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Romancing the Fixed Annuity: KKR Buys Global Atlantic

Posted on July 9, 2020 by -

KKR & Co., the private equity firm, said this week that it would acquire Global Atlantic Financial Group Ltd., the fourth largest originator of fixed annuity contracts in the U.S. in 2019, in a deal that will raise KKR’s assets under management by about a third, to $279 billion, according to press reports.

Under the terms of the agreement, KKR will pay Global Atlantic shareholders an amount equal to Global Atlantic’s book value as of the date of closing, subject to an equity roll-over for certain existing shareholders.

As of March 31, Global Atlantic’s book value was approximately $4.4 billion. Global Atlantic reported $602 million in operating earnings in 2019 on $90 billion in assets, up from $377 million in operating earnings on $50 billion in assets in 2016, according to KKR. [hartford kept… mark pulley.

KKR, formerly Kohlberg, Kravis, Roberts & Co., expects to fund the acquisition, net of equity roll-over participation, from a combination of cash on hand, proceeds from potential minority co-investors and the issuance of new debt and/or equity. The investment in Global Atlantic will be held on KKR’s balance sheet and through a proprietary vehicle established for others to invest alongside KKR’s balance sheet, not in any client funds.

After closing, Global Atlantic will continue to operate as a separate business with its existing brands and management team, led by Allan Levine, Global Atlantic’s chairman and CEO.

The transaction, which is expected to close in early 2021, is subject to required regulatory approvals and certain other customary closing conditions.

The impact of low interest rates

The deal appears to be a continuation of the trend that began in the wake of the 2008 financial crisis, when private equity or investment companies like Apollo, Guggenheim Partners, Goldman Sachs and others started buying annuity companies or re-insuring existing annuity blocks at bargain prices from companies that needed capital or just wanted out of the U.S. annuity business.

Starting in 2010, for instance, Guggenheim bought Security Benefit Life, Equitrust Life, and Sun Life (now Delaware Life). Global Atlantic, which grew out of Goldman Sachs’ reinsurance group in 2004, eventually bought the U.S. life insurance business of Aviva plc (from Athene) and Forethought Financial Group, which owned The Hartford’s former annuity businesses.

That trend is very much alive today. In recent weeks, Athene, which was first financed by Apollo, bought a $27 billion annuity block from Jackson National. Recently, Nassau Financial (which was funded in 2015 by Golden Gate Capital) concluded its purchase of the International Order of Foresters’ annuity businesses.

The trend is tied to the Federal Reserve’s interest rate policy. The benchmark overnight rate for Fed funds plunged to nearly zero in 2008 as part of the government’s rescue of the financial system. Those rates edged back up to almost 3% by the end of 2018; that’s when the tightening stopped. Rates dropped twice in the second half of 2019 and then went to near zero in March.

Cuts in rates help the stock market recover from swoons and support the prices of existing bonds. But they hurt the ability of life insurance companies to earn enough interest to support their existing liabilities when they have to reinvest the proceeds of maturing bonds into new bonds at lower rates.

Fixed-rate and fixed indexed annuity blocks can be highly desirable to nimble, asset-hungry firms. The blocks are sources of stable assets, while the liabilities (payouts) may not come due for five to 10 years. The private equity-led firms have—or claim to have—sharper asset management skills, access to niche opportunities and higher-yielding assets, and a self-professed ability to exploit the tax and capital advantages of captive Bermuda-based reinsurance partners.

These traits are said to make them better than larger, older life insurers at managing acquired as well as self-originated annuity blocks more profitably. Blocks of variable annuities, by contrast, are much less attractive to private equity firms. Most variable annuity assets are in separate accounts and not under the insurer’s control. In addition, variable annuities’ optional lifetime income guarantees make potential liabilities hard to predict.

About the partners

Goldman Sachs formed Global Atlantic in 2004 and converted it into an independent company in 2013. Headquartered in Bermuda, Global Atlantic acquired Allmerica Life in 2005 and Forethought Life Insurance Company (owner of The Hartford’s fixed annuity business) in 2013. Also in 2013, Global Atlantic acquired the U.S. annuity arm of Aviva PLC, converting it into Accordia Life and Annuity.

KKR was founded in 1976. In 1992, the firm helped buy American Re Corp. out from Aetna Inc. KKR made a big investment in Willis, which is now part of Willis Towers Watson, in 1998. In 2017, Aflac Inc. tapped KKR in an effort to use private equity investments to increase returns on its $120 billion investment portfolio.

© 2020 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on July 9, 2020 by -

SIMON platform to offer Allianz Life fixed indexed annuities

Allianz Life Insurance Company of North America, the top seller of fixed indexed annuities (FIAs) in the U.S. for well over a decade, has added its products to the SIMON Annuities and Insurance Services annuities platform and digital marketplace for Raymond James wealth managers.

“Expanding SIMON’s Marketplace with the on-boarding of Allianz Life delivers not only a broader selection of annuities products to Raymond James advisors [who use] SIMON’s platform, but also the depth of analytics they seek to effectively serve the wealth management and retirement needs of their clients,” a SIMON release said.

Within SIMON’s interactive platform, Raymond James advisors can evaluate Allianz Life’s annuity products and features, run allocation and income analytics within these products, and access product-specific marketing literature.

Scott Stolz, president of Raymond James Insurance Group, who facilitated ties between SIMON Annuities and Raymond James advisors earlier this year said in a statement, “SIMON greatly simplifies all required annuity education by combining it together into a single, easy to use platform that resides on each of our advisors’ desktop.”

SIMON, an independent spin-off from Goldman Sachs’ structured product department, serves more than 30,000 financial professionals managing more than $3 trillion in assets.

Previous RIJ stories about SIMON’s annuity business appeared in our issues of October 2019 and December 2019.

Janus risk-managed index available in Global Atlantic FIA

Janus Henderson Investors has licensed its Janus SG Global Trends Index to Global Atlantic Financial Group, which is in the process of being acquired by KKR, the private equity firm.

The index will be available in a new FIA crediting method called the Enhanced Accumulation Strategy, or EAS, which is available in Global Atlantic’s Choice Accumulation Edge product. The Janus SG Global Trends Index uses dynamic risk management tools to diversify among global stocks, bonds and commodities.

“Traditional tools have typically relied on the assumption that stocks are always higher risk, while bonds are relatively safe, which does not always hold true. Such asset allocation approaches can over-allocate to bonds in rising interest rate environments, and may not consider the changing return potential of different asset classes over time,” a Janus release said.

The Index was co-developed with Société Générale who acts as the index sponsor and licensor. Global Atlantic will have exclusive usage rights to the index within their fixed index annuity (FIA) offering.

Janus Henderson Indices has been providing quantitative index strategies since 2012, and these strategies are now the basis for $3.5 billion in investment products with major financial partners including FIAs, variable annuities, and exchange traded funds (ETFs). The Janus SG Global Trends Index uses market signals to manage these challenges dynamically, adapting to changes in risk profiles between bonds, stocks and commodities.

Morningstar completes purchase of Sustainalytics

Morningstar, Inc., has completed its previously announced acquisition of Sustainalytics, which provides security-level ESG Risk Ratings on the environmental, social, and governance (ESG) factors of tens of thousands of companies worldwide, Morningstar said in a release.

Institutional asset managers, pension funds and investors use Sustainalytics’ risk ratings when integrating ESG factors into their investment processes and decision-making. They underpin Morningstar Indexes and Morningstar’s Sustainability Rating for funds.

More than 650 members of Sustainalytics global workforce, including its CEO, Michael Jantzi, and his executive team, have joined Morningstar.

Morningstar will support Sustainalytics’ existing offerings and integrate ESG data and insights across the firm’s research and solutions for individual investors, advisors, private equity firms, asset managers and owners, plan sponsors, and credit issuers.

Morningstar marked the acquisition by publishing a primer on sustainable investing, “Sharpening the Tools of the ESG Investor: Why ESG Factors Are Important, How Investors Use ESG Data, and What Policies Promote (or Impede) Effective ESG Investing?”

MetLife joins sustainability initiative

MetLife, Inc. has become the first U.S.-based life insurer to join the United Nations Global Compact, the world’s largest corporate sustainability initiative. The compact calls for companies to honor 10 universal principles in the areas of human rights, labor, the environment, and anti-corruption.

The 10 principles of the Global Compact are:

On human rights

Businesses should support and respect the protection of internationally proclaimed human rights and make sure that they are not complicit in human rights abuses.

On labor

Businesses should uphold: the freedom of association and the effective recognition of the right to collective bargaining; the elimination of all forms of forced and compulsory labor; the effective abolition of child labor; the elimination of discrimination in respect of employment and occupation.

On the environment

Businesses should support a precautionary approach to environmental challenges; undertake initiatives to promote greater environmental responsibility; encourage the development and diffusion of environmentally friendly technologies.

On anti-corruption

Businesses should work against corruption in all its forms, including extortion and bribery.

Last week, MetLife issued its annual Sustainability Report, which aligns with the U.N. Sustainable Development Goals and details the ways MetLife and MetLife Foundation deliver for their stakeholders.

In 2019, MetLife became the first insurance company to join the U.N. Women Global Innovation Coalition for Change, and in February 2020, the company became the first U.S.-based insurer to sign the U.N. Women’s Empowerment Principles.

Life insurers’ real estate assets bear watching: AM Best

U.S. life/annuity (L/A) insurance companies continued to increase their exposures to commercial mortgage loans in 2019 and now hold more than $522 billion, up significantly from $382 billion in 2015, according to a new AM Best special report.

The Best’s Special Report, titled, “Commercial Mortgage Loans Increasing, Credit Quality Decreasing,” notes that U.S. economic fundamentals were mostly favorable throughout 2019, with continued GDP growth, low unemployment and rising retail sales. All of these factors led to stable commercial real estate rents and stable vacancy rates. However, more recent trends for commercial mortgage loans (CML) properties show decreases in office and retail properties and increases in apartment properties.

COVID-19-related developments may lead to further percentage declines in these holdings. Holdings in hotel and motel properties, which make up roughly 4% of L/A insurers’ CML investments, also likely will come under pressure until economies reopen more fully.

Despite the increased holdings, including an 8% year-over-year increase in 2019, the percentage of investment-grade loans with the highest rating, designated as CM-1, has declined steadily, while the percentage of loans designated as CM-2 has grown. The shift to CM-2 loans appears to be due to insurers’ efforts to increase yield, rather than to deteriorating conditions leading to downgrades.

AM Best’s recent COVID-19 stress testing on its rated companies assumed declines in several asset categories, including a 10% drop in the statement values of CMLs, with such declines reducing surplus, adjusted for taxes.

CML valuation declines will impact Best’s Capital Adequacy Ratio (BCAR) results, particularly for property types affected the most by the COVID-19 shutdowns. Hotel properties in particular are experiencing unprecedented vacancy rates.

Retail and office property also are experiencing significant drops in revenue, which can lead to deterioration in quality and declines in valuations. This will also affect the performance of other mortgage-backed assets, such as commercial mortgage-backed securities. A prolonged impact of COVID-19 could have a significant effect on the loan values and operating income of most property types as well.

As the pandemic leads to loan forbearance, along with remote work forces and travel restrictions, the potential for deterioration in credit quality grows. However, L/A insurers’ low exposure to hotels will help minimize the impact. Instead, insurers will feel the impact of longer-term pandemic conditions through accelerated loss recognition, leading to pressure on GAAP earnings. AM Best said it will closely monitor insurers with higher CML exposures relative to total statutory surplus.

Asset management consolidation to continue: Cerulli

Secular trends in the asset management market that made the environment ripe for consolidation during the past five years—namely, fee compression, outflows from higher-cost active strategies, and product rationalization—are still active despite the COVID-19 pandemic, to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.

Numerous subscale managers have joined forces In order to combat fee compression, shrinking shelf space, and the rising cost of compliance due to stricter regulations. These subscale deals are aimed at strategic expansion into broader markets around the globe and consolidation/rationalization of product lineups to focus on top-performing strategies.

“In theory, these M&A deals make sense on paper,” said Cerulli managing director Bing Waldert. “But they can also exemplify the difficulties of melding operations within different firms with varying cultures. They typically lead to at least some level of reorganization and staffing reductions.”

A clearer path to success may reside in another type of M&A deal, said Cerulli senior editor David Fletcher said. “We have observed an increasing amount of M&A deals that primarily focus on the opportunistic acquisition by larger firms of smaller firms with strong brands and reputations for specific capabilities in a given sector—e.g., alternative investments and environmental, social, and governance (ESG) offerings.

Alternative investment capabilities are an attractive M&A target for many asset managers given investors’ increasing interest in uncorrelated, risk-adjusted allocations and these products’ relatively attractive revenue potential.

Alongside the 74% of firms polled by Cerulli in 2020 citing the potential for increasing revenues as motivation for developing alternative investment capabilities, 59% point to business diversification as a chief driver. In addition to the alternatives space, an increasing number of managers are expanding via acquisitions in the ESG-related product universe.

Nearly one-quarter of firms polled are in the process of developing ESG capabilities during the next two years. For some firms, there will be significant cost to building these processes and staffing them.

Therefore, as asset owners continue to place increased scrutiny on asset managers’ business practices and processes, Cerulli expects that more M&A activity related to ESG/responsible investing will occur in the near term.

© 2020 RIJ Publishing LLC. All rights reserved.

Nassau Financial creates Apple app to sell fixed-rate annuities

Posted on July 9, 2020 by -

Nassau Financial Group has launched a fixed-rate multi-year guaranteed annuity with virtual distribution through an iOS mobile application.

The contract, called “Simple Annuity,” and the app of the same name will support the sale of the annuity by independent, commissioned insurance agents and by Nassau’s own licensed, salaried representatives. The app is intended to “redesign the sales and consumer experience for annuities, empowering agents with digital tools to support sales,” a Nassau release said.

The Simple Annuity is a fixed rate, multi-year guaranteed annuity with four-year and six-year terms. As of June 1, the guaranteed annual returns are:

  • 4-year, 2.45%
  • 6-year, 2.75%

“The future of annuity distribution will be a digitally-enabled agent,” said Paul Tyler, chief marketing officer of Nassau Financial, in an interview. “We also get a lot of good intelligence when we offer this product directly to consumers.” The single-premium product has a minimum investment of $5,000 in non-qualified money. The yield on the contract is the same whether sold by a commissioned agent or salaried representative.

With the app and phone support, a sale can be closed in as little as “six minutes,” Tyler told RIJ. “The clients take a picture of their driver’s license, you verify their identity, you do an EFT [electronic funds transfer]. It’s a great way for agents to reach people who have no time for paperwork or an appointment. If we can sell direct, it will be groundbreaking.”

Nassau was founded in 2015 with capital provided by Golden Gate Capital, a private investment firm with over $15 billion of committed capital. Aiming to “build a franchise across the insurance value chain,” the firm bought Phoenix Life and related companies, Saybrus Partners, a distribution firm, Constitution Life and CorAmerica. It also formed Nassau Re Cayman, and Nassau Corporate Credit.

Nassau Financial Group currently has combined assets of about $22.6 billion and capital of about $1.3 billion. It has four business segments: insurance, reinsurance, distribution and asset management through various affiliates.

In a deal announced in October 2019 and completed this year, Nassau Financial Group acquired two New York-domiciled firms, Foresters Financial Holding Company, Inc. and Foresters Life Insurance and Annuity Company (FLIAC) from the International Order of Foresters. Founded in 1962, FLIAC has 112,000 life insurance and annuity policyholders in the U.S. and $2.5 billion in assets.

Foresters Financial Holding Company, Inc., includes a registered broker-dealer, two investment advisers, a life insurance company and a transfer agent. Foresters Life Insurance and Annuity Company maintains an “A” (Excellent) rating by A.M. Best.

Phil Gass is a co-founder of Nassau Re and serves as chairman and chief executive officer. Gass previously served as chairman and director of Fidelity & Guaranty Life (2011 through 2015) and managing director of investments at HRG Group, Inc.

From 2004 to 2008, he served as vice president of GE Capital. Before then, he held positions at Dresdner Kleinwort Wasserstein and the Sumitomo Bank.

Symetra Life Insurance Company announced this week that it is partnering with the Nassau Re/Imagine insurtech incubator based in Hartford, Connecticut, in order to tap the region’s deep insurance industry talent pipeline.

Nassau Re/Imagine currently supports 19 startups focused on solving pressing problems for the life, annuity, reinsurance, and property & casualty sectors. Symetra’s Harry Monti, executive vice president, Benefits Division, will join the Nassau Re/Imagine advisory board.

“Our Enfield, Connecticut-based employees [will have] greater access to Hartford’s vibrant innovation network, multiple brainstorming events and the kind of collaborative environment that can fuel viable business ideas,” Monti said in a release.

Through parent company Sumitomo Life, Symetra is already a participant in the Plug and Play Tech Center in Sunnyvale, California.

The Nassau Re/Imagine program, launched in early 2019, supports individuals and teams committed to fostering an insurtech ecosystem in Greater Hartford. The program provides entrepreneurs with operational resources, access to potential customers, support for product commercialization, and introductions to investors. The support network includes Hartford-area insurance carriers, technology companies, academic institutions and professional service firms.

© 2020 RIJ Publishing LLC. All rights reserved.

Odds Favor Yield Curve Control

Posted on July 9, 2020 by -

I staked out a position on yield curve control in Bloomberg Opinion:

The Federal Reserve might not be ready to explicitly target yields on U.S. Treasury securities to keep them from rising and hindering the economic recovery, but that doesn’t mean it won’t happen. If you believe the Fed will be under continued pressure to do more to support the economy, it’s tough to bet against the eventual adoption of so-called yield-curve control.

Recall that last week, the Fed signaled doubts about yield curve control. My expectation is that those doubts will eventually fade.

How do I arrive at such a conclusion despite the Fed’s reticence? My position assumes continued economic weakness, inflation persistently below target, and an eventual unwillingness on the part of the Fed to continuously ramp up the scale of asset purchases.

With a new wave of Covid-19 cases sweeping some states, particularly in the South and West, it is becoming increasingly evident that we will not experience anything like a V-shaped recovery. We are in this for the long haul; consumers are already starting to step back:

From a July 8, 2020 Tweet by Julie Coronado, Ph.D.

We have to assume that even in the case of a miracle vaccine, full recovery remains years away. If the last recovery is any example, inflation will remain persistently below the Fed’s 2% target. With that being the case, the Fed will be under constant pressure to DO MORE.

What does “doing more” entail? First up will be enhanced forward guidance. They will tie policy to economic conditions, likely weighted more toward realized inflation. Beyond that, they will want to move onto a tool they can escalate. They could escalate quantitative easing, but that commits them to a path of expanding the balance sheet at an increasing pace. Doing more with quantitative easing means $45 billion becomes $60 billion becomes $75 billion, etc. You get the idea. I think the Fed would eventually become concerned about the optics.

Alternatively, you could instead move toward yield curve control. The Australian experience is that once you establish credibility on the policy, you don’t need to actually buy any bonds. Plus, you don’t have to jump straight to three years out. You start at one year, then two years, then three years. That’s like a full year of “doing more” without escalating the pace of asset purchases.

You can argue whether this actually accomplishes anything. That’s fine, you don’t think the signaling alone has much value. Others think it does. Either way, you have an investment position. Note also that a turn toward yield curve control doesn’t necessarily preclude the Fed from doing more quantitative easing. I expect they would use the tools in tandem, yield curve control to lock down the front end and enhance forward guidance and asset purchases to reduce term premiums and force investors into less safe assets.

Of course, a surprisingly quick recovery or an outbreak of inflation would eliminate the need for additional policy. For example, Congress could in theory pump enough money into the economy to accelerate the return to full employment. It’s not my expectation, but it could happen and shift the path of Fed policy.

Bottom Line: Yield curve curve control seems too obvious a choice to easily dismiss.

© 2020 Tim Duy. Used by permission. This column first appeared on his blog.

In robo deal, Empower pays $1 billion for Personal Capital

Posted on July 2, 2020 by -

Empower Retirement, second only to Fidelity as a U.S. retirement plan provider, has acquired Personal Capital, the hybrid human-and-digital investment advice platform.

Empower will pay “up to $1 billion in enterprise value, composed of $825 million on closing and up to $175 million for planned growth,” according to a release this week.

In Personal Capital, Empower acquires an advice platform that has “added over 2.5 million users on its platform, tracking over $771 billion of household assets” since its founding in 2009, the release said.

“There are few modern wealth management platforms that can deliver personalization at scale direct to the consumer,” Personal Capital co-founder Rob Foregger told RIJ this week. “They’re hard to build and hard from an execution standpoint. And it’s not easy to do the marketing and to build a national brand.

“Personal Capital brings together all the pieces,” he added. “There’s a scarcity of pure-play platforms that can drive this technology. That’s one reason why Empower made this acquisition, and why these types of acquisitions will continue.”

The COVID-19 pandemic will accelerate the digitization of professional services, bringing it to maturity about five years sooner than the financial services industry expected, Foregger said. “Changes in the financial industry that were underway but still 10 years from taking full effect, are now on top of us.”

NextCapital, a sibling company to Personal Capital, remains independent, Foregger said. NextCapital is an advice platform that enterprises can provide to their clients under their own brand, in a “white-label” relationship. Such enterprises include 401(k) plans, broker-dealers, Registered Investment Advisors, and other retail financial businesses.

After the close of the transaction, Personal Capital will be branded as “Personal Capital, an Empower Company.” It will continue to provide its financial tools and investment solutions to clients. Personal Capital CEO Jay Shah will serve as president of Personal Capital, the release said.

Shah will report to Empower CEO Edmund F. Murphy III, and join Empower’s executive team. A joint team from both enterprises will work together to integrate the Personal Capital and Empower offerings. The transaction is expected to close in the second half of 2020.

Sullivan & Cromwell LLP served as legal counsel and Morgan Stanley & Co. LLC and Rockefeller Capital Management advised Empower. Willkie Farr & Gallagher LLP served as legal counsel and Moelis & Company LLC served as financial advisor to Personal Capital.

© 2020 RIJ Publishing LLC. All rights reserved.

Fresh from Midland National and DPL, AllianzIM

Posted on July 1, 2020 by -

A versatile fee-based FIA from Midland National, on the DPL platform

DPL Financial Partners and Midland National Life Insurance Company are introducing a new commission-free fixed index annuity (FIA) with a “health-activated income multiplier” feature.

The contract is called Midland National Capital Income. Contract owners can receive double income payments for up to five years “to help prepare for increased personal care costs.” Capital Income will be available exclusively to DPL’s RIA member firms by the end of July 2020.

Policy-owners who can’t perform two or more of the six basic activities of daily living (bathing, continence, dressing, eating, toileting, and transferring in and out of beds and chairs) can turn the rider on. It is not intended to replace long-term care insurance.

The multiplier is a feature of the product’s guaranteed lifetime income rider, available for a rider fee of 1% per year; it can be dropped after seven years. There’s a seven-year surrender period with a 6% first-year penalty for withdrawals of more than 10% of the account value.

A waiting period and an elimination period are among the conditions and limitations on the benefit, the companies said in a release. There’s a three-year waiting period after the purchase of the contract, and a three-month waiting period after switching on income.

The older you are when you buy the contract, and the longer you wait after buying the product to start income, the higher the annual annual payout percentage. According to the product brochure, for example, a 65-year-old single contract owner could take lifetime income of 5% per year. The rate would go up to 5.75% if he or she delayed income until age 70. Payouts for couples are a bit less.

According to the product rate sheet, the contract currently offers a fixed-rate account paying a guaranteed 2.75% per year. There’s a market-value adjustment for excess withdrawals. The minimum investment is $20,000.

There are two annual point-to-point crediting strategies offering exposure to the S&P500 Index (without dividends). One has a 5.25% cap, the other has a 35% participation rate and an “index margin” of 2%.

There’s also uncapped annual point-to-point exposure to the Fidelity Multifactor Yield Index 5% ER, “a multi-asset index, offering exposure to companies with attractive valuations, high quality profiles, positive momentum signals, lower volatility and higher dividend yield than the broader market, as well as U.S. Treasuries, which may reduce volatility over time.”

New rates for Allianz buffered ETFs

Allianz Investment Management LLC (AllianzIM) has announced new caps and buffers on the structured exchange-traded funds that it introduced in June and which trade on the New York Stock Exchange, an Allianz news release said. The new rates are valid from July 1, 2020 to June 30, 2021.

There are two versions of the ETF: the “U.S. Large Cap Buffer10 Jul ETF” (NYSE Arca: AZAL) and the “U.S. Large Cap Buffer20 Jul ETF” (NYSE Arca: AZBL). Both have begun trading on the New York Stock Exchange.

AZAL has a gross 10% buffer and a gross upside cap of 16.1%. AZBL has a gross 20% buffer and a gross upside cap of 8.8%. The net buffers and caps are 0.74% lower than the gross, reflecting the 0.74% annual expense ratio.

The net return will also reflect brokerage commissions, trading fees, taxes and non-routine or extraordinary expenses. The cap and buffer experienced by investors may be different than the stated numbers, the release said. The funds’ website, at www.allianzIM.com, provides additional fund information and information relating to the potential outcomes of an investment in the funds on a daily basis.

Accessible to retail investors via the New York Stock Exchange, AllianzIM Buffered Outcome ETFs are also available to advisers through Halo Investing, Inc.’s (Halo) global technology platform.

© 2020 RIJ Publishing LLC. All rights reserved.

Should Nursing Homes Be Closed?

Posted on June 30, 2020 by -

Many senior-living executives advanced in the industry by qualifying as Nursing Home Administrators. That has tilted the industry toward caring for the frail more than celebrating the capable. There are different kinds of nursing homes, ranging from small board and care homes, to proprietary nursing homes specializing in Medicaid, to the care facilities in Continuing Care Retirement Communities (CCRCs).

Life in a SNF

CCRC residents are sometimes seen as embarked on a life journey that ends with confinement in the Care Center, as CCRC nursing facilities are often termed. That is no longer seen as a desirable place to spend one’s final days. Sharing a room and a bathroom with a total stranger, who may have annoying habits, is not an outcome that anyone would want.

The COVID-19 pandemic has led to a media focus on Skilled Nursing Facilities (SNFs) as disease-prone concentrations of vulnerable people. Estimates have suggested that as many as one-third of all COVID-19 deaths may occur in SNFs. This, of course, ignores the death rates in hospitals. As one wise person said, “Have you ever thought about what a privilege it is that your residents have chosen to die in your community?” The recent negative publicity may be unfair, but it is a new public awareness reality with which senior living operators must cope.

Some of what media reports present as “excessive” deaths may be no more than hospice patients, for instance, choosing to forego treatment. Thus, many of the SNF deaths may be among people who were likely to die soon in any event, but for whom COVID-19 has merely accelerated the inevitable.

Who’s to Blame?

LeadingAge’s Katie Smith Sloan recently courageously pointed to the failure of our national leaders to give priority to shielding nursing home workers with adequate Personal Protective Equipment (PPE). The nursing home industry has not been as effective as have hospitals in making their plight known. One reason may be the artificial distinctions that prevent the trade associations – LeadingAge, American Senior Housing Association, and Argentum – from speaking with a shared voice. A secondary reason may be that their voice is less compelling due to the absence of residents and their family members in trade association policy councils. AARP has demonstrated that true grassroots support weighs heavily in Washington.

Nevertheless, as the National Institutes of Health’s respected spokesman, Dr. Tony Fauci, said recently, now is not the time to be assigning blame. Now is the time to address the common foe with all our strength, with all our will, and with all our capacity. That the media have chosen to single out nursing homes and then to assign blame to their proprietors has not been helpful. Moreover, it shows a journalistic superficiality that is unworthy of those who are given authority to shape public opinion in a democracy. Still, unjust publicity is not the only challenge confronting nursing homes. They face financial challenges as well.

Do We Need SNFs?

Financially, licensed SNFs are eligible for short term Medicare reimbursement benefits. Downward pressure on reimbursement rates makes it increasingly difficult to cover the cost of quality care. Thus, it’s not surprising that, even before COVID-19, many CCRCs were delicensing their SNFs and converting them into more homelike high-acuity assisted living. Most needs calling for a SNF license can be provided in that more inviting setting if there is competently licensed staff.

Without a skilled nursing facility, senior living operators won’t need to have a licensed Nursing Home Administrator. The focus can shift to ensuring that what seems like an attractive home for life remains just that.

Trend Away from SNFs

A trend away from skilled nursing began before COVID-19. A 2018 CBRE (Coldwell Banker Richard Ellis) study concluded: “Telemedicine and other technological advances in the delivery of health care are keeping seniors with significant health-care needs in non- nursing care environments longer.” COVID-19 has accelerated the adoption of telemedicine, so it is likely that the decline of licensed SNFs will continue.

A two-stage assisted living approach can allow CCRCs to provide a more integrated care response. Generally, skilled nursing staff are not allowed to respond to independent and assisted living residents if an emergency develops, say, in the middle of the night. That can lead to expensive and unnecessary transports to emergency rooms. Effective telemedicine, however, can connect remotely with emergency room physicians, who can determine whether transport is needed or not.

What Happened?

Criticism of nursing homes is not new. During the 1980s, there was a move toward privatization, which spurred the expansion of proprietary skilled nursing homes. A 1986 study titled “For-Profit Enterprise in Health Care” from the Institute of Medicine decried the prospect of substandard care. Some proprietary SNFs have been characterized as greed-motivated, suggesting that profit takes precedence over patient welfare. That unsavory perspective may now have tainted the entire industry.

The COVID-19 crisis is accelerating many business trends. The time may be now when senior living operators need to decide whether it is wise to continue. It’s hard to make a case for continuing a care model that can result in losses, especially when serving needy Medicaid patients. Now that financial challenge is exacerbated as nursing homes are seen as hazardous for the welfare of those served. It’s possible that hospitals will offer SNF-type services in separate facilities on their campuses, or that specialized operators may be able to scale SNFs to be viable. If so, those who no longer provide SNF services as part of their portfolio can contract with others to meet those needs.

© 2020 SeniorLivingForesight (seniorlivingforesight.net). This article first appeared here. Reprinted by permission.

 

Why Is Income Planning So Hard?

Posted on June 30, 2020 by -

Bill Sharpe, who won a Nobel Prize for co-creating the capital asset pricing model, called retirement income planning the hardest financial problem he has ever tackled. It’s clearly different from other types of financial puzzles.

On a personal level, the pre-retirement “accumulation stage” might actually be more stressful. Financially, it involves earning, saving and investing; borrowing and re-paying; buying all kinds of insurance. Plus parenting. That entails a lot of stress. People are least happy at mid-life, research shows.

Then comes retirement. It’s not all that bad. Medicare and Social Security benefits begin. Mortgages, loans, and credit card debt have melted away, ideally. Paydays end but deferred income or pensions may begin. Many people dread retirement until they dive in. When they do, the water feels surprisingly good.

So what makes retirement income planning so difficult—for adviser and client? Well, it’s different from the accumulation stage. The risks are different, for one thing. Longevity risk (living too long) replaces mortality risk (dying too soon). “Sequence risk” (selling depressed assets for income) looms larger than market risk (volatility). Those “deferred” income taxes start to come due. Risk capacity supersedes risk tolerance or risk appetite.

For many people, these changes demand a new approach to money management. Your clients probably won’t know that the rules of the game have changed. They’ll rely on you to guide them through an unfamiliar financial landscape. To maximize your value to them, you may need to make a few mental adjustments yourself. For instance, creating plans that involve investments and insurance can be challenging if you’re not used to it.

Blending investments and insurance

At RIJ, we believe that a combination of the two can create financial synergies for the client. But most advisers, by personal and professional history, are grounded in either the investment or the insurance world. Investment specialists may find it awkward to “frame” the role of insurance products in their own minds, and when communicating their pros and cons to a client.

The awkwardness is understandable. For retirees, insurance (annuities, life insurance, Medigap or Medicare Advantage policies, long-term care insurance, reverse mortgages) can be looked at as expensive investments, as sunk costs, as income-generating assets, or as tax-deferral or tax-reduction vehicles. The role of deferred annuities with “income riders” can be especially difficult to frame or position in the portfolio, because they contain several of those elements.

There’s a fundamental difference between investments and insurance. When people invest, they buy risk in the form of securities. They also buy asset management services. When they insure, they do the opposite. They sell (or transfer) risk to an insurance company by signing contracts. That is, they buy risk protection or risk management services. When annuities serve as both investments and insurance, their value can be hard to value or communicate.

One important benefit of insurance products often goes unarticulated, I think. Insurance creates opportunities. To transfer one risk, like market risk or longevity risk, to an insurance company is to create “risk budget” for a different kind of investment or expenditure.

Insurance lets people do things that would otherwise be too financially risky. Like spending money today instead of hoarding it for an uncertain or even unlikely calamity in the future. Identifying or measuring those things won’t be easy. Every client’s opportunity will be unique. Only the client can name it. But helping retirees name their own opportunities might produce the most satisfying moments you have with them.

Topics for the future

There are other challenges to retirement income planning. You’re probably familiar with them. There are, of course, the obvious uncertainties related to health and length of life. Then there is the sheer multiplicity of methods for generating income from existing assets. Not least, income planning often involves difficult trade-offs or sacrifices. Spouses may not agree on how to resolve them. Hesitation over an unpalatable trade-off can stall the execution of a plan forever.

Your business model may also present a significant challenge, if not an obstacle. If you earn fees only by charging a percentage of assets-under-management, how can you obtain compensation for providing advice on insurance or home equity? Advisers who are multi-licensed might not have difficulty handling this challenge, but others will.

There’s also the challenge of broaching personal topics with clients. Mortality is an unavoidable presence at the table. Any discussion of annuities, especially for couples, will involve mortality. Many clients will avoid talking about death. Retirement income planning encompasses almost everything that happens within a household. Not all clients or advisers will be equally eager or capable of “going there.” But we believe that the satisfactions make the effort worthwhile.

© 2020 RIJ Publishing LLC. All rights reserved.

Tontine Savings Accounts

Posted on June 30, 2020 by -

A tontine is a financial vehicle that allows people to pool their assets and their mortality risk and thereby enhance their savings. We envision tontine savings accounts (TSAs) as taxable or tax-deferred retirement accounts, with investors free to select their investments and payout method. Payouts could be 10% to 15% higher than those of commercial life annuities.

Unlike a regular savings account (but like a life annuity), an investor in a TSA can’t directly access her contributions or earnings. Instead, the investor would receive payouts only according to the payout method she elected.

A typical investor in a TSA might elect to receive relatively level monthly payments starting at her planned retirement age (if she is alive then) until her death. Alternatively, she might elect inflation-adjusted payouts that would start out lower than level payments but end up much higher. TSA payouts would be higher than payouts from regular savings accounts—precisely because surviving pool participants inherit the assets of those who die. These enhancements are known as “mortality gains” or “mortality credits.”

Payouts from a TSA are based on:

  • The investment returns on the investment portfolio that the investor elects
  • The mortality experience of her tontine pool
  • The payout method elected

While mimicking the high payouts of an actuarially fair variable life annuity, TSAs would cost significantly less than commercial life annuities. Tontine sponsors don’t insure investors against market risk or longevity risk, so they don’t need to set aside reserves to back up any guarantees. For a relatively trivial fee, they would merely invest and custody passively-managed funds, keep track of when investors die, reallocate forfeited assets to surviving investor accounts, and deliver payouts.

Sally, a 35-year-old investor

Consider Sally, a hypothetical 35-year-old investor who contributes $1,000 to a TSA at ABC Co., which could be an insurance or investment company. Sally and ABC agree that: 1) her contribution will be invested in a Standard & Poor’s 500 (S&P 500) stock index fund, 2) Sally will get an appropriate lump-sum payout at, say, age 70 if she is alive then, but 3) if she dies before age 70, her contribution will be forfeited (for the benefit of the other investors in ABC’s TSA portfolio).

Richard Fullmer

ABC does not guarantee the amount Sally would receive at age 70. When Sally first invests, neither she nor ABC knows how large her lump-sum payout will be in 35 years. But ABC offers Sally a “fair deal” [see explanation below] based on its transparent estimates of her probability of surviving to age 70 and the probable size of the lump-sum payout she would get.

For instance, ABC might tell Sally that a 35-year-old investor like her has an 80% chance of surviving to age 70 (from an appropriate life expectancy table) and that her investment in the S&P 500 index fund will earn an average annual rate of return of around 7% (from a capital markets forecast).

Given these two assumptions, ABC can tell Sally that if she survives until age 70, she should expect to collect a lump-sum payout of about $13,350 then. Here’s the math:

First, if the S&P 500 index fund grows at exactly 7% every year for the next 35 years, then Sally’s $1,000 investment will grow (ignoring expenses) to around $10,700 in 35 years ($10,676.58 = $1,000 × 1.0735). Second, if exactly 20% of the 35-year-old investors in the TSA pool die before reaching age 70, then (if she survives until then) her payout will be around $13,350 ($13,345.73 = $10,676.58/0.80). If she doesn’t survive, she will have already forfeited her investment.

In other words, if Sally invests $1,000 in an S&P 500 index fund, she (or her heirs or estate) should get around $10,700 in 35 years. But if she instead invests $1,000 in a TSA, she should get around $13,350 if she survives until then. She would have an extra $2,670 to live on in retirement ($2,669.15 = $13,345.73 – $10,676.58). Depending on her bequest motives and other preferences, she could split her investment between a TSA and a regular account, for which she would designate beneficiaries.

‘Fair’ tontines

In a fair tontine, each investor receives a “fair” bet in the probabilistic sense, meaning that the expected value of mortality gains (while living) will equal the expected value of the account forfeiture (at death). Satisfying this “fairness constraint” requires that the forfeited assets of dying investors be transferred to the surviving investors in an actuarially fair (unbiased) way, based on each investor’s relative stake in the tontine pool and probability of dying.

Jonathan Forman

All in all, a fair tontine can be designed to offer fair bets to all investors even if they are of different ages and genders, invest different amounts at different times, use different investment portfolios, and elect different types of payouts.

Like traditional savings accounts and brokerage offerings, TSAs would be perpetually open-ended. New investors could open new accounts at any time, and current investors could make additional investments at any time. The individuals who make up any given financial institution’s tontine pool would change over time, and, eventually, newer generations of investors would completely replace older generations.

All fees for TSAs would be plainly and transparently disclosed. The use of index funds as investments would make the all-in costs to investors very low. For example, a TSA might invest entirely in index funds. Many discount brokerages charge 0.15% or less per year to administer such funds. If TSA management and record-keeping functions could be performed for about 0.25% of investments per year, a TSA’s annual expense ratio could be as low as 0.40%.

TSAs in practice

Besides IRAs or standard taxable accounts, accounts in 401(k) and other defined contribution plans could also serve as vehicles for TSAs. An employer could invest its matching contributions into TSAs for its employees and allow them to direct some, or all, of their own contributions into their TSAs.

During the accumulation stage, investors could also elect from a wide variety of investment options including stock, bond, and target-date strategies. Investors could be allowed to reallocate their assets (i.e., trade within their accounts) periodically.

When an investor contributes to her TSA, she would choose among payout options. These would include not only the lump-sum payout option chosen by Sally in the example above but also a variety of periodic and lifetime payout options. Lifetime payout options could be designed to mimic:

  • Immediate, level-payment annuities
  • Immediate, inflation-adjusted annuities
  • Deferred annuities (i.e., longevity insurance)
  • Joint-and-survivor annuities

Life insurance companies are well positioned to offer TSAs since they already deal with mortality data and trends. State insurance commissioners already know how to regulate pooled annuities, if not tontines. However, mutual fund or investment brokerage companies might also wish to offer TSAs since TSAs do not offer guarantees and thus are technically not contracts of insurance in the traditional sense of risk transfer.

No doubt, there will be some regulatory hurdles for TSAs, but we are confident that those hurdles can be overcome—as with any new financial product. All in all, we believe that TSAs can provide investors with a new and more valuable source of lifetime income, and we look forward to their inception.

Jonathan Barry Forman, J.D., M.A. (Economics), M.A. (Psychology), is the Kenneth E. McAfee Centennial Chair in Law at the University of Oklahoma College of Law. He can be contacted at [email protected].

Richard K. Fullmer, CFA, M.Sc. (Finance, Management), is the founder of Nuova Longevità Research. He can be contacted at [email protected].

AM Best expects lower annuity sales in 2020

Posted on June 25, 2020 by -

The U.S. life/annuity (L/A) insurance industry saw its pre-tax operating income rise by 34% in 2019, to $63.4 billion, driven by a decline in transaction-driven volatility relative to previous years and favorable equity markets for the year, according to a new AM Best report.

In its Best’s Special Report, “US Life/Annuity 2019 Statutory Results: Favorable Operating Results and Underwriting Performance,” AM Best said that the L/A industry’s underwriting performance was favorable, although margins narrowed owing to the ongoing decline in net investment returns.

For 2020, AM Best expects that annuity sales will not continue to grow at the same pace as the previous year given the current economic uncertainty, as the low interest rate environment, along with the impact of COVID-19, will exacerbate spread compression.

Low rates likely to continue to drag on margins until longer-term interest rates and credit spreads return to more historical levels. The ongoing drag from the low interest rate environment continues to hurt margins and stifle earnings growth, as is evident in the continued weakening in the industry’s investment returns, an AM Best release said.

The 2019 pre-tax operating gain rose was still below 2016-2017 amounts. The increase was driven mainly by earnings volatility in 2018, because of a fair amount of one-off transactions and company-specific events, which negatively impacted the industry’s statutory results. Partially offsetting the lower returns was the ongoing growth in absolute invested assets, which reached a record $4.49 trillion at year-end 2019.

Many transactions, which included affiliated reinsurance and captive transactions, were large in dollar amounts, but often had a neutral impact on enterprise-wide operating results.

Companies have been looking to offset the drag somewhat through expense efficiencies. The general expense to net premiums written ratio declined to 10.1% from 11.1% at year-end 2018, which shows that companies have found ways to be more efficient despite increasing their technology spending.

Statutory net income rose by 19% to $47.2 billion in 2019. There was a slight increase in realized losses, totaling $6.7 billion, as equity hedges and the decline in long-term interest rates impacted this line item.

While companies continued to build up capital, those capital levels will be tested in 2020, AM Best said. Modestly low single-digit premium growth was driven solely by a rise in annuity sales. AM Best expects growth to be challenged in 2020 due to the COVID-19 pandemic.

Companies are learning to make effective use of digital capabilities for sales, but innovation initiatives to bolster growth may be tested sooner than anticipated.

“However, even with falling equity markets, fixed annuities are still an attractive choice for consumers, and the need for guaranteed income could rise. Improving public perception about annuities, as well as simplification, should lead to increased sales,” the Special Report said.

© 2020 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on June 25, 2020 by -

After the big deal, AM Best affirms ratings of Jackson National and Athene

Jackson National Life Insurance Company’s financial strength and long-term issuer credit ratings remained “A” (Excellent) and “a+,” respectively, in the wake of its recently announced investment and reinsurance transactions with Athene Holding Ltd., according to the ratings agency AM Best.

AM Best has commented that the Credit Ratings (ratings) and outlooks of the members of Athene Group (Athene) remain unchanged following the recent announcement of its fixed annuity reinsurance agreement.

The agreement adds $27 billion of fixed deferred and fixed indexed annuity statutory reserves from Jackson National Life Insurance Company and includes a $1.25 billion ceding commission, with a net $29 billion in assets transferred to Athene.

AM Best also affirmed the ratings of Jackson’s wholly owned subsidiary, Jackson National Life Insurance Company of New York, and its direct parent, Brooke Life Insurance Company. Jackson National Life is headquartered in Lansing, MI.

On June 18, 2020, JNL’s parent company, Britain’s Prudential plc (Prudential), announced an agreement to reinsure JNL’s $27.6 billion IFRS book of fixed and fixed indexed annuity business to Athene Life Re Ltd, a subsidiary of Athene Holding Ltd.

Concurrently, Prudential (no relation to Prudential Financial in the U.S.) also announced that it has reached an agreement with Athene Holding Ltd for its subsidiary, Athene Life Re Ltd, to invest $500 million in Prudential’s U.S. holding company in exchange for an 11.1% economic interest (9.9% voting interest) in Prudential’s U.S. business.

Athene’s investment will be deployed in JNL, and the net impact of the capital investment and the reinsurance transaction is expected to be accretive to absolute and risk-adjusted capitalization. AM Best will monitor the execution of the announced transactions and Prudential’s future strategic plans for JNL in order to determine their impact on JNL’s ratings.

AM Best views this deal as potentially accretive to Athene’s business profile by expanding and increasing the diversification of earnings sources, dependent on the execution and integration of the block.

As part of the transaction, and expecting to close in July 2020, Athene will invest $500 million in Prudential plc’s U.S. holding company in exchange for an 11.1% economic interest (9.9% voting interest) in Prudential plc’s U.S. business.

The outlooks of Athene Holding Ltd.’s Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb”, its existing Long-Term IRs and the Long-Term ICRs of its operating insurance subsidiaries were affirmed with a positive outlook on May 22, 2020 and remain unchanged.

Not many people talk to advisers about decumulation: Allianz Life

Even before the recent equity market turmoil, more than half (55%) of non-retirees said they were worried they won’t have enough saved for retirement and 31% said they were way too far behind on retirement goals to be able to catch up in time.

Yet only 12% said “setting long-term financial goals” was their top priority and merely 6% identified developing a formal plan with an adviser as their top priority, according to a survey conducted in January 2020 by Allianz Life.

The upshot is that “many financial professionals may be missing opportunities to shift conversations about retirement from accumulation to protection,” an Allianz Life release said.

The 2020 Retirement Risk Readiness Study from Allianz Life Insurance Company of North America (Allianz Life) surveyed three categories of Americans:

  • Pre-retirees (those 10 years or more from retirement);
  • Near-retirees (those within 10 years of retirement); and
  • Retirees

While retirees were fairly confident about how long their money will last, six in 10 non-retirees said running out of money before they die is one of their biggest concerns. But only 27% of non-retirees who have advisers said they have discussed longevity risk and fewer than 15% had shared their financial insecurities about retirement with their advisers.

Before the recent market turmoil, 49% of all respondents identified a stock market drop as the greatest threat to their retirement income. But fewer than 30% of Americans with advisers said they had discussed market risk, including only 22% of those within 10 years of retirement.

Inflation-related anxiety

Nearly half (48%) of those surveyed viewed inflation as a threat in retirement. More than half (59%) were worried that the rising prices will prevent them from enjoying their retirement. Sixty-seven percent of those 10 years or more from retirement (versus 59% for near-retirees and 40% for retirees) expressed that concern. Only around two in 10 are talking about inflation with their advisers.

Allianz Life conducted an online survey, the 2020 Retirement Risk Readiness Study, in January 2020 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous USA with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.

TIAA and Savi partner for student debt resolution

TIAA, a leading financial services provider, today announced that it is working with social impact technology startup Savi to make it easier for nonprofit institutions to offer a meaningful student debt relief solution to their employees.

The companies together launched a student debt solution designed to help employees of nonprofit organizations reduce their monthly student loan payments immediately, and to qualify over time for relief from the balance of their federal student loans by enrolling in the federal Public Service Loan Forgiveness (PSLF) program.

TIAA and Savi conducted a pilot of the solution from July 2019 through March 2020 with seven nonprofit institutions, four in higher education and three in healthcare. Within that period, employees who signed up for the solution were on track to save an average of $1,700 a year in student debt payments. Some employees’ payments were cut in half.

In addition, employees had an average projected forgiveness of more than $50,000 upon successful completion of 120 months in the PSLF program. The total projected forgiveness from the pilot exceeds $53,000,000 to date.

Fidelity nears settlement with its own plan participants

The nation’s largest retirement plan recordkeeper, Fidelity Investments, is close to settling a suit in which participants in its own 401(k) plan said they were charged excessive recordkeeping fees, NAPANet reported this week.

In October 2018, plan participants, as plaintiffs, accused their employer of violating its fiduciary duties by using the plan “as an opportunity to promote Fidelity’s mutual fund business at the expense of the Plan and its participants.”

The Fidelity Retirement Savings Plan had nearly $15 billion in assets and covered 58,000 participants at the end of 2016, according to the suit.

Judge William G. Young of the U.S. District Court for the District of Massachusetts ruled in late March that

“Fidelity has breached its duty of prudence with regard to its failure to monitor the recordkeeping expenses, and the class members may recover under the equitable doctrine of surcharge,” explaining that, “as with the failure to monitor the proprietary mutual funds, the Plaintiffs at trial will bear the burden of proving the exact extent of loss (an exercise that may or may not be trivial given the parties’ stipulations), while Fidelity will bear the burden of showing this lack of monitoring has not caused this loss.”

Fidelity “…does not dispute that the Plan Fiduciaries declined to monitor recordkeeping expenses but argues that it has not violated its fiduciary duties because all expenses were returned to the Plan through the mandatory Revenue Credit, and thus netted to zero,” wrote Judge Young. The “argument rests on the proposition that there is no breach of a duty to be cost-conscious where there are no costs.”

MetLife inks first U.K. longevity reinsurance deal

Metropolitan Tower Life Insurance Co., a subsidiary of MetLife, Inc., has announced its first United Kingdom longevity reinsurance transaction with Pension Insurance Corporation plc. Metropolitan Tower will provide reinsurance to PIC for longevity risk associated with about £280 million of pension liabilities.

“With this transaction, MetLife is establishing itself as a reinsurance solution for direct insurers in the U.K,” said Graham Cox, executive vice president and head of Retirement & Income Solutions at MetLife, in a release.

“While this is MetLife’s initial step into the U.K. longevity reinsurance market, our long history and mortality expertise position us well for the future,” he said. “In 2019, there were more than £40 billion of U.K. pension risk transfer transactions completed.”

© 2020 RIJ Publishing LLC. All rights reserved.

 

DOL Has Discouraging Words for ESG Funds

Posted on June 25, 2020 by -

Under a new Department of Labor proposed rule, ERISA plan fiduciaries would not be able to include ESG funds in plans when the investment strategy of the vehicle is to “subordinate return or increase risk for the purpose of non-financial objectives.”

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” said Secretary of Labor Eugene Scalia, in a press release Tuesday evening. “[Plans] should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

The proposal would make five core additions to the regulation:

  • New regulatory text to codify the Department’s longstanding position that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.
  • An express regulatory provision stating that compliance with the exclusive-purpose (i.e., loyalty) duty in ERISA section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.
  • A new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA.
  • The proposal acknowledges that ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The proposal adds new regulatory text on required investment analysis and documentation requirements in the rare circumstances when fiduciaries are choosing among truly economically “indistinguishable” investments.
  • A new provision on selecting designated investment alternatives for 401(k)-type plans. The proposal reiterates the Department’s view that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of an investment alternative to be offered to plan participants and beneficiaries in an individual account plan (commonly referred to as a 401(k)-type plan). The proposal describes the requirements for selecting investment alternatives for such plans that purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name.

This proposed rule says little that is new. “ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals,” a DOL Field Assistance Bulletin said in 2018, and in previous bulletins.

But this proposal lacks the nuance or flexibility that the DOL has expressed in the past. Phyllis Borzi, the director of the Employee Benefit Security Administration under President Obama, described previous policy to RIJ in an email this week.

“Throughout the history of ERISA, on a bipartisan basis, the DOL has consistently refused to ban either ESG/ETI investing or proxy voting,” Borzi told RIJ this week. “Instead, the Department has consistently said that while financial considerations must be paramount and fiduciaries cannot sacrifice return to advance other objectives, that when faced with multiple investment possibilities with equal financial characteristics and impacts, a fiduciary can take ESG/ETI factors into consideration (the so-called “all things being equal” rule).

“But since the end of the George W. Bush Administration, the U.S. Chamber of Commerce has aggressively and successfully lobbied the Department to issue guidance that in effect creates a strong deterrent effort for a fiduciary to consider these factors,” she said.

“In the Obama Administration, the Department issued guidance to reiterate the balanced interpretation of ERISA that existed since the late 70’s and reverse the strong inference that the legal barriers were nearly insurmountable to engage in ESG investing. One of the earliest things the Trump Administration did was to try to go back to the unfavorable interpretation issued in the waning days of the Bush Administration. This is simply a continuation of that effort.”

Is there a danger that activist fiduciaries might try to divert plan assets toward their own social or political goals? This concern may have been pertinent in the defined benefit pension era, when fiduciaries controlled vast pools of money, but it seems less so in the 401(k) era, when participants can choose their own investments.

A study of thousands of companies, published in the Journal of Sustainable Finance and Investment, found no evidence of poor performance by ESG companies. “The results show that the business case for ESG investing is empirically very well founded. Roughly 90% of studies find a nonnegative ESG–CFP (corporate financial performance) relation,” the study said.

A 2016 survey by Natixis Global Asset Management of 951 U.S. employees participating in defined contribution plans demonstrated interest from individuals in ESG investments: 64% said they were concerned about the environmental, social and ethical records of the companies they invest in and 74% said they would like to see more socially responsible investments in their retirement plan offerings.”

© 2020 RIJ Publishing LLC. All rights reserved.

Better than Throwing Darts

Posted on June 25, 2020 by -

When Kent Jacquay, a 47-year-old former insurance producer with a knack for computer programming, speaks to groups of insurance agents about selling fixed indexed annuities (FIAs) his favorite prop is a dartboard—a metaphor for how they tend to pick contracts for clients.

To improve their methodology, Jacquay set up a software company in Fort Wayne, Indiana in 2018 called Index Resource Center LLC. His anchor product is Indexalyzer, a Excel-based tool for sorting, filtering and comparing fixed indexed annuity (FIA) contracts.

Jacquay has been acquainted with FIAs since 1996, when the products were new and only insurance agents sold them. He believes FIAs can uniquely enhance the financial lives of American retirees by giving them a chance for higher returns than fixed-rate products but with equal protection from loss.

“The FIA was designed to beat MYGAs (multi-year guaranteed rate annuities), bonds, and certificates of deposit—anything that’s guaranteed not to lose money,” he told RIJ. “And it does its job really well.”

But FIA insurance marketing organizations (IMOs) and agents who sell FIAs don’t do an equally good job of explaining—or even understanding—the growth mechanisms that drive the products, he says. And when it comes to navigating the bewildering array of “crediting” strategies and indices that determine a contract’s likely returns, they don’t know much more than their clients.

“We have all these agents selling billions of dollars of these products. But they have few clues about how the crediting rates have performed,” Jacquay said. “If I look at the crediting choices and try to choose where to put my money, how do I know what to do? Do I choose a two percent monthly cap on the S&P 500 Index, or a 120% participation rate on the Barclays Focus 50? Nobody knows.”

Lots of tools are advertised on the Internet that claim to help insurance agents and financial advisers select the “best” FIA. “There are a million different software vendors trying to sell their wares to marketing organizations,” said Sheryl Moore, CEO of Wink, Inc., the annuity data and analysis firm, noting that there’s little or no regulation of them.

But that is changing. Many broker-dealers (who are more closely regulated than insurance agents) now sell FIAs. At the same time, the Securities & Exchange Commission’s “Reg BI” (Regulation Best Interest) is about to require brokers to be more ethical. Demand should grow for tools like Indexalyzer that can document an adviser’s due diligence regarding product recommendations. The tools themselves are likely to come under greater scrutiny as well.

How Indexalyzer works

Via GoToMeeting, Jacquay guided me on a virtual tour of Indexalyzer this week. He demonstrated its sorting and comparison functions. The number of variables is immense, and the number of potential combinations of those variables must run into the millions.

Options to consider include the insurance carrier, the strength rating of the carrier, and the various products each carrier offers. Within each product, there are multiple term lengths, multiple indices, and a host of triggers, caps, spreads, fees and participation rates that affect returns (and reflect the structure of the underlying call options). Some products offer lifetime income options and/or bonuses.

(A “cap” means that the client is credited with interest equal to the index gain up to a cap. A “participation rate” indicates the percentage of the index gain that the client’s account will receive.)

Jacquay proudly pointed out Indexalyzer’s ability to back-test the performance of a specific crediting strategy. He showed me the annual returns of a specific strategy using a specific index. He knows that past returns don’t predict future returns, but he thinks they allow for rankings that reveal the strongest contracts. (Mutual funds use past returns in their marketing, of course.)

“We take the past ten years’ movement of the indices, to the month, to see how the products performed. We apply every bonus and every fee that would affect the average 10-year compound rate of return. Updating the indices every month is crucial. Most of the others do it once a year. We update rates from carriers every day. Indexalyzer shows how each crediting method and index performed over the past 10 years.

“We don’t try to predict the future,” he added. “We’re just looking at the most recent ten years. We don’t say, ‘You can expect a certain percent return out of this product.’ We’re showing exactly what happened in a real market cycle, for all the different crediting options. We help the client and agent make a more informed decision about seven or eight or ten options, to see which performed well and which didn’t.”

(His back-tests showed that some contracts averaged returns of 8% or more over the past ten years, but that shouldn’t be surprising. The S&P 500 Index rose three-fold over a recent 10-year period, to 3,335 on Feb. 5, 2020 from 1,066 on February 5, 2010.)

For investors, a perplexing and even deal-breaking aspect of FIAs is that carriers can, after the first crediting term, change their caps or participation rates in response to changing investment conditions, such as interest rates or volatility levels. The minimums are published in the contracts, Jacquay said, but they do not commonly appear among the specs on product rate sheets.

(These are not the minimum non-forfeiture interest rates paid by issuers of fixed annuities and required by state insurance laws. They are the lowest rates that the issuer can use without re-filing the contract for approval by regulators.)

“You have this one variable that can’t be predicted, and that’s the carriers’ ability to change the rates after the first year,” he told RIJ. “You might see statements from the carriers about their past renewal records, but you don’t know what will happen in the future. The insurance companies always have a card they can play: they can take the performance down to the minimum.”

Jacquay can’t predict such reductions, but can model hypothetical reductions in the rates, to stress-test a crediting rate. Such reductions don’t necessarily destroy the contract value, he said. “The agents and IMOs get furious when a carrier lowers its rates. But I say, Let’s look at what that really does to the final return. We can adjust the rates in Indexalyzer to the minimum to see how it performs. The product may still be doing its job in outperforming guaranteed fixed rate products. I’d like to own a product that does its job [of outperforming fixed-rate products] even at the minimum.”

Takeways

Of course, no one can predict the returns of an FIA, just as no one can predict the returns of a risky security. But an FIA’s caps and participation rates are so suggestive of future returns that it’s difficult not to be enticed by them. For instance, some contracts offer participation rates of more than 100%, while other have no caps on returns.

But there must be rules of thumb that agents can use when for comparing FIAs, right? Here are some takeaways from my conservation with Jacquay:

  • Consider term length first. Does the client have the desire or ability to park the money in an investment for one year? Three years? Ten years?
  • Will the client use the product to generate retirement income? Contracts that are designed for income may not be optimal for accumulation and vice-versa.
  • The client’s risk tolerance is an important consideration. Would he or she buy from a company with a B++ credit rating if the payouts were potentially higher, or only from an A rated company? This decision may depend in part on the term length.
  • The month-to-month crediting strategy, which may appear to have tremendous potential, has consistently produced low returns in the recent market cycles.
  • The crediting strategy (caps, participation rates) is a more important consideration than the index. An uncapped strategy (100% participation) is more advantageous when equity markets are rising. In flat markets, a capped strategy may be more advantageous than a participation rate.
  • When choosing an index, most agents recommend and most clients adopt the S&P 500 Index. But Jacquay suggests that other indices, with higher risk profiles, may be more suitable for less risk-averse clients. Differences in indices, however, may be rendered moot by offsetting differences in crediting rates.

Bottom line: Don’t expect fixed indexed annuities to produce equity-like returns. Their advantage stems from their ability to outperform other products with no-loss guarantees, such as fixed rate annuities and certificates of deposits.

© 2020 RIJ Publishing LLC. All rights reserved.

Your Safest Retirement Asset

Posted on June 25, 2020 by -

For as long as I’ve paid into Social Security, I’ve regarded it as an asset, not a liability. So I’m always perplexed by the way Social Security is denigrated.

People call it a Ponzi scheme, as if the U.S. Treasury’s ability and responsibility—as the creator of our sovereign currency, and because benefits are earned—to send out Social Security checks would ever be in doubt.

Social Security is also often slandered as a zero-sum game between generations—as if the program were strictly a liability for workers and not an asset until mailed to retirees. This is an intentional distortion. I believe I receive an asset in return for my payroll taxes. It’s not marketable; that’s part of what makes it so valuable.

Already, I hear legislators refer to an approaching Social Security “train wreck.” There is no approaching train wreck. When people want to fool you, they show you half of a balance sheet. They show you the liabilities and distract you from the assets.

So you will hear higher Social Security taxes described as “unaffordable,” even though the program adds $1 trillion of consumer demand into the U.S. economy each year and keeps tens of millions of older people out of poverty—and less dependent on their children.

You will hear about scary trillion dollar “shortfalls,” even though the shortfall is a tiny percentage of payroll over the next 75 years. If payroll taxes do go up a bit, everyone’s (except for the wealthiest, and they don’t need it) Social Security asset will not have to shrink by 25%.

Many people say that they’d rather invest their payroll taxes in stocks. This idea does not acknowledge that the certainty of future Social Security benefits gives them more risk budget or risk tolerance to spend on stocks. They also say that the low worker-to-retiree ratio in the U.S. (a result of declining birth rates) means that there will be shortages of goods and inflation. As long as the Chinese keep accepting dollars for goods, shortages seem unlikely.

You hear that today’s bailouts mean that we won’t be able to afford a better-funded Social Security program. Quite the opposite. The bailouts prove that there are no strict limits to what we can or can’t afford. Do we still have to pay taxes? Of course. But we will pay the taxes (progressively) with money that the government has already spent into the economy.

Social Security has for decades been the “third-rail” of American politics. I hope it stays that way.

© 2020 RIJ Publishing LLC. All rights reserved.

Aon launches ‘PEP,’ with Voya as recordkeeper

Posted on June 25, 2020 by -

Aon plc, the global employee benefits firm, has launched a Pooled Employer Plan (PEP), with itself as the “pooled plan provider” and fiduciary. After a competitive bidding process, Aon chose Voya Financial as the recordkeeper for the new plan, which will be available Jan. 1, according to an Aon release today.

If they catch on, PEPs could transform the federally-regulated 401(k) defined contribution savings industry in the U.S. By allowing service providers to consolidate dozens or hundreds of small individual plans into large omnibus plans, they would gain vast new economies of scale.

Lots of questions still remain about PEPs:

  • Will the benefits of those economies of scale will be passed on to plan participants?
  • Will PEPs significantly expand access to workplace retirement savings plans in the U.S.?
  • Are there conflicts of interest inherent in provider-sponsorship of 401(k) plans?
  • Will PEP sponsors try to consolidate existing plans or create new plans?
  • What fiduciary responsibility will employers retain?
  • Will PEPs create new monopoly power among service providers in the retirement business?
  • Will PEPs wipe out large numbers of “mom-and-pop” 401(k) service providers?
  • Could PEPs increase or decrease the likelihood of offering annuities in 401(k) plans?

The U.S. Department of Labor is currently gathering comments on some of those issues. (See today’s story in RIJ on the official Request for Information.)

The new PEP stems from the Setting Every Community Up for Retirement Enhancement (SECURE) Act provision allowing employers to join forces to create 401(k) plans. Voya serves approximately 13.8 million individual and institutional customers in the U.S. Click here for more information from Aon.

According to today’s press release:

“Aon’s PEP will relieve employers of many fiduciary duties they have today. Due to the economies of scale, it also has the potential to lower fees for plan participants and provide access to state-of-the-art features that may be difficult for individual employers and fiduciary committees to both assess and access independently.

“The defined contribution plan provides the efficiency and scale of a pooled plan, while maintaining individual employer autonomy to define matching and other contribution levels, and various key plan design features. It also has the potential to provide cost savings to employers of all sizes.

“The SECURE Act, which was federal legislation passed into law December 2019, was designed to encourage broader 401(k) plan participation and greater retirement savings.

“With the law’s passing, employers will no longer need to sponsor their own individual 401(k) plan and absorb the risks and workload associated with that role. Instead, employers from all industries and sizes may pool resources together to increase efficiency and create better outcomes for participants.”

© 2020 RIJ Publishing LLC. All rights reserved.

DOL requests input on ‘pooled’ 401(k)s

Posted on June 25, 2020 by -

Changes to U.S. labor laws by the SECURE Act of 2018 created the opportunity for a variety of 401(k) service providers—asset managers, recordkeepers, fiduciaries—to sponsor “pooled” 401(k) plans for a number of unrelated companies.

In the past, only employers could sponsor individual plans, and only related companies or businesses could create or join pooled employer plans, or PEPs. So the legal change represents a potential sea change in the way the U.S. does defined contribution.

On the one hand, the shift to provider-sponsorship could free employers from cumbersome and expensive pension-like responsibilities. On the other hand, sponsorship of plans by profit-seeking service providers creates obvious potential for self-dealing.

To explore that potential, and confront it, the DOL’s Employee Benefits Security Administration is “seeking information regarding the possible parties, business models, conflicts of interest, and prohibited transactions that might exist in connection with PEPs” to assess “the need for new prohibited transaction exemptions or amendments to existing exemptions.”

Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to [email protected]. You can also submit comments by clicking here.

As stated in the June 18 issue of the Federal Register, the DOL would like feedback by July 20, 2020, on the following questions:

  1. What types of entities are likely to act as pooled plan providers? For example, there are a variety of service providers to single employer plans that may have the ability and expertise to act as a pooled plan provider, such as banks, insurance companies, broker-dealers, and similar financial services firms (including pension recordkeepers and third-party administrators).

Are these types of entities likely to act as a pooled plan provider? Are some of these entities more likely to take on the role of the pooled plan provider than others? Why or why not? How many entities are likely to act as pooled plan providers? Will a single entity establish multiple PEPs with different features?

  1. What business models will pooled plan providers adopt in making a PEP available to employers? For example, will pooled plan providers rely on affiliates as service providers, and will they offer proprietary investment products?
  2. What conflicts of interest, if any, would a pooled plan provider (along with its affiliates and related parties) likely have with respect to the PEP and its participants? Are there conflicts that some entities might have that others will not?
  3. To what extent will a pooled plan provider be able to unilaterally affect its own compensation or the compensation of its affiliates or related parties through its actions establishing a PEP or acting as a fiduciary or service provider to the

PEP? What categories of fees and compensation, direct or indirect, will pooled plan providers and their affiliates and related parties be likely to receive as a result of operating a PEP, including through the offering of proprietary investment products? Are there likely to be any differences in types of fees and compensation associated with operation of a PEP as compared to a single employer plan?

  1. Do respondents anticipate that the Department’s existing prohibited transaction exemptions will be relied on by pooled plan providers, and if so, which exemptions are most relevant? Are any amendments needed to the Department’s existing exemptions to address unique issues with respect to PEPs? Do respondents believe that there is a need for additional prohibited transaction exemptions? If so, please describe the specific transactions and the prohibited transactions provisions that would be violated in connection with the transactions.
  2. If additional prohibited transaction relief is necessary, should the Department consider developing distinct exemptions for different categories of pooled plan providers (e.g., to specifically address the unique prohibited transactions involved for certain entities) or should the Department address pooled plan provider conflicts more generally, in a single exemption? What are advantages and disadvantages of either approach?
  3. To the extent respondents do not believe additional prohibited transaction relief is necessary, why? How would the conflicts of interest be appropriately addressed to avoid prohibited transactions? Are different mitigating provisions appropriate for different entities? Why or why not?
  4. Do employer groups, associations, and PEOs described in the Department’s

MEP Final Rule face similar prohibited transactions to those of pooled plan providers, and do they have similar need for additional prohibited transaction relief? Are there prohibited transaction issues unique to employer groups or associations, or PEOs?

Plan Investments
  1. What plan investment options do respondents anticipate will be offered in PEPs and MEPs? Are the investment options likely to be as varied as those offered by large single employer plans? Are the options likely to be more varied than those offered by small single employer plans?
  2. What role will the entities serving as pooled plan providers or MEP sponsors, or their affiliates or related entities, serve with respect to the investment options offered in PEPs and MEPs?
Employers in the PEP or MEP
  1. How many employers are likely to join a PEP or MEP? Will joining a PEP or MEP be more appealing to employers of a particular size? Are there any estimates of the total number of employers and participants likely to be covered by newly formed PEPs and MEPs? Are there any estimates of the number of employers and participants that will migrate from a single employer plan to a newly formed PEP or MEP?
  2. Will larger employers also seek to join PEPs or MEPs in order to take advantage of additional economies of scale? Will any additional prohibited transactions exist as a result of substantial size differences between employers in the PEP or MEP (e.g., because a large employer has greater ability to influence decisions of a pooled plan provider or MEP sponsor as compared to a small employer)?
  3. Will the existence of multiple employers in a PEP or MEP cause greater exposure to prohibited transactions in connection with investments in employer securities or employer real property? In what form will PEPs and MEPs hold employer securities or employer real property?
  4. Do respondents anticipate that prohibited transactions will occur in connection with a decision to move assets from a PEP or MEP to another plan or IRA, in the case of a noncompliant employer? Do respondents anticipate that any other prohibited transactions will occur in connection with the execution of that decision?
Where to view comments

All comments received must include the agency name and Regulation Identifier Number (Z–RIN) for this request for information (1210–ZA28). In light of the COVID–19 pandemic, the DOL asks that all comments be submitted electronically and not followed with paper copies.

Comments will be available to the public, without charge, online at http://www.regulations.gov and http://www.dol.gov/agencies/ebsa, and at the

Public Disclosure Room, Employee

Benefits Security Administration, Suite

N–1513, 200 Constitution Avenue NW,

Washington, DC 20210.

© 2020 RIJ Publishing LLC. All rights reserved.

‘We Are Going To Buy Your Bonds Whether You Want Us To Or Not’

Posted on June 18, 2020 by -

This week the Federal Reserve announced it is expanding its corporate bond-buying program. Via Victoria Guida at Politico:

The Fed is going to create an index of U.S. corporate bonds that it will purchase on the open market as long as they meet eligibility standards — an approach that will spare the companies from having to seek aid directly from the central bank.

The goal of the $750 billion emergency lending program is to keep cash flowing in the markets and support “the availability of credit for large employers,” the Fed said on Monday. Stocks rose on the news, reversing sharp losses earlier in the day.

The announcement represents a shift in strategy for the central bank, which was previously only going to buy individual bonds issued by companies that approached it directly. Now the Fed will buy bonds of all eligible companies, whether they ask or not.

Brian Chappatta at Bloomberg wonders why the Fed is doing this at all:

The most surprising part of this is there is virtually no evidence that the corporate-bond market needs this kind of intervention — it has been working nearly flawlessly for months.

This does create a bit of a problem for my narrative (not that it’s all about me). I  have typically described the Fed’s asset purchase program and lending program in terms of market functioning. The Fed identifies a gap in the credit market and tries to bridge that gap. In some cases, bridging the gap might be possible by simply being a credible backstop to a credit market. This appeared to be the case in the corporate debt market.

Just the willingness of the Fed to prevent a liquidity crisis from becoming a solvency crisis was enough to revive the corporate debt market. As Chappatta noted, the market appeared to be functioning just fine. So why the extension of the program? Isn’t the best case scenario the one in which the Fed can stabilize credit markets without actually buying anything?

This isn’t the first time the Fed has done something like this. Last week, the Fed put a floor under the asset purchase program by holding it “at least at the current pace to sustain smooth market functioning.” Heather Long at the Washington Post quickly eyed the logical conundrum:

Hi, good afternoon, Chair Powell. I’m struggling with two things that I’m hoping you can provide some clarity on. The first is the ongoing bond buying program. You say that it’s needed to continue the smooth functioning of markets, but I guess most of us aren’t really seeing instability in markets right now. So, if you could kind of give us some clarity of what you’re seeing that needs to continue to be smooth at that level and that pace.

Powell responds:

CHAIR POWELL. There have been gains in market function, although not fully back to where you would say they were, for example, in — in February, before the pandemic arrived. We don’t take those gains for granted though. This is a — this is a highly fluid situation and we’re we’re not taking those for granted. And in addition, as I pointed out in my — in my statement, those purchases are clearly also supporting highly accommodative — or accommodative financial conditions, and that’s — that’s a good thing, so that’s why we’re doing that.

 

It is not a particularly satisfying answer. It doesn’t fully embrace that asset purchases are increasingly less about market functioning and increasingly more about accommodative financial conditions. In other words, quantitative easing does not just allow for the transmission of accommodative interest rate policy, but is accommodative policy by itself. I discussed this Monday in my Bloomberg column.

The Fed did a stealth easing last week and it kind of flew under the radar.After this week’s bond market news, I am more convinced that the Fed is rapidly moving beyond market functioning but not being very direct about that move. It is fairly easy to conclude that the Fed is working to push down interest rates (or push up prices) across a range of financial assets but not directly saying this is the Fed’s objective. I understand why they want to pursue such a policy. I don’t understand why they don’t just say they are pursuing such a policy.

The Fed’s behavior this past week does give us a clue on how yield curve control is going to work. In theory, an advantage of yield curve control is that the Fed could control interest rates by just promising to purchase debt at a certain price. The promise alone should be effective with minimal actual purchases. Just as the Fed’s promise was enough to stabilize the corporate debt market.

A risk management focused policy that maybe didn’t quite know which was more important, the price or the quantity, might choose to do both. In that world, the Fed set interest rates at zero along the one, two, etc. year horizons while at the same time expanding the quantity of assets purchased. I think that’s how it would work. At least that what I am thinking tonight.

Bottom Line:  The Fed appears to be taking actions that are not obviously necessary to meet its stated objective of smooth market functioning. It looks like the Fed is trying to enhance the portfolio balance effect of asset purchases. I am not opposed to that, but I am wondering why they don’t just say it.

One reason could be that they fear Congress will limit the amount of fiscal support should the Fed push monetary policy further now. I am at a loss for another reason. The implication is that, short-term psychological shift aside, even if the economy just limps ahead it looks like the Fed is providing support for a wide range of asset classes.

This post originally appeared on Tim Duy’s blog.