Archives: Articles

Prudential Annuities, a unit of Prudential Financial, Inc. has reduced the annual “roll-up” of the guaranteed income base (Protected Withdrawal Value) of its Highest Daily Lifetime Plus variable annuity from seven percent to six percent.

The insurer’s action corresponds to the “de-risking” measures that other issuers of variable annuity guaranteed lifetime income riders have taken since the financial crisis last year to make their living benefits less rich and easier to hedge.

Prudential’s Highest Daily Lifetime 6 Plus variable annuity—like the HD5 and HD7 versions that preceded it—is unusual. Every day during the accumulation period the contract’s Protected Withdrawal Value (PWV) increases at an annualized rate of six percent or by the amount the account value has increased, whichever is larger.

As a result, the guaranteed amount is never lower than the account value, as it can be in VA contracts where the guaranteed amount “steps up” to the account value only on specific dates, such as contract anniversaries.

The PWV is the notional amount on which the contract owner’s annual payouts (at a rate of 4% to 6% per year, depending on the owner’s age when income starts) are based during the annuity’s income phase. Unless the owner takes withdrawals from the contract, the PWV can never be lower than the purchase premium, even if poor market performance drives down the account value.

The HD6 guarantee doesn’t necessarily mean that the PWV will always equal the high water market of the S&P 500 Index; it will simply never be less than the highest account value. If the equity market goes down sharply, Prudential automatically moves account assets to an investment grade bond account, so that the allocation becomes more conservative.

That process, called dynamic rebalancing, dampens returns on the upside but buffers losses on the downside. According to Prudential, dynamic rebalancing reduced the Highest Daily Lifetime Plus contract owners’ average paper losses during the crisis to less than 20%, compared to the losses of 30% or more suffered by many VA portfolios.

Of those who bought Prudential variable annuities in the second quarter of 2009, 90% elected a living benefit rider with either single or joint coverage, the company said. Total account values of Prudential VA contracts with guaranteed withdrawal benefits at mid-year 2009 for life were $23.2 billion.

To help investors learn more about its products, Prudential Annuities also announced a new website, www.retirementredzone.com/protect, which features a seven-minute educational video, simple navigation, and consumer-friendly language about HD Lifetime 6 Plus.

© 2009 RIJ Publishing. All rights reserved.

If Americans became as healthy and long-lived as Europeans have become, the U.S. could cut its health care bill by up to $1.1 trillion during the first half of the 21st century, according to a new paper from the National Bureau of Economic Research.

The NBER paper, “International Differences in Longevity and Health and Their Economic Consequences,” was produced by five analysts at the RAND Corporation in Santa Monica, Calif.

As recently as 1975, the paper said, 50-year-olds in the U.S. had about the same life expectancy as Europeans: just over 27 years. Since then, however, the life expectancy of European 50-year-olds has grown to 32.5 years, but is only 31 years for American 50-year-olds.

“A difference of 1.5 years in life expectancy implies a non-trivial welfare loss,” the paper said. “For example, using $100,000 as a lower-bound estimate of the value of a statistical life year, this represents at least a $700 million dollar disadvantage for the current generation of 50-year -olds.”

Among those between ages 50 and 55, the researchers found, Americans are about twice as likely to have high blood pressure, twice as likely to be obese, and twice as likely to have diabetes as Europeans. Although Europeans are more likely to be current smokers, 50-something Americans are nearly 50% more likely to have ever smoked.

If Americans became healthier, they would live longer, and the over-50 population in 2050 would be about 4.75 million larger. Social Security payouts in that year would be an estimated $70.4 billion higher, but medical costs would fall by $124 billion and Medicare would save a projected $36.4 billion, the RAND study claimed.

Based on those figures, the present value of the savings for Medicare and Medicaid between 2004 and 2050 would be $1.1 trillion, the researchers concluded.

© 2009 RIJ Publishing. All rights reserved.

In a speech last Friday in Jackson Hole, Wyoming, Federal Reserve chairman Ben S. Bernanke went out of his way to describe the financial crisis in terms that didn’t blame anyone in particular for causing it.

In telling attendees at the Fed’s Annual Economic Symposium that the crisis devolved into a “classic panic,” he didn’t suggest that sheer recklessness and a lack of fiduciary responsibility might have created the conditions for the panic.

Instead, Bernanke described the crisis in clinical central banking jargon, rather than telling the blunt truth: that Lehman Brothers and others failed in 2008 partly because they played a lucrative but dangerous game that involved not keeping a reasonable amount of cash on hand for emergencies. The Fed chairman used more formal language to describe, or perhaps to obscure, the situation.

“Many financial institutions,” he explained, “Notably including the independent investment banks, financed a portion of their assets through short-term repo agreements. In repo agreements, the asset being financed serves as collateral for the loan, and the maximum amount of the loan is the current assessed value of the collateral less a haircut. In a crisis, haircuts typically rise as short-term lenders attempt to protect themselves from possible declines in asset prices.

“But this individually rational behavior can set off a run-like dynamic: As high haircuts make financing portfolios more difficult, some borrowers may have no option but to sell assets into illiquid markets. These forced sales drive down asset prices, increase volatility, and weaken the financial positions of all holders of similar assets, which in turn increases the risks borne by repo lenders and thus the haircuts they demand,” he said.

“A panic is possible in any situation in which longer-term, illiquid assets are financed by short-term, liquid liabilities, and in which suppliers of short-term funding either lose confidence in the borrower or become worried that other short-term lenders may lose confidence,” he said, as though describing the progression of a tornado or an avalanche, instead of a wholly man-made disaster. 

“Although, in a certain sense, a panic may be collectively irrational, it may be entirely rational at the individual level, as each market participant has a strong incentive to be among the first to the exit,” the chairman mused.

Bernanke suggested regulatory reforms. “In the future, a more system-wide or macro-prudential approach to regulation is needed,” he said, as opposed to the fragmented regulatory system in the U.S. that spends its energy detecting small-time fraud while allowing enormous but legal abuses of the spirit of the law.

“The Basel Committee on Banking Supervision and the U.S. bank regulatory agencies have recently issued guidelines for strengthening liquidity risk management at financial institutions,” Bernanke said in reference to the banks’ failure to hold enough cash or cash equivalents.

“Among other objectives, liquidity guidelines must take into account the risks that inadequate liquidity planning by major financial firms pose for the broader financial system, and they must ensure that these firms do not become excessively reliant on liquidity support from the central bank,” he added.

More coordinated or “macro-prudential” regulation is also needed to prevent the failure of one or two big banks from pulling down all the others, Bernanke said.  

“The hallmark of a macro-prudential approach is its emphasis on the interdependencies among firms and markets that have the potential to undermine the stability of the financial system, including the linkages that arise through short-term funding markets and other counterparty relationships, such as over-the-counter derivatives contracts. A comprehensive regulatory approach must examine those interdependencies as well as the financial conditions of individual firms in isolation,” he said.

Bernanke’s story had an exuberant ending. “The use of Fed liquidity facilities has declined sharply since the beginning of the year—a clear market signal that liquidity pressures are easing and market conditions are normalizing… After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near-term appear good.”

But not irrationally exuberant. “Notwithstanding this noteworthy progress, critical challenges remain: Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit,” he noted. “Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Such is the art of “talking to the markets.” It would have been refreshing to hear Bernanke say, as President Obama blurted out about the Cambridge police officer who arrested a famous professor in his own home, that leading bankers had acted “stupidly,” and that such activities won’t be tolerated in the future. 

© 2009 RIJ Publishing. All rights reserved.

Sun Life Financial, the Massachusetts-based U.S. unit of Sun Life of Canada, has introduced a new Masters Extra variable annuity contract with two new living benefits that are “de-risked” versions of more generous riders that are no longer for sale to new contract owners. The riders became available August 17.

The riders are Sun Income Riser, which replaces Retirement Income Escalator II, and Income ON Demand III Escalator, a new version of Sun Life’s Income ON Demand line of flexible-payout lifetime income benefits. The company has also phased out a guaranteed minimum accumulation benefit rider called Retirement Asset Protector.

Maximum fees for the new riders are higher (110 bps for single coverage and 130 bps for joint) than in the past (the maximum was 100 bps). The mortality and expense risk charge for the base contract is 1.40%, plus a 0.15% administration charge and a 0.15% distribution charge.

The age-bands at which contract owners qualify for a higher annual payout rate are higher. For instance, the youngest policyholder has to be 80 years old to qualify for a 6% payout, up from age 75, and the 7% payout has been eliminated.

Clients who opt for the Sun Income Riser are eligible for an annual 6% roll-up in the guaranteed income base for every year during the first 10 years when they do not take a withdrawal from the contract. A new 10-year period starts every time the client opts for the step-up. This rider pays out a level income in retirement.

The Income On Demand rider is tailored for clients who want a flexible income. It allows clients to carry over their unspent annual payout from year to year during retirement. Clients who choose this rider are also eligible for either a 5% bonus on purchase payments made in the contract’s first year or, alternately, a bonus of 2% of the account value on every fifth anniversary of the contract.

The contract has a seven-year surrender period starting at 8%, but allows free annual withdrawals of up to 10% of purchase payments made in the previous seven years. To qualify for step-ups, assets have to be invested in certain designated funds or, if they wish, contract owners can build their own portfolios according to certain guidelines.

The designated funds include SC Ibbotson Growth, Balanced, and Moderate Funds; the Fidelity 2015 and 2020 target-date funds; the Fidelity Balanced Portfolio; the MFS Total Return Portfolio; the PIMCO Global Multi-Asset Portfolio; the AllianceBernstein Balanced Wealth Strategy Fund; the Equity and Income Portfolio from Universal Institutional Funds Inc.; and the BlackRock Global Allocation V.I.

“The PIMCO VIT Global Multi-Asset Portfolio has never offered before as a variable annuity investment option before,” Sun Life said. The diversified portfolio, co-managed by PIMCO CEO and Co-Chief Investment Officer Mohamed A. El-Erian, holds global equities and bonds, commodities, real estate, derivatives and other variable insurance product funds (including other PIMCO funds).

© 2009 RIJ Publishing. All rights reserved.

Facebook, the hugely popular social networking site, recently enabled its millions of users to enjoy a more personalized Web experience by allowing them to register “vanity URLs”—user-defined web addresses that lead directly to their Facebook pages. At exactly 12:01 AM on Saturday, June 13, Facebook flipped the switch.

The popularity of Facebook’s move was astounding. Within three minutes, 200,000 users had registered personal URLs. Within 24 hours, 5.75 million people had claimed their preferred web addresses.

Facebook was actually late to the game of offering personal URLs. In the past, its policy was to restrict the availability of personal URLs to certain high-profile people. (How high-profile? You can check out Barack Obama’s Facebook website at http://www.facebook.com/barackobama.)

Both MySpace and Twitter beat Facebook to the punch in offering personal URLs. Like these other popular social networking sites, Facebook realized how powerfully people respond to personalization. LinkedIn has also recently joined the personal URL stampede.

One of the drivers of personalized URLs is the fact that people enjoy searching the Web for all manner of things… including themselves! Perhaps you’ve “Googled” your own name.

People not only like to search the Web for information about themselves, they also want to make it easier for others to find them in search results generated by Google, Bing and other popular search engines. Personal URLs make locating people and businesses much easier.

Web search is second only to email in popularity. And at its current growth rate, Web search may soon overtake email as the number one online activity. Oh, and it’s good for you. Recent research suggests that searching the Web stimulates the brain more than reading books. It apparently stimulates parts of the brain that control decision-making and complex reasoning.

Says Dr. Gary Small, a professor at the Semel Institute for Neuroscience and Human Behavior at UCLA, “A simple, everyday task like searching the Web appears to enhance brain circuitry in older adults, demonstrating that our brains are sensitive and can continue to learn as we grow older.”

If the hundreds of billions of Web searches conducted each year are any indication, people must be getting smarter by the day. According to research from the Pew Internet & American Life Project, in a typical day half of all Internet users search the Web. Moreover, not just young people are searching.

The implications for retirement income businesses

You may wonder what all of this has to do with the retirement income business. The answer is that, regardless of your particular role in the retirement industry, you have a direct or indirect connection to investors. Investors’ behaviors and preferences matter to you. With millions of investors routinely searching the Web, it’s prudent to examine the changes in the way investors learn about and evaluate products and services.

Often times the most active Web searchers are the best prospects for retirement income services. Pew’s research indicates that 40% of adults between the ages of 50 and 64 use search engine sites on any given day. In households where annual income exceeds $75,000, 62% of people search the Web every day.

Let’s say that you are a financial advisor who offers retirement income planning services. Your relationship with your clients has traditionally been face-to-face. Should you be concerned about where you rank in search engine results? If you aren’t easy to find in Google, Yahoo or Bing, does it matter? I believe it does. And it should concern you.

Here’s why. The global economic disaster and stock market crash exacted a huge economic and psychological toll on millions of Americans who are approaching retirement or are already retired. In the chaotic aftermath of trillion-dollar losses, investor confidence has been badly shaken. Reestablishing trust and confidence in this climate is no easy task.

Eventually, millions of investors are sure to seek our new approaches to retirement investing. Many already have. To the extent that investors believe they need to evaluate new investing strategies, searching the Web will be more important than ever. Having a quality online presence will be essential to your success. Not having a quality online presence will diminish your potential for success.

“The Internet is no longer a niche technology,” said Jonathan Carlson, president of Nielsen Online. “It is mass media and an utterly integral part of modern life. Almost no aspect of life remains untouched by online media. As our lives become more fractured and cluttered, it isn’t surprising that consumers turn to the unrivaled convenience of the Internet when it comes to researching and buying products.”

When it comes to experiences delivered via the Web browser, financial services companies don’t set consumers’ expectations; consumers set consumers’ expectations. Investing in the technology and content necessary to meet their expectations-including personalization-is becoming essential as you search for your success in the business of retirement.

David Macchia is founder & president of Wealth2k, Inc., Burlington, Mass. His email address is [email protected].

© 2009 RIJ Publishing. All rights reserved.

Prospectuses for four new variable annuity contracts were filed with the Securities & Exchange Commission, according to Beacon Research. Two of the filings came from The Hartford, one from AXA Equitable, and one from MetLife Investors USA.

The Hartford filed two prospectuses for Series V-A of the Hartford Leaders line of variable annuities, effective August 14. Contributions to the contract can be allocated to variable sub-accounts, to a Fixed Accumulation Feature paying a guaranteed rate, and to a Personal Pension Account—where assets accrue interest until dispersed as an annuity or as a ladder of annuities. The Personal Pension Account can also be commuted to a lump sum payout.

“The Personal Pension Account… has features and guarantees you can use to design your own personal pension plan to provide you with life-long income payments without having to use the sub-accounts or Fixed Accumulation Feature for that purpose. These guarantees let you know in advance how much your income payments will be in the future,” the prospectus said.

AXA Equitable Life filed a prospectus for a Retirement Cornerstone suite of deferred variable annuities with no specific effective date. The contracts offer an annual roll-up during the accumulation period that is tied to the 10-year Treasury rate, and three age bands.

The contract’s guaranteed income benefit pays out 4% (3.25% for joint contracts) up to age 85, 5% (4% for joint contracts) from ages 86 to 94, and 6% (4.5% for joint contracts) from age 95 on.

The optional guaranteed benefits under the contract include a guaranteed income benefit, a return of principal death benefit, an annual ratchet death benefit, and a “greater of” death benefit. Annual charges for mortality and expense risk, administration and distribution range from 1.30% to 1.70%. The income rider charge is 0.80% to start, but can reach a maximum of 1.10%.

Aside from variable sub-accounts, contract owners can invest up to 25% of assets in a guaranteed return account. Investors can also allocate funds to specific pre-set portfolios. The XC version of the contract offers a 4% credit on first-year contributions up to $350,000 and 5% on larger contributions.

MetLife Investors USA has filed a contract for a single premium deferred variable annuity contract called MetLife Growth and Guarantee Income, with no confirmed introduction date. It has with a $50,000 minimum premium and only two investment options. There’s a large cap blend fund that invests 60% in equities, 35% in bonds and five percent in cash, called the Fidelity VIP Funds Manager 60% Portfolio. It has an expense ratio of only 0.89%. The other option is a Fidelity money market fund.

The payout rates and age bands for the lifetime income benefit are 4% for contract owners ages 59½ to 64, 5% for those ages 65 to 75, and 6% for those age 76 and older. The mortality and expense risk fee is 1.90% for single annuitants and 2.05% for joint annuitants, but the surrender charge is only 2% and lasts five years.

Prospectuses:
The Hartford
www.sec.gov/Archives/edgar/data/809013/000110465909049823/a09-17206_1n4a.txt
www.sec.gov/Archives/edgar/data/1084147/000110465909049824/a09-17215_1n4a.txt

AXA Equitable Life
www.sec.gov/Archives/edgar/data/1015570/000008902409000507/e11885.txt

MetLife Investors USA
www.sec.gov/Archives/edgar/data/356475/000119312509178269/dn4.txt

© 2009 RIJ Publishing. All rights reserved.

In 2010, the exclusion of contributions to employer-sponsored health insurance plans (ESI) from income and payroll taxes will be worth $240 billion, according to a July 2009 report from the Synthesis Project of the Robert Wood Johnson Foundation.

The paper, “Tax Subsidies for Private Health Insurance: Who Benefits and at What Cost?” suggests that the U.S. government already pays part of the bill for private health insurance simply by not taxing it, and asserts that the benefits of the exclusion go disproportionately to those with the richest medical packages and in the highest tax brackets.

Proposals have been put a cap on the amount of contributions to employer-provided health care plans that can be excluded from income tax. The new tax receipts would be used to finance health care or health insurance for the uninsured. But there’s little expectation that Congress will remove the entire subsidy.

“If all premiums were taxed as income, you’d get quite a disruption in the employer system,” said the Urban Institute’s Steve Zuckerman, one of the authors of the study. “There’s no chance of the subsidy being taken away in its entirety. But there could be policy changes to lower the exclusion. And that would move us in the right direction.”

Activists who favor universal health care believe that the subsidy encourages overly generous health care packages, just as low interest rates appear to encourage the construction of bigger and fancier homes, he said. Reducing the subsidy and taxing health care expenditures might discourage over-spending on health care, the way higher gas prices discourage needless driving.

The main findings from the study were:

• Higher-income workers benefit the most from the current taxes subsidies because they are in a higher tax bracket, are more likely to work for employers offering ESI and more likely to use ESI when offered than lower-income workers.

• The subsidy is worth more than $4,500 per year to the highest-income families. The average subsidy for the highest income workers is three times the average subsidy for the lowest income workers.

• Lower-income families pay the largest percent of income on insurance (>25%), but receive the smallest tax subsidy.

• Almost 90% of workers with incomes at least three times the poverty level have ESI compared with less than one-quarter of workers below the poverty level.

• The federal subsidy for ESI may encourage overly generous coverage.

The study recommended three policy options:

• Eliminate the tax exclusion for ESI. This policy would increase payroll and income tax receipts to help pay for health coverage for the uninsured and hard-to-insure, but would also raise the cost of ESI for workers and result in much less employer coverage.

• Cap the tax exclusion for ESI. This policy could cap the exclusion at the median premium level, raising an estimated $22 billion in tax revenue in 2010. A cap at the 75% percentile of premiums would raise $22 billion. Thus, plans with higher premiums would lose part of their subsidy and would cost employers and employees more.

• Allow non-group coverage to be purchased with pre-tax dollars. This option would expand the subsidy to provide a similar tax advantage to those purchasing coverage outside of the employer system. This change might encourage young people to forego ESI in favor of individually purchased coverage, making ESI more expensive for those remaining.

Health care reform will have a big impact on retirees. Even with Medicare coverage, the average couple is expected to spend $250,000 out-of-pocket for medical care during retirement, according to the National Coalition on Health Care. Many experts believe that this figure is conservative and that $300,000 may be a more realistic number.

In 2005, a survey of Iowa consumers by the Iowa Department of Public Health found that in order to cope with rising health insurance costs, 86% said they had cut back on how much they could save, and 44% said that they have cut back on food and heating expenses.

Americans spent $2.26 trillion on health care in 2007, according to the Office of Actuary Centers for Medicare and Medicaid Services, and an estimated $2.4 trillion in 2008.

© 2009 RIJ Publishing. All rights reserved.

John Hancock Financial has launched “JH Signature,” a modified guaranteed annuity designed to provide a combination of ‘rate for term’ choices, guaranteed interest rates, and support services to help manage eldercare situations.

“We believe the JH Signature fixed annuity is an excellent addition to the strong, highly competitive John Hancock product portfolio in the marketplace,” said Ron McHugh, Senior Vice President and General Manager, John Hancock Fixed Products.

“JH Signature Fixed Annuity offers safety and security to clients as well as competitive rates and tax deferred growth backed by the financial strength of one of the most highly rated insurance companies in the industry.”

Investors can choose either a 3-, 5-, 7-or 10-year period with a matching withdrawal charge schedule. The minimum premium is $25,000, with higher interest rates for premiums above $50,000 and $100,000, respectively.

Contract owners can take withdrawals or surrender the contract during the guarantee period, but withdrawals greater than the interest credited over the previous 12 months would be subject to a withdrawal charge and a market value adjustment (MVA). The MVA, based on a formula which responds to interest rate movements, can be positive or negative. 

JH Signature also offers the Family Resource Benefits, which offers professional health and lifestyle information at no additional charge. This includes discounts, referral services and programs to help clients and their families better understand and manage challenging eldercare situations.

John Hancock Financial is a unit of Canadian-based Manulife Financial Corporation, a leading Canadian-based financial services group. Funds under management by Manulife Financial and its subsidiaries were Cdn$421 billion (US$362 billion) as at June 30, 2009.

© 2009 RIJ Publishing. All rights reserved.