased contributions, 3% have taken out a loan, 3% have stopped contributing and 2% have taken out a hardship withdrawal.
  • The most common reasons for changes their saving habits included “pay down debt,” “pay daily expenses,” and “build up savings accounts.”
  • 18% of employees say their balance is the same or higher than it was on Jan. 1, 2008, compared with 9% after the first quarter.
  • 16% of employees feel it will take less than two years to recover their lost savings, compared with 11% after the first quarter.
  • 20% of employees are not sure how long it will take, up from 12% after the first quarter.
  • 2% of employees think they will never recover their peak account balance.

On retirement planning

  • 50% of employees are not sure when they will retire.
  • 12% have delayed their planned retirement date.
  • 40% said they would delay retirement by six years or more.
  • 83% of employees say they do not have a plan for transitioning their retirement savings into a steady income stream.
  • 43% of those who said they have a plan for transitioning from savings to income have an “actual written plan.”
  • 44% of retirees said they began to think about managing their spending and investments in retirement more than 10 years before retirement.
  • 73% said they would start planning more than 10 years prior to retirement if they could do it over again.

© 2009 RIJ Publishing. All rights reserved.

Shunned in U.S., Income Annuities Thrive in the U.K.

In sharp contrast to financial behavior in the U.S., hundreds of thousands of people in the United Kingdom convert their tax-deferred savings into income annuities as soon as they retire, according to a report from Watson Wyatt, the global consulting firm.

The so-called “at retirement” market for annuities grew to over £14 billion ($22.4 billion) in 2008 and is expected to grow 60% to about £23 billion ($36.8 billion) over the next five years. Britons buy roughly half of all income annuities sold worldwide, with a population of only 60 million. Prudential plc (no relation to Prudential in the U.S.) is the largest writer.

For those unfamiliar with the U.K annuity landscape, the report, “The UK Pension Annuities Market: Structure, Trends & Innovation” provides a detailed description.

Sales Trends in the UK Annuities Market - Number of New Policies SoldIn 2008, the Association of British Insurers data indicates, over 450,000 pensions annuities were written, with an average “pensions pot” or retirement account balance of about £25,000 ($40,000). The median value was only about £15,000 ($24,000), with 75% of cases related to pensions pots worth less than £30,000 ($48,000). A pensions pot of £15,000 would generate a level income of perhaps £1000 ($1600) a year for a male aged 65, with no spousal entitlement.

When they reach age 75, Britons are required to buy income annuities with their remaining tax-deferred savings-a requirement not entirely different from the U.S. required minimum distribution at age 70½.

Before then, when they first retire, British citizens can buy a “drawdown” product puts loose limits on the amount they can withdraw from savings, a “third-way product” like our variable annuities with lifetime income benefits, or an income annuity. Three types of income annuities are available, with fixed, variable, and “enhanced” payout streams.

Sales Trends in the UK Annuities Market - Value of New PremiumsEnhanced annuities, which accelerate payments for contract owners who have health issues that reduce their life expectancies, have been popular among retirees in the U.K. They don’t yet sell as well as standard income annuities, but their market share is 16% and growing. In the U.S., these products are known as “impaired risk” or “medically underwritten” annuities.

The recent financial crisis has impacted the British annuity market in several ways. The European Union is requiring insurers to increase their reserves and invest more conservatively, thus putting downward pressure on annuity payout rates. But the collapse of the stock market after 2007 has helped drive sales of fixed income annuities by making investors and retirees more conservative.

In other U.K. developments, more Britons are taking advantage of the mid-2009 stock rally to swap their recently-recovered account balances for income annuities before stocks collapse again, if they do. “Managed and UK equity funds had jumped by an average of 29% and 38.5% respectively since March and a number of pension savers have had the opportunity to lock into these gains,” Professional Pensions reported.

A pension analyst at Hargreaves Lansdown, Nigel Callaghan, told Professional Pensions that individuals should also consider hedging risk by purchasing an annuity with part of their capital and leaving the rest invested. The EU Solvency Directive—which becomes effective in 2011, and will force insurers to hold greater reserves—could reduce annuity rates drop by as much as 20%. And it said government quantitative easing measures—the low interest rate policy—could lead to an inflationary environment causing annuities to rise in the medium-term.

© 2009 RIJ Publishing. All rights reserved.

 

A Fate Worse than Fargo

What makes the current market calamities so much more damaging then the ones of 1987 or 2000-1 is that, indeed, it’s not 1987 or 2001. Barring a huge reversal in the market’s fortunes, there’s not enough time for the current 50%+ losses in equity markets to be recouped.

Now, the average age of America’s baby boomers is in the early/mid 50s, meaning that if they try soon to retire on what the financial crisis has left in their retirement accounts, rather than looking at a future of enjoying coq au vin in Provence, they’ll be dumpster-diving at McDonald’s for a long, long time after the money runs out.

A common pitch in advertisements for American retirement advisory services is that one must have enough so as to not “outlive your money”; presumably, what happens then is that you spend your last years lying in your own excrement in a substandard nursing home populated by those on public assistance. With lifespans lengthening and retirement incomes shrinking, will baby boomers start to regret all those wasted hours in that dammed aerobics class?

What about some other traditional support planks of the American retirement? Well, it’s obvious that many Americans can’t rely on their house as the ark that they can float through retirement on. With real-estate prices down now about 25% from their peak, and still declining about 3% each and every month, the dream of selling the house and moving to a low-priced, sunbelt nirvana is very much in question, especially if the homeowner loaded up the property with first, second mortgages and home-equity lines of credit, hoping that he could pay off the debt with continued house price appreciation.

I suppose that, if you’re infirm and arthritic, there are worse fates than having to spend your retirement in the winters of Buffalo, New York, or Fargo, North Dakota, although right now I can’t think of one.

But even if the case can be made that the road down the defined contribution/401(k) path is a dead end, does that mean that those still in traditional defined benefit plans, primarily workers in older industries such as automobiles and steel, and public sector workers, are living out their retirements with days of wine and roses? No, they’ve got their own problems, almost as bad as those cringing upon seeing what the stock market did to their 401(k) today.

Even with corporations under legal mandate and fiduciary obligation to fully fund their defined benefit plans, many of them don’t; it is estimated that private sector defined benefit pensions are underfunded to the tune of about $400 billion. Labor unions know that if they pushed the companies in court to fully fund their obligations, the companies could just declare bankruptcy to have the judge discharge them from their obligations, as Delta and Northwest Airlines did in 2005. If the companies do declare bankruptcy, their pension obligations are transferred to the US government’s Pension Benefit Guarantee Corporation (PBGC), which is not mandated to continue your pension payments at your previous level.

Congress chronically ignores the PBGC’s cries that it is underfunded, currently to the tune of about $11 billion a year. If one or all three of the Big 3 automakers declare bankruptcy and throw their pension obligations to PBGC, the agency will become massively insolvent within seconds.

Public sector pensions are not covered by the PBGC. If their resources are falling behind obligations, as they are now, with the stock investments of the public sector pension managers heading south just like those of the 401(k)s, it is up to the public authority to make up the shortfall, currently estimated around $1 trillion. That would have to be done with either higher taxes, cuts in other government services, or combinations of both.

Good luck asking voters for increased taxes to support public sector retirements, when their own 401(k)s are being eviscerated.

Is there any form of liberation from the tyranny of evaporating American old-age support? There is, but it’s not pleasant. As camp commander Rudolf Höss said in the sign he placed above the gates of Auschwitz, Arbeit Macht Frei—Work Makes You Free.

Just like the case of the 91-year-old Floridian who had to go back to work bagging groceries after losing his fortune to Bernie Madoff, younger Americans are going to have to get used to sharing the public, working space with a lot more elderly people than ever before. Maybe they’ll still be at their old jobs, blocking career advancement and creating hostility among younger folk, but you’ll see lots more of them in far more menial work—sweeping parks, flipping burgers, manning school crossings, until they can barely stand anymore.

Will the young people take pity on their elders and vote to increase taxes to support these people, or will they, like what happens every day with the sight of homeless people, just turn their heads and look away, and, in doing so, make the society that much coarser and colder?

The magazine Architecture Week recently reported on a project called EDAR (Everyone Deserves a Roof), an attempt by California design students to create a prefabricated living space for the homeless out of abandoned single shopping carts. For American baby boomers, who started out in Levittowns, then moved and are now being foreclosed out of McMansions, will this be where destiny forces them to seek shelter from the sun in their Golden Years?

This is far from impossible—it essentially did happen, in the 1930s. If the financial crisis does not abate promptly, it becomes even more likely that it will again. Anybody that can do simple long division can see that stocks are down 50%, but very few fully realize what it means.

It means that 50%-plus of the wealth of America, built up over generations and generations, has been destroyed in the past 17 months. As the pundits should say now instead of what they said on September 11, when a country is finally forced to live within its means after decades of excess, nothing will ever be the same again.

Julian Delasantellis is a management consultant, private investor and educator in international business in Washington State. 

Read Like Lambs to the Financial Slaughter: Part 1 of a two-part critical essay on how the American retiree became hostage to volatile markets.

Copyright 2009 Asia Times Online (atimes.com)


A Comic Approach to Participant-Ed

Can a little cleavage and a clever storyline lure young people into learning more about their pension plans? A pension administrator in the Netherlands will soon find out.

The administrator, SPF Beheer, has published a mildly racy but primarily educational 96-page comic book for the 4,500 or so participants under age 35 in two of its plans—the $16 billion Dutch railway pension fund, SPF, and a $2.9 billion bus drivers’ fund for transport workers, SPOV.

The comic book features an imaginary young financial advisor and model train enthusiast named Wessel Wachter who quarrels with his wife and falls into a slumber. Subsequent frames whisk him to Paris, Rome, Istanbul, Johannesburg, and New Delhi.

A Comic Approach to Participant-Ed: Wessel Wachter Along the way, he talks to an attractive pension representative about the impact of divorce on benefits, gives a lecture about the three pillars of Dutch retirement finance, and, at one point, finds himself in a train compartment with a beautiful, buxom starlet in his lap.

“The idea is not to go very deeply into the pension information. It only touches on it lightly,” said Tjitte Faber, a SPF Beheer spokesperson told RIJ. “We wanted a story that reads easily and nicely, and to give the reader some basic notions about what goes on in the world of pensions.

“In his private life, Wessel is going through a divorce and they talk about how the money would be divided. There is an actress to make it more appealing. Then there is an opening for more technical information,” he added. The protagonist’s name is random, Faber said; it contains no hidden wordplay or reference.

In the United States, the task of engaging, educating and motivating plan participants is an ongoing challenge for plan sponsors and administrators. But it’s hard to say whether a comic book about 401(k) rules and procedures would get past the FINRA’s compliance police.

It’s probably even less likely that pension administrators in the U.S. would green-light the handful of images in the Dutch comic book where two of the female characters sport décolletage. For the Dutch, whose citizenry seem to have no trouble reconciling Amsterdam’s red light district and hashish bars with a spic-and-span sense of Nordic order, it’s no problem.

“We have a lot of reactions, from people working in pensions in Holland especially, and some international press attention. People are divided. On the positive side, people see the efforts that we’re making. Of course, there is always criticism,” Faber added.

A Comic Approach to Participant-Ed: Wessel Wachter“Some people say it doesn’t work, that you can’t reach young people this way, that’s it’s still too formal,” he said. “We just launched the book, and we are this week still sending it to people under 35 as part of a packet with other information. So we don’t yet have measurements of the results.”

In the Netherlands, workers generally retire with three sources of income: a state pension, a work-related pension, and personal savings. Work-related pensions like the SPF (Spoorwegpensioenfonds) and the SPOV (Stichting Pensioenfonds Openbaar Vervoer) are administered by professional administrators like SPF Beeher and governed by a foundation whose directors include representatives of the workforce and management.

“It is important to make the comic book interesting,” Faber said. “It must be lightly done, and it should be part of a mix of instruments. You can’t tell everything in a comic book, but there are all kinds of possibilities. For instance, you can create a figure like Wessel Wachter who can become widely known and popular. In Dutch culture, there are perhaps more possibilities. Things are perceived differently by different cultures.”

Every culture appreciates a happy ending, however, and the story of Wessel Wachter delivers one. His argument with his wife at the beginning was real, but it turns out that everything else was just a crazy dream. In the final frames, after he awakes, the two clink goblets of red wine over a romantic dinner.

© 2009 RIJ Publishing. All rights reserved.

 

Marketing Online Education To Advisors

For annuity providers, marketing products and educational features to advisors often comes down to making the most of the limited space their respective websites offer. After all, there is only so much real estate to work with on a website, and firms are continually trying to find the right balance between product information and key advisor resources, such as educational content.

In recent years, we have noticed that many of the firms we track have begun to use Flash-based microsites – autonomous websites accessible exclusively behind the login from the advisor website – to promote educational content. Flash is an ideal format for promoting educational content, allowing firms to incorporate vivid images and eye-catching animations and videos into their sites. In short, microsites are a great way for firms to draw advisor attention to educational materials without sacrificing valuable space on the advisor website.

Most Flash-based microsites feature creative themes and pages loaded with bright colors, vivid imagery and interactive features that engage the user. In many cases, sales materials, tools and informational content found on the advisor website are repackaged and integrated into the microsite. This practice gives preexisting advisor resources added exposure.

John Hancock's Advisor of ChoiceOver the past year, John Hancock and Prudential have both launched notable microsites. John Hancock’s Advisor of Choice was one of the first education-focused microsites we encountered. The theme was self-improvement, offering advisors a variety of resources to help meet clients’ retirement income needs.

An animated promotion at the top of the Advisor Of Choice microsite leads to a recently released sales tool, the Client Communications Calendar. A variety of sales literature, including product brochures, prospecting letters and sales ideas, are presented at the center of the page along with a risk tolerance questionnaire and retirement income calculator. A series of links at the bottom leads to an assortment of sales materials and tools found on the advisor website.

Prudential Capture An Annuity's Highest Daily Value Microsite In March of this year, Prudential released a microsite titled Capture An Annuity’s Highest Daily Value, which focuses on the firm’s new line of Highest Daily (HD) optional living benefit riders. The microsite is stunning, featuring a series of large, vibrant rotating Flash images at the top and an attractive color scheme. An abundance of product information is provided to advisors highlighting key product features and selling points. Hypothetical performance data and marketing materials are also available on the microsite.

As annuities continue to grow in popularity, keeping advisors up to speed on new products and regulations remains one of the industry’s main challenges. Over the past few years, we have seen a great improvement in the quality and quantity of online advisor annuity education content. Firms are not only offering more detailed product information, but also making a greater effort to educate advisors about suitability, regulatory matters, account opening procedures and sales techniques.

Despite these advancements, surveys continue to show that many advisors, particularly those who have been in the business for many years, still do not utilize online educational resources on a regular basis.  Thus, it is important that online education content continues to be aggressively promoted on advisor websites.  Firms must build upon their recent advancements in Flash marketing and strive to find innovative new ways to capture the attention of advisors.


Sign-up for Corporate Insight‘s free monthly e-newsletters, Industry Insights, and receive a copy of the special report, “Alternative Products For Income Generation In Retirement.” All fields are required.
Email
First Name
Last Name
Company

© 2009 Corporate Insight, Inc. All rights reserved.


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

What Affluent Investors Plan To Do Soon

What Affluent Investors Plan To Do Soon
  % Actions Taken % Actions Intended
Meet with a financial advisor 36.19% 21.25%
Invest in mutual funds rather than individual equity securities
34.16% 12.26%
Increase my portfolio positions in Certificates of Deposits (CDs) 24.95% 13.25%
Source: Phoenix Comunications and Brand Analytics, 2009

2008 Top 15 U.S. Broker-Dealers By Advisor Headcount

2008 Top 15 U.S. Broker-Dealers By Advisor Headcount
Wells Fargo & Co.1 21,073
Morgan Stanley Smith Barney 18,444
Bank of America2 17,978
Ameriprise Financial Services 12,473
Linsco/Private Ledger 11,460
Edward Jones & Co. 11,172
MetLife 10,231
Allstate Financial Services 9,560
ING 9,212
UBS 8,182
AIG 7,871
AEGON/Transamerica 7,589
Lincoln Financial Network 7,366
AXA Advisors 6,139
NYLife Securities 5,932
1Wells Fargo advisor headcount reflects the Wachovia Securities merger
2Bank of America headcount reflects the Merrill Lynch merger
Chart source: Cerulli Associates
Data sources: Securities Industry and Financial Markets Association, Investment News, Financial Planning, Bank Insurance Market Research Group, National Regulatory Services, Standard and Poor’s Money Market Directories, Cerulli Associates.