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Another Tough Decade for Annuities?

Posted on March 26, 2020 by Kerry Pechter -

For millions of older Americans who bought annuities with living benefit riders over the past decade, the terrible event they were insuring themselves against—a stock market crash during their passage through the retirement ‘red zone’—actually happened over the last two weeks.

But how many of these contract owners exercise those riders and initiate guaranteed monthly payments for life? How many will lapse their policies because they need instant cash? What will their advisers tell them to do?

And will the defensive steps taken by surviving variable annuity manufacturers over the past decade—to de-risk, re-price, re-capitalize, or discontinue product lines and diversify into fixed indexed annuities—help them to weather the current crisis? Or will we see a re-run of the restructurings, benefit buy-backs, and ugly publicity that followed the 2008-2009 crisis?

Life insurers tend to be taciturn during times like these. So, to get some perspective, I called actuary Tim Paris of Ruark Consulting, Gary “The Annuity Maestro” Mettler, and Tamiko Toland, research director at CANNEX, the annuity data and analysis shop that supplies up-to-date contract prices to thousands of advisers in the U.S. and Canada.

The ‘R.U.B’: Rider Utilization Behavior

Since the Great Financial Crisis, Ruark Consulting has analyzed data from life insurers to identify utilization behavior patterns among owners of deferred variable and fixed indexed annuities with guaranteed lifetime withdrawal benefits (GLWBs) or guaranteed minimum income benefits (GMIBs).

Many factors determine policyholder behavior. But having studied such data for more than 10 years, he’s learned that policyholders are most likely to activate their income riders when the contracts are “in the money” and the contracts no longer benefit from further deferral bonuses. (In this case, a contract is “in the money” when the value of the guaranteed benefit base, which determines monthly income amounts, exceeds the contract’s cash value. This is most likely to happen during an equity market crash.)

“If I were 60-something and I’d been paying rider fees for 10 years and had deliberately delayed taking income in order to get the full bonus, I would think about doing it now,” Paris told RIJ. You’d think that this was fundamental to the offering. Presumably, advisers are telling clients to that.”

Enough time has passed since the peak in sales of deferred variable annuities (VAs) with GLWBs and GMIBs for Ruark to see such a pattern appear. “In the last few years the data has started to go out beyond the 10-year mark,” he said. “We’re now in the 11th and 12th policy years. A lot of contracts have riders that incentivize the owner to defer income for 10 years.

“What we find is that after year 10, once the incentives kick in, that people are five to six times more likely to commence income. Commencement is highly sensitive to the end of the deferral period. I would not be at all surprised that when the market is down 30%, folks will recognize that the product was fundamentally built for this purpose, and say, ‘I’ll take the income now.’”

I asked Paris if VA issuers were likely to suffer as much as they did during the 2010s. “I wouldn’t be too surprised if we had a similar experience this time,” he told me. “It won’t be exactly the same, because carriers are more educated now than they were last time. After the shock of the last crisis, issuers found out how expensive the riders were. That led companies to think along different lines.”

If the Fed keeps interest rates close to zero, however, he added, it will be difficult for carriers to issue attractive products. “With zero rates, I get a ‘shrinking iceberg’ feeling,” he said.

“It will be hard to offer a lifetime income guarantee. There are more levers the carriers could tinker with. The guaranteed floors could go lower, the income payout rates could go down. But you can’t escape the reality that these are the rates and these are the costs and you’re forced to bake them into the product. As a result, the products will won’t look as good.”

At CANNEX, Toland is seeing distributors pulling annuity products off their shelves. New products are not attractive at the prices that life insurers are able to offer right now, and today’s products will look even worse if rates rise and better products eclipse them.

“We’re seeing suspensions of sales of annuities across all product categories, including immediate and deferred income annuities,” Toland told RIJ. “We anticipate more of the same.”

On the other hand, she added, “There’s still an argument to buy an annuity. If someone has to retire now, and needs a guaranteed income, and is worried about sequence of returns risk, there’s still an argument to buy. So there’s going to be a demand regardless of what happens to rates.”

Mettler, an insurance agent who recommends income annuities to his clients, believes that life insurers may be able to bring annuities to market, but they may not be products that agents will want to sell.

“There will still be an annuity market, but the carriers that remain will be overwhelmed by demand,” he said. “They might say that their budget for annuities will be only so much in a given year. And they might hit that mark in the first three months of the year.

“Some might partially withdraw from the market, or they’ll stay in the market with pricing that’s even more terrible than it is now. They might stop issuing contracts to people under 50. There might be no ‘period certains’ longer than 10 years, or no cash refunds. The carriers will find a way to survive. But who will be available to sell the products?”

Twenty States Hit Hardest by COVID-19

Posted on March 26, 2020 by No Author -

Can employers contribute less to their retirement plans?

Posted on March 26, 2020 by Wagner Law Group -

In reaction to the current volatility in the economy due to COVID-19, we have been receiving a large number of questions from retirement plan sponsors regarding whether it is permissible to suspend or reduce required safe-harbor contributions during the plan year.

Many companies have to reduce their expenses and improve cash flow. In recent years many of these companies adopted safe harbor designs for their defined contribution retirement plans in order to satisfy required nondiscrimination and top heavy testing, but these designs impose on the sponsoring company the cost of making required employer safe harbor nonelective contributions or safe harbor matching contributions.

An employer can reduce or suspend its safe harbor contributions during a plan year, but only if certain conditions are met:

The employer must either: (a) have included in the required annual safe harbor notice a statement that the plan could be amended during the plan year to reduce or suspend safe harbor contributions, or (b) be operating at an economic loss as described in Section 412(c)(2)(A) of the Code, which generally requires that the employer and related employers in the same controlled group would likely need to show that its expenses exceed income for the year using generally accepted accounting principles.
The plan sponsor must send a supplemental notice informing participants that the plan will be amended with an explanation of the reduction or suspension of the safe harbor contribution. The suspension or reduction cannot be effective until 30 days after the later of: (a) the date the supplemental notice is distributed to participants, or (b) the effective date of the plan amendment. Participants must have a reasonable opportunity prior to the suspension or reduction of the safe harbor contribution to change their deferral elections, and this opportunity also must be described in the supplemental notice.
The plan document must be amended to reduce or suspend the safe harbor contribution and to add the required nondiscrimination testing provisions for the plan year: the “actual deferral percentage” (“ADP”) test for 401(k) plans and the “actual contribution percentage” (“ACP”) test for plans with matching contributions, both of which must use the current-year testing method. The plan also cannot rely on the top-heavy exemption available to safe harbor plans for the plan year in which the safe harbor contributions are suspended or reduced, which means the employer may be required to make a top heavy minimum contribution at the end of the plan year that could potentially exceed the cost of the safe harbor contributions.
An employer that suspends or reduces its safe harbor contribution mid-year must pay the safe harbor contribution amount from the beginning of the plan year until the effective date of the change. The annual compensation limit used to calculate the amount of the safe harbor contribution is prorated through the date of suspension.

A few additional considerations also should be kept in mind:

If the employer wishes to reinstate the safe harbor provision, another plan amendment and an annual notice may be required before the start of the applicable plan year (see additional comment regarding the SECURE Act below).
A plan could lose its tax-qualified status if safe harbor contributions are suspended during a plan year and the IRS determines that all requirements were not met. The employer may further be at risk of being found to have engaged in a prohibited transaction or fiduciary breach by not making its required contributions.
Given the current circumstances, the Internal Revenue Service may issue further guidance in this regard.

Additional comment regarding SECURE Act changes to safe harbor nonelective contribution requirements.

The SECURE Act made changes to the safe harbor rules that allow an employer to amend a plan during the plan year or even after the end of a plan year to add safe harbor nonelective contributions without having to provide notice to plan participants before the start of that plan year. It is not clear how the new rules under the SECURE Act will affect an employer that suspends its safe harbor contributions during a plan year and wishes to amend its plan later that same plan year to resume making those contributions and make up the amount owed for the suspension period. The IRS will need to provide guidance to clarify the interplay of these rules.

The long-term prospects for the economy are uncertain, but the immediate short-term impact of the current degradation in economic growth has been significant. Employers must take steps to remain in business, which means reducing expenses, including their contributions to their qualified retirement plans.

The Wagner Law Group can provide whatever assistance is needed to review and revise plan documents, draft amendments and prepare employee communications for employers wishing to suspend or reduce their safe harbor contributions, or to amend their non-safe harbor plans to make mandatory employer contributions discretionary.

‘Dull’ Investments Shine in a Crisis

Posted on March 26, 2020 by Kerry Pechter -

During bull markets, products like whole life insurance, annuities, and inflation-protected government bonds look too conservative for most investors to bother with. But during bear markets, guaranteed products (and those who recommend them) start to make sense.

RIJ spoke recently with three champions of ultra-safe products. Antoine Orr and Michael Seibert are insurance-licensed representatives of RIAs (Registered Investment Advisors). Zvi Bodie is an emeritus professor of management, pension fund expert and author.

Spoiler alert: You won’t read much here about profiting from the current volatility. Rather, you’ll read about products your clients might wish they bought a year ago, or that they might want to buy after the current crisis passes and before the next one begins.

No risk-free risk premium

Zvi Bodie, a retired pension expert who has taught at Harvard, MIT, and Boston University, and a prolific author of textbooks and popular books on safe investing (Risk Less & Prosper, Wiley, 2011), admits that when the stock market started its multi-decade ascent in the 1980s, he was an avid buyer of equities.

Zvi Bodie

But Bodie got out of the market when the price/earnings (P/E) ratio reached 40 in the late 1990s. Since then, he has invested mainly in equity-indexed certificates of deposit (CDs).

He’s now enthusiastic about I-Bonds, which are tax-deferred, liquid, inflation-protected Treasury savings bonds whose yield tracks inflation. They cannot lose value (though there are small penalties for withdrawals in the first five years), are exempt from state and local taxes, and yield a small fixed interest rate plus the rate of inflation. The current “composite yield” is 2.22%.

“I-Bonds are better than Treasury Inflation-Protected Securities (TIPS),” he said. “They’re perfect for an emergency fund. The only ‘drawback’ is that you can’t buy more than $10,000 worth per year.”

Bodie has also contested the validity of the gospel that stocks always “pay off in the long run.” If stocks (or baskets of stocks, called indices) were safer the longer you hold them, he has pointed out, then investment banks would happily sell long-dated shortfall put options on them. But no one writes such options; they’d be too expensive. “How can there be a risk premium if there’s no risk?” he often asks.

The source of the confusion, he explained over the phone this week, is what he calls the “Bodie Paradox.” Over any specific time period, “the probability increases that stocks will beat the risk-free rate,” he said, referring to the rate on risk-free Treasury bonds whose maturities match the designated time period.

But, paradoxically, the potential magnitude of an extreme equity market loss grows over time—because unforeseen black-swan events like the COVID-19 pandemic happen from time to time. “Two things determine risk: the likelihood of a bad thing, and the severity of a bad thing,” he said. “When there is a shortfall, it’s really terrible. And you have to take that into account.”

‘Sadly, he’s all in stocks’

Michael Seibert and I met at a modish restaurant near Allentown, PA, called Grille3501. Once a Pennsylvania Dutch eatery called “Trinkle’s,” Grille3501 reflects this small East Coast city’s evolution from Amish-flavored mill town to satellite of New York.

Michael Seibert

Seibert was under some time pressure. The S&P500 Index was falling. Later that afternoon, he would call a nervous new client—a 62-year-old man whose existing wealth consisted of ownership of a successful business, the cash value of a large whole life policy, and a 401(k) account holding $700,000 in equities.

“Sadly, he’s in all stocks,” Seibert told me. “He’s not retiring for four or five more years, so he’s holding on tight. When stocks rebound, whenever that may be, we’ll move some of the money to a fixed income annuity (FIA).”

During crises, he said, “Retirees have four volatility buffers: Cash, the cash value of life insurance—either spending it or borrowing against it—a reverse mortgage line of credit, or taking Social Security earlier than planned.”

Seibert is a representative of 1847Financial, and a national trainer with Wealth Building Cornerstones. He said that his business has blossomed since he positioned himself a few years ago as a retirement income specialist. Recently, he earned his Retirement Income Certified Professional (RICP) designation from The American College and started following the teachings of the College’s Wade Pfau—who recently wrote a paper on the potential synergies between life insurance and annuities in retirement.

He’s trying to deliver those synergies to his new 62-year-old client. As the client approaches retirement, Seibert may recommend that he follow a “covered assets” strategy.

This move involves taking advantage of a client’s whole life policy to buy a single or joint-and-survivor income annuity with other savings—but only if the client is healthy and has a substantial life-expectancy. The purchase premium of the annuity and the death benefit of the life policy are roughly equal, so that the client and his family are equally and simultaneously protected from mortality risk and longevity risk.

‘C’ stands for control

Antoine Orr’s clients are likely to be middle-class people who need to get out of debt and save before they invest. Perhaps lacking enough investable assets to attract asset-based advisers, or perhaps very conservative, they’re part of the vast market traditionally served by commission-based, insurance-driven advisers.

Antoine Orr

Orr is president of Plancorr Wealth Management in Nottingham, Maryland and West Palm Beach, Florida. He’s both an insurance agent and an IAR (Investment Advisor Representative), as well as author of the 2009 book, “Inside the Huddle,” and creator of the IVEST LLC marketing system.

“LLC” stands for Liquidity, Leverage and Control. “First, there’s liquidity. When you’re liquid, you can jump on any opportunity or need that arises without going into debt,” Orr told RIJ. “Second, we want to find out if you can borrow against an asset without interrupting its growth. The last issue is control: Do you control the outcome, the fees, the preservation of the asset, and taxes on the back end? Most people don’t have liquidity or leverage or control.”

Orr said that his clients often “feel powerless on the way to prosperity.” They’re contributing to 401(k) accounts, making extra mortgage payments, and paying down credit card debt.

But they’re also paying fees and interest and accumulating a future tax liability. “People feel like they’re held hostage by their finances, and I’m there to help them negotiate their way out of that. I say, ‘Only put money in to stocks after you’ve paid down your non-mortgage debt, strengthened your free cash flow, are highly liquid, and have leverage and control over your assets.’ Once we’ve taken care of the foundation, then we can talk about stocks and P/E ratios. Even if they don’t make money there, they’ll be OK.”

Right-size the lifeboats

If you’ve never sold insurance or you consider Treasury bonds too stingy with yield, or if you don’t like “products” and never accept commissions from life insurers, then the strategies described above probably won’t make much sense to you. They may seem too safe or, in the case of insurance, too self-serving.

Indeed, carrying a lot of whole life insurance or inflation-protected bonds may also seem absurd—like sailing on a ship with lifeboats bigger than the ship itself. But none of the three experts cited here suggests that safe assets should constitute the bulk of every portfolio.

My big takeaway from talking to these three retirement specialists is that most people, particularly younger workers and pre-retirees, should make sure they have a foundation of safe assets before they start taking risks. As many people learn the hard way, it’s much easier to establish a safe foundation before a crisis than after a crisis begins.

An Imperfect Demand Stimulus

Posted on March 26, 2020 by George A. (Sandy) Mackenzie -

What is happening today may be likened to a hurricane or a tornado, but one that affects every city, town and county in the country, as well as the rest of the world, at the same time. Because so many workers simply cannot report to work, the economy’s effective capacity will shrink drastically for a time, in the same way that the ability of a small island’s economy to produce is devastated temporarily by a hurricane.

Unlike a small island economy, however, there can be no prospect of external aid. Even if the textbook Keynesian response would work in more normal times, it cannot offset this decline.

However, aggregate demand could still fall well short even of the economy’s reduced capacity. Laid-off workers, especially those living paycheck to paycheck, will have to cut back drastically on their spending on those goods and services that the economy is still capable of producing. Declines in income will be particularly severe for gig workers, and workers in the hospitality and retail sectors. Even households that are spared lay-offs and are not (or have stopped) hoarding will be trying to economize, or will be cutting expenditure on what is no longer available, like a drink at their local bar. The increased efforts to save by many households will not automatically be offset by an increase in business investment, except perhaps for some involuntary inventory accumulation, which will be reversed as inventories mount.

Many workers, especially teachers and other civil servants in government and education, will continue to receive a paycheck even if they are unable to work from home. Some of the households that are financially strapped may benefit from transfers from their parents and grandparents, which will partly mitigate their plight. Households that remain in a comfortable position may also increase their charitable contributions. Nonetheless, millions and millions of workers will find themselves virtually without resources unless the government steps in.

This truly grim economic outlook has led some commentators to argue that the economic suffering entailed by concerted and strong action to control the virus may outweigh the pain and suffering of those who end up sick or who die. Comparisons with the Great Depression, which lasted for a decade, are made, but are surely exaggerated. This writer believes that if strong public action can stop the spread of COVID-19 before many months have passed, even a huge increase in unemployment can be reversed.

What should be done?

In this writer’s view, economic policy should be geared to preventing a further fall in aggregate demand below the economy’s reduced capacity level, and to helping those households with the lowest and least secure incomes, including one-person households. In addition to assisting hospitals and medical workers obtain the supplies they so desperately need, assistance from the federal, state and local governments to businesses and to households is urgently needed, in the form of loans, grants and transfers.

The news media report that the Senate has agreed on a $2 trillion dollar package. The components of this package (which fall short of $2 trillion) are reported to be:

$130 billion to hospitals
$250 billion for direct payments to households and individuals, apparently in the form of direct mail-outs
$250 billion in increased unemployment insurance benefits accompanied by a broadening of its application
$350 billion in loans to small businesses
$150 billion for state and local governments, which are starting to run short of tax revenue to pay their furloughed employees
$500 billion for distressed corporations and municipalities, with requirements to ensure that these payments will go to support their workforce

As of today, the bill has left the Senate and gone to the House, where it must be approved before going to the White House for the President’s signature.

In the writer’s view, the package that is ultimately passed should be judged by three criteria: (1) how well targeted it is; (2) how quickly it acts; and (3) its administrative feasibility. On those counts, how does the latest version stack up?

Loans to business, even when the lender enjoys a guarantee, are not well targeted. Their impact on employment is indirect and uncertain, unless there is a way of requiring recipients to keep their workers on the payroll. They may also take some time to implement. Direct investment and loans by the government, which are probably feasible only for large corporations, may be better targeted, but only if they are accompanied by an effective employment requirement. This is probably not feasible for hundreds and thousands of small businesses. That said, if such a policy can be made to work for them, all the better.
Enhanced unemployment insurance (increased by $600 per week for four months) is well targeted, although its decentralized administration at the state level makes it more complex. Nonetheless, the infrastructure is established—it doesn’t have to be started up from scratch.
A direct mail-out of checks to households is quick and easy to do. The Senate bill makes the mail-out decline with income and be phased out when adjusted gross income (AGI) reported to the IRS in 2018 reaches $99,000 for singles and $198,000 for couples. The maximum benefit for singles is $1,200, payable if their AGI is $75,000 or less and $2,400 for couples with an AGI of $150,000 or less. An additional $500 is paid for each child (also subject to a phase-out). A mail-out is undoubtedly appealing politically. Making payments decline with income is desirable, but the policy does not distinguish between households with secure and those with insecure incomes. Many payments will be going to households that do not really need them, because many households have reasonably secure incomes, and a lower cut-off point could finance larger payments to low-income households.
Enforcing a moratorium on evictions of tenants and foreclosures of households behind in their mortgage payments, as some commentators have proposed, might also help. Ideally, it should be should be targeted at low-income households. The feasibility of this is uncertain. Outright forgiveness of student debt is poorly targeted, especially if it is a permanent policy. A temporary moratorium on loan servicing makes more sense, although even this measure will benefit a large number of students and their families who are not in desperate need.

An emphasis on payments to persons, not business entities, is the best policy, and an increase in unemployment insurance with a concomitant relaxation of its terms is probably the best single policy of this sort. Loans with guarantees in place for the lender, direct loans by the federal government, and ownership positions in very large employers could be justified provided their terms make them effective in preventing large-scale lay-offs. Of course, assistance to hospitals is vital.

The writer is not in a position to put a number on the size of the total package, but it should be large. The initial package may have to be followed up by another, given the uncertain duration of the drop in the economy’s ability to supply the normal amount of goods and services and the possibility that demand falls even below that level. Any stimulus package will take some time to implement.

Conceivably, and unbelievable though it might seem, a very large package or series of packages might actually push demand beyond what the economy can now supply. In the writer’s opinion, the resulting increase in the price level and in the rate of inflation would not be a large price to pay to prevent a true calamity. Inflation is very low now, and the price level is in fact likely to drop—i.e. the rate of inflation will probably become negative for a time, given the inevitable drop in demand before any stimulus takes hold. We are not on the verge of hyperinflation.

Dividend futures signal long slowdown: U. of Chicago

Posted on March 19, 2020 by Editorial Staff -

Analyzing data from the aggregate equity market and dividend futures, two professors at the University of Chicago’s Booth School this week quantified investors’ expectations about economic growth in light of the coronavirus outbreak and potential policy responses to it.

“As of March 18, our forecast of annual growth in dividends is down 28% in the US and 25% in the EU, and our forecast of GDP growth is down by 2.6% both in the US and in the EU,” they write in a new research paper.

“The lower bound on the change in expected dividends is -43% in the US and -50% in the EU on the 3-year horizon. The lower bound is model free and completely forward looking. There are signs of catch-up growth from year 4 to year 10.”

According to the paper, “news about economic relief programs on March 13 appear to have increased stock prices by lowering risk aversion and lift long-term growth expectations, but did little to improve expectations about short-term growth.

“The events on March 16 and March 18 reflect a deterioration of expected growth in the US and predict a deepening of the economic downturn. We also show how data on dividend futures can be used to understand why stock markets fell so sharply, well beyond changes in growth expectations.

“Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a simple forecasting model. We show how the actual forecast and the bound evolve over time.”

For annuities, 2019 was great. 2020 is TBD

Posted on March 19, 2020 by Editorial Staff -

Total fourth quarter sales for all deferred annuity sales were $53.3 billion, a decline of 3.3% from the previous quarter. Total 2019 deferred annuity sales were $221.8 billion, according to the 90th edition of Wink’s Sales & Market Report for 4th quarter, 2019.

Sixty-two indexed annuity providers, 50 fixed annuity providers, 68 multi-year guaranteed annuity (MYGA) providers, 11 structured annuity providers, and 47 variable annuity providers participated.

Overall sales leaders

Jackson National Life ranked as the top carrier overall for deferred annuity sales, with a market share of 9.8%. Its Perspective II Flexible Premium Variable & Fixed Deferred Annuity, a variable annuity, was the top-selling deferred annuity, for all channels combined in overall sales for the fourth consecutive quarter. Lincoln National Life, AIG, Equitable Financial, and Allianz Life followed.

from Secure Retirement Institute.

All fixed annuities

Total fourth quarter non-variable deferred annuity sales were $26.9 billion, down 7.6% from the previous quarter and down 17.8% from the same period last year. Total 2019 non-variable deferred annuity sales were $122.8 billion. Non-variable deferred annuities include indexed annuities, traditional fixed annuities, and MYGA products.

AIG ranked as the top carrier overall for non-variable deferred annuity sales, with a market share of 8.5%. Allianz Life, Jackson National, Global Atlantic Financial Group and Nationwide followed. Allianz Life’s Allianz 222 Annuity, an indexed annuity, was the top-selling non-variable deferred annuity, for all channels combined, in overall sales for the fifteenth consecutive quarter.

All variable products (structured and conventional)

Total fourth quarter variable deferred annuity sales were $26.3 billion, up 1.3% from the previous quarter. Total 2019 variable deferred annuity sales were $99.0 billion. Variable deferred annuities include the structured annuity and variable annuity product lines.

“A steadily-rising market and continued rate reductions for fixed annuities lent to increased sales of structured and variable annuities this quarter,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink, Inc.

Jackson National Life ranked as the top seller overall of variable deferred annuities, with a market share of 13.9%. Equitable Financial, Lincoln National Life, Prudential and Brighthouse Financial followed.

Conventional variable

Variable annuity sales in the fourth quarter were $21.4 billion, an increase of 1.0% as compared to the previous quarter. Total 2019 variable annuity sales were $81.6 billion. Variable annuities have no floor, and potential for gains/losses that are determined by the performance of the subaccounts that may be invested in an external index, stocks, bonds, commodities, or other investments.

Jackson National Life held its ranking as the top seller of variable annuities, with a market share of 17.2%. Lincoln National, Prudential, Equitable Financial, and Nationwide followed. Jackson National’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity was the top-selling variable annuity for the fourth consecutive quarter, for all channels combined.

Structured variable (Registered index-linked annuities)

Structured annuity sales in the fourth quarter were $4.9 billion; up 2.7% from the previous quarter, and up 39.3% from the previous year. Total 2019 structured annuity sales were $17.3 billion. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccounts. “Structured annuity sales are still setting records. It will be interesting to see how low fixed interest rates, coupled with market volatility, will affect this immature product line, in terms of sales,” Moore said.

Equitable Financial (formerly AXA) was the top seller of structured annuities, with a market share of 28.9%. Its Structured Capital Strategies Plus was the best-selling structured annuity for the quarter, for all channels combined.

Fixed indexed

Indexed annuity sales for the fourth quarter were $17.1 billion, down 8.1% from the previous quarter, and down 10.6% from the same period last year. Total 2019 indexed annuity sales were $73.2 billion. Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500.

FIA sales by Qtr, from WinkIntel

“This was another record year for indexed annuity sales,” Moore said in a release. “Given the recent volatility in the markets, coupled with even lower fixed interest rates, I suggest we are going to have a repeat in 2020.”

Allianz Life retained its top ranking in indexed annuities, with a market share of 9.8%. AIG, Nationwide, Jackson National Life, and Athene USA followed. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity, for all channels combined, for the twenty-second consecutive quarter.

Traditional fixed

Traditional fixed annuity sales in the fourth quarter were $764.7 million, down 2.6% from the previous quarter, and down 26.5% when compared with the same period last year. Total 2019 fixed annuity sales were $3.6 billion. Traditional fixed annuities have a fixed rate that is guaranteed for one year only.

Great American Insurance Group ranked as the top seller in fixed annuities, with a market share of 10.9%. Modern Woodmen of America, Global Atlantic Financial Group, Jackson National Life, and OneAmerica followed. Forethought Life ForeCare Fixed Annuity was the top-selling fixed annuity for the third consecutive quarter, for all channels combined.

MYGA

Multi-year guaranteed annuity (MYGA) sales in the fourth quarter were $9.0 billion, down 7.0% from the previous quarter and down 28.0% from the same period last year. Total 2019 MYGA sales were $45.8 billion. MYGAs have a fixed rate that is guaranteed for more than one year.

Massachusetts Mutual Life Companies ranked as the top carrier, with a market share of 13.2%. New York Life, Symetra Financial, AIG, and Global Atlantic Financial Group followed. Massachusetts Mutual Life’s Stable Voyage 3-Year was the top-selling multi-year guaranteed annuity for the quarter, for all channels combined.

Report from Secure Retirement Institute

Total annuity sales reached a 12-year high in 2019, surpassing 2018 sales by three percent to reach $241.7 billion. The top three issuers held a combined 22% market share, down from 25% in 2014, the Secure Retirement Institute reported this week.

from Secure Retirement Institute.

Total variable annuity (VA) sales were $101.9 billion in 2019, up 2% from 2018. VA sales grew for the second year in a row. Jackson led the sales in the VA market in 2019 for the seventh straight year. The top three VA sellers represented 36% of the total VA market in 2019, up slightly from 35% in 2014.

Registered index-linked annuities (RILAs) drove the growth in the VA market. In 2019, RILA sales were $17.4 billion, up 55% from 201x. RILA sales held a 17% share of the total VA market. Equitable Financial was the top seller of RILAs in 2019, with 29% of sales.

Fixed annuity sales set a new sales record in 2019. Total fixed sales were $139.8 billion in 2019, up 5% from prior year. AIG was the top seller of total fixed annuities for the second consecutive year. The top three fixed annuity manufacturers represent 23% of the U.S. fixed annuity market, down from 28% from 2014.

For the second year in a row, fixed indexed annuities (FIAs) broke annual sales records. FIA sales were $73.5 billion in 2019, up 6% from 2018. For the 11th consecutive year, Allianz Life gathered the most FIA premium in the U.S. In 2019, the top three FIA sellers represented 28% of the market, down from 43% in 2014.

“In 2019, Jackson focused on growing its fixed annuity market share, which propelled its overall growth in 2019,” said Todd Giesing, SRI senior annuity research director. “Its FIA sales jumped 1,293% in 2019, while its fixed-rate deferred annuity sales climbed 169%.”

SRI’s U.S. annuity sales survey represents 94% of the U.S. annuity market.

IPO reflects ongoing shift at Jackson National

Posted on March 19, 2020 by Editorial Staff -

Seeking outside capital to fuel Jackson National Life’s aggressive retirement product diversification strategy, the U.S. life insurer’s British parent has decided to sell a minority position in its flagship subsidiary via an initial public offering (IPO) in the U.S.

Prudential plc, which earned $525 million from Jackson in 2019, said in a March 11 release that it sees a “substantial opportunity for Jackson’s products” in the U.S., “the world’s largest retirement savings market and the continuing transition of millions of Americans into retirement.”

“In order to diversify at pace, Jackson will need access to additional investment, which we believe would best be provided by third parties,” Prudential plc’s release said. “We are today announcing that the Board has determined that the preferred route to achieve this is a minority Initial Public Offering (IPO) of Jackson.”

Prudential plc appears to have acted under shareholder pressure. The Financial Times reported February 24 that Dan Loeb, leader of Third Point, the $14 billion US hedge fund with a stake of almost $2 billion in Prudential, had urged the insurer’s board to separate Prudential’s US and Asian businesses and eliminate its figurehead UK office. Prudential no longer has any operations in the UK, but it remains the largest insurer listed on the London market, with a value of £37bn.

Jackson National emerged as the U.S. variable annuity sales leader about seven years ago—especially after Prudential Financial (no relation to Prudential plc) and MetLife throttled down their sales pace. More recently, Jackson, AIG and other life insurers have diversified their product offerings for greater stability.

“In 2019, Jackson diversified its annuity sales to focus on growing its fixed annuity market share, which propelled its overall growth in 2019,” said Todd Giesing, senior annuity research director at the Secure Retirement Institute, in a release this week. “Jackson’s fixed indexed annuity sales jumped a staggering 1,293% in 2019, while their fixed-rate deferred annuity sales climbed 169%.”

According to Prudential plc:

“US adjusted operating profit increased by 20% to $3.07 billion, reflecting the impact of lower market-related amortisation of deferred acquisition costs. Higher equity markets also led to US separate account assets increasing by 19% to $195.1 billion.

US APE (Annual premium equivalent) sales increased by 8%, driven by fixed income and fixed index annuities, in line with our diversification strategy. New business profit declined by 28%, reflecting lower interest rates and changes in product mix.”

Prudential plc bought Michigan-based Jackson for $610 million in 1986. The business, which has four million U.S. customers, accounts for half of the group’s operating profit.

Jackson today announced its full-year financial results, generating $3 billion in IFRS pre-tax operating income in 2019, an increase of 22% over 2018 and the highest in company history. Jackson also reported $22.2 billion in total sales and deposits, noting significant growth in fixed and fixed index annuity sales.

The British insurer acknowledged the potential impact of the pandemic and financial crisis on its industry:

“We continue to monitor closely the development of the coronavirus outbreak and are focused on the health and well-being of our customers and staff. The outbreak has slowed economic activity and dampened our sales momentum in Hong Kong and China,” the firm said in a release, adding, “lower levels of new sales activity in affected markets are to be expected with a consequential effect on new business profit. Our in-force business is proving robust.”

“The U.S. is the world’s largest retirement market, with trillions of dollars expected to move from savings into retirement income products over the next decade,” said Michael Falcon, CEO of Jackson Holdings LLC. “Jackson’s ambition is to play the fullest role possible in this through a strategy of diversifying its product range and distribution network. Over time, this is expected to lead to a more balanced mix of policyholder liabilities and enhance statutory capital and cash generation.”

Strong equity markets drove the company’s 2019 results, Falcon said. Variable annuity separate account assets, which generate asset-based fees, totaled a record $195.1 billion in 2019.

“As Jackson works to achieve commercial diversification, we are continuing our efforts to balance our business,” said Falcon. “By offering the right mix of products through the right distribution channels, we have strengthened our leadership position in the U.S. retirement market. Our deliberate approach has enabled us to deepen our presence in the advisory space and capture new opportunities as we move into the next phase of our growth.”

How Annuity Owners Behave in a Storm

Posted on March 19, 2020 by Editorial Staff -

Based on its own studies of annuity policyholder behavior since 2007, Connecticut-based actuarial firm Ruark Consulting published a report yesterday on the responses that annuity issuers can expect from policyholders amid the current volatility.

According to the report, “Market Turmoil: What Does It Mean for Annuity Policyholder Behavior,” variable annuity writers should expect:

Greater persistency overall, but elevated surrenders for at-the-money GLWB
Greater income utilization, especially for GLWB after the deferral incentive period and “hybrid” GMIB
Greater GMIB annuitization elections, especially on traditional “pro-rata” benefit forms

Fixed indexed annuity writers should expect:

Greater persistency for GLIB, and lower persistency without GLIB
Greater income utilization for GLIB

In addition, the impact of COVID-19 on mortality will likely depend on the level of containment among the general population at retirement ages, with potential differences between those with and without living benefit guarantees.

To access the report, click here.

Observation Posts

Posted on March 19, 2020 by Kerry Pechter -

As if we weren’t already deeply divided, Americans are now asked to stand six feet apart. Clear verbal communication, not communicable viruses, is now essential. Words can be contagious, for good or ill. If the following comments go viral, no harm will be done, and maybe some good.

This week, RIJ asked some of the influencers in its network to share their thoughts about our unprecedented medico-political-economic dilemma. Here’s what economists, insurance agents, financial advisers, and entrepreneurs told us:

‘Don’t wait for the good news’

Stocks will begin to recover long before the pandemic is on the wane. The strongest bull markets are not built on a foundation of good news, but on diminishing bad news. Wouldn’t it be nice if the world of academic finance had coined the expression “equity fear premium” instead of “equity risk premium”?! That premium is at its best when fear is at a peak. It will be hard to be perfectly right on the turning point, naturally, but don’t wait for the good news—just wait until the pattern of bad news lets up. —Rob Arnott, Research Associates

Time for ‘Series I Savings Bonds’

The current crisis has intensified risk and made Series I Savings Bonds even more desirable. As I have written many times before, these bonds are the best kept secret in America. There is an annual limit of $10,000 per person, and I advise all of my friends and relatives to buy the maximum every year. Here is a recent interview I gave on the subject: America’s Best Kept Investing Secret. —Zvi Bodie, Boston University

‘Who is selling and why?’

Revelatory moments break generalizations about generations. Boomer retirement plans become at least more clearly dichotomized: Probability-based plans vs. Safety-first plans. The former seemed wiser before. The latter seems wiser now. The uncertain wisdom of the choice of plan remains. Is this revelatory moment a reset of future business growth, such that prices cannot swing back the other way, and fast? Selling breaks the uncertainty by realizing the loss. Do you have a sense of who is selling and why? How many have their Household Balance Sheet assets matched or mismatched to the duration of their liabilities? —Francois Gadenne, co-founder, chair and executive director of The Curve Triangle & Rectangle Institute

‘Flight to safety’

There’ll be a flight to safety with annuities. The market that we’re witnessing now will drive annuity sales because people will realize they need more guarantees in their portfolios than they have currently. They’ll say, ‘We probably shouldn’t be this deep into risk.’ The demographic tidal wave of baby boomers reaching retirement age wants guarantees, and annuities are the only product on the planet that provide a lifetime income stream.—Stan ‘The Annuity Man’ Haithcock, in ThinkAdvisor

‘No one has pulled out of the [annuity] business’

Companies are reducing rates, pulling select annuities, pulling select riders, but no one has pulled out of the business yet. Although it seems like the sky is falling, this is the PERFECT market environment for sales. Consumers want guarantees, and annuities are all about the guarantees.—Sheryl Moore, CEO, WinkIntel

‘Production will be crippled for some time’

The Great Depression of the 1930s witnessed a huge shock to aggregate demand. What we are now experiencing is a huge shock to aggregate supply; albeit one that will have depressing multiplier effects on demand. A strong stimulative package is desperately needed, but it will not be able to restore GDP to its pre-Coronavirus level, because production will be crippled for some time. A well-designed package will help offset the decline in personal expenditure of laid-off workers and self-employed persons for those goods and services the economy is still capable of producing.—Sandy Mackenzie, former editor, Journal of Retirement

The trend toward longer retirements will end

Projections of retirement security will soon be changing to reflect a more realistic assessment of what returns will be available to old and young retirees alike. I hope that financial advisers and intermediaries start learning their lesson.

All of this builds on top of a public system that cannot possibly support its current level of guaranteed benefits for what will rise to close to one-third of the adult population if people continue to retire on average at age 64. The almost century-long trend toward ever more years spent in retirement will almost certainly end, if for no other reason than that someone must meet the demand for labor.

At the same time, the stock crash will increase public demand for the government, rather than a risky market, to provide retirement security—which in many ways could be supplied and afforded if we recognize the need for labor and emphasize a minimum base of support. The spur for more retirement security induced by the crash may require those with above-median income to work more, save more, and pay more taxes (though don’t expect to hear any of this from those running for office). —Eugene Steuerle, the Urban Institute.

A moratorium on foreclosures, evictions and debt collection

Forget the Trump re-election gambit of $1,000-2,000 checks for all. The problem is a collapse of supply, not demand. Putting more cash into the economy is not a solution when people cannot go to work. We should tackle the health crisis directly (free testing and Federal government single-payer medical care for all who might have been exposed; Federal government-paid sick leave and parental leave for all affected by the crisis) and then deal with those affected economically (more inclusive and higher paying unemployment benefits for ANYONE who has lost work or hours because of the crisis; Federal government cash payments targeted to those who need it most) and as well affected small business (loans or grants, but with conditionality).

Since the 2007 crash, the biggest corporations have enjoyed high profits, but instead of investing, they used all their profits for stock-buybacks and because of that they have no cushion for the proverbial “rainy day.” And now it is pouring. Any financial or nonfinancial corporation that seeks help must be effectively nationalized under the control of a government-appointed manager. All the corporation’s top management would submit letters of resignation that could be used at any time by the government’s manager to clean house. Stock buy-backs for recipients of government aid would be banned; CEO pay would be permanently reduced to appropriate General Schedule levels; and the government’s manager would decide whether it is in the nation’s interest to try to save the firm or to shut it down.

Finally we need a moratorium on foreclosures, evictions of renters, debt collections, student loan debt, utilities bills, late fees, hikes of rents or interest rates, and all taxes until the crisis passes. Significant jail time for anyone who violates the moratorium. —Randall Wray, Senior Scholar, Levy Economics Institute, Professor of Economics, Bard College

‘We need something good to come out of this’

After an 11-year bull market, the past 30 days will most certainly serve as a wakeup call for both advisors and investors. Even prior to these events, many of those in and near retirement were already taking steps to protect their retirement portfolio from the volatility of the markets. Without a doubt, that trend will now accelerate. Any product that can provide some level of protection and/or income guarantees will likely see increased demand.

The industry itself will change forever. By the time this crisis passes, flexible work schedules and working remotely will no longer be something done by portions of the workforce as a convenience to those workers. Such work schedules will become a way of life for virtually every firm. In addition, I predict that this crisis will finally drag the insurance and annuity industry into the 21st century.

By the time we settle into the new normal, our need to continue to function—when so many can’t come into the office—will finally bring an end to all of the passing of paper, processing of physical checks and the need for wet signatures (and don’t even get me started on faxes). One can only hope I’m right about that, because we need something good to come out of this.—Scott Stolz, annuity distribution

Volatile retirement income creates anxiety

The current conditions in the financial markets are revealing that Denmark, with its growing emphasis on variable income annuities (payments fluctuate with the markets), is facing a retirement crisis. These products imply riding a roller coaster of retirement income. The initial income is affected by sudden market swings; market volatility will cause your retirement income to vary too much from year to year, creating anxiety among retirees and is soon-to-be retirees.—Per Linnemann, former Chief Actuary, Denmark

‘A longer path to improvement’

While acknowledging the Life/Annuity industry’s strong capital and liquidity resources, the report identified these challenges:

A material acceleration in a global economic slowdown, increasing the expectation of dampened earnings throughout 2020 for spread and fee-driven businesses
A rapid further deterioration in the U.S. economy, paired with its direct impact on equities and interest rates
A greater expectation of a longer path to sufficient improvements from record low levels for the 10-year Treasury yield, as well as a flattened yield curve.—A.M. Best Company, March 17, 2020

Insurance has a unique advantage

Like all intermediated retail financial products, life insurance and annuities have a nontrivial distribution cost, but in the case of insurance products, it is somewhat alleviated by the embedded interest rate in the policies and tax deferral. However, when the embedded interest rate goes toward zero, the tax deferral aspect means nothing and the cost of distribution becomes more obvious and off-putting to potential purchasers. The same can be said of other intermediated financial products, such mutual funds, hedge funds and the like.

But life insurance and annuities do address some concerns through the pooling of risks and guarantees that cannot be matched by other intermediated financial products. While those customers who purchase insurance products solely for their financial attractiveness may be dissuaded under current circumstances, still there remains nothing else that can insure against living too short or too long.

As long as agents stress these features and find clients who are interested in managing these risks, they have an advantage over other marketers.—David Babbel, emeritus professor, Finance and Insurance, the Wharton School.

‘Keep working, delay Social Security’

You can’t ‘should have done’ anything. It’s simply not possible, so take a few deep breaths and try to relax. So, you didn’t reduce your exposure to equities when you had the chance. You didn’t move 20% of your retirement savings into a deferred annuity to ‘take some risk of the table’, as Tom Hegna says. Keep working if you can. Delay taking Social Security. Consider a Home Equity Conversion Mortgage (HECM, or reverse mortgage) line of credit if you need income now. Just don’t make any knee-jerk decisions you can’t take back, like panic selling. Things will improve. They always do. This time, just don’t go back to whatever you were doing and forget about your to-do list of financial and insurance decisions. You may not get another chance to get it right. —Bill Borton, W.R. Borton & Associates

‘A mad scramble’

We’ve had two cruises cancelled in the past six weeks. Just today we returned from Quito where our trip to the Galapagos was cancelled. The Ecuadorian government was going to close the Quito airport at midnight Monday. There was a mad scramble to get out.

The recent experience has caught everybody—not just the cruise industry—scrambling to figure out how best to deal with it. Nursing homes like that one in Seattle show how easily viruses can spread. Will people change their minds about putting loved ones in nursing homes? If so, what alternatives are there? What about retirement communities in general? Will they become breeding grounds for viruses? Don’t know the answer to either question.—Steven Slifer, Numbernomics.com

Shocks loom for U.S. life insurers, annuity issuers: A.M. Best

Posted on March 18, 2020 by Editorial Staff -

AM Best has downgraded its outlook on the U.S. life/annuity (L/A) industry to negative due to the “significant volatility and uncertainty in the financial markets created by the COVID-19 virus,” the respected ratings agency reported this week.

In its March 17 report, “Market Segment Outlook: U.S. Life/Annuity,” AM Best reversed its previous view that “the overall impact for most carriers was likely to be manageable.”

“Because the financial markets have responded negatively and quickly to the outbreak of COVID-19, the longer-term economic impact remains uncertain,” the report said. “As interest rates and the equity markets plummet, AM Best expects operating performance to move to the negative, driven by declining sales and intensifying spread compression.”

While acknowledging the L/A industry’s strong capital and liquidity resources, the report identified these challenges:

A material acceleration in a global economic slowdown, increasing the expectation of dampened earnings throughout 2020 for spread and fee-driven businesses
A rapid further deterioration in the U.S. economy, paired with its direct impact on equities and interest rates
A greater expectation of a longer path to sufficient improvements from record low levels for the 10-year Treasury yield, as well as a flattened yield curve

In the United States, the Federal Reserve (Fed) cut the federal funds rate by 50 basis points on March 3, 2020, followed quickly by a further reduction on March 15 to a target range of 0-25 basis points. At the same time, the Fed launched a $700 billion quantitative easing program. The 10-year Treasury note fell below 50 basis points to a record low at one point this March, and remains below 1%.

AM Best anticipates that COVID-19 also will significantly affect the L/A industry’s ability to move forward quickly with costly innovation efforts. Factors moderating these negatives include:

The industry’s strong capitalization and improved liquidity
Stress testing that has better prepared the industry for downturns from economic and pandemic-type events
Credit spread widening to offset some of the interest rate decline

“Carriers with less capital, questionable liquidity access and limited business profiles or outsized exposures to at-risk sectors such as energy, retail, and travel, will feel the negative economic impact faster and more deeply than most of the industry,” the report said.

“For companies active in variable products, separate account assets will be marked to market, resulting in declines in asset-based fees. L/A insurers taking on higher degrees of investment risk and those with less-than-optimal asset-liability matching strategies are likely to be more negatively impacted as well.”

Ironically, the U.S. life/health industry saw solid growth in pre-tax and net operating profits in 2019. Net income increased by 12.6% year-over-year to $45.6 billion. Capital and surplus for the industry increased by 6.2% from the end of 2018, reaching $415.6 billion at year-end 2019.

These preliminary financial results were detailed in the recent Best’s Special Report, titled, “First Look: 12-Month 2019 Life/Annuity Financial Results.” The data is derived from companies’ annual statutory statements that were received by March 10, 2019, representing an estimated 95% of total industry premiums and annuity considerations.

According to the report, the life/annuity industry’s total income for 2019 increased by 3.0% to $872.3 billion compared with the previous year. A $59.5 billion increase in premiums and annuity considerations was offset by a $38.0 billion decline in other income.

These significant swings were primarily the result of modified coinsurance agreements and the recapture of retrocessions from foreign affiliates at American General Life Insurance Company, Hannover Life Reassurance Company of America and United States Life Insurance in the City of New York.

Income growth slightly outpaced a 2.5% increase in total expenses, leading to a pre-tax operating gain of $55.1 billion, 11.8% higher than in the previous year. A $4.2 billion increase in taxes was offset by a $3.5 billion reduction in net realized capital losses, resulting in the $5.1 billion year-over-year increase in net income.

IPO Signals Strategic Shift at Jackson National

Posted on March 18, 2020 by Editorial Staff -

Seeking outside capital to fuel Jackson National Life’s aggressive retirement product diversification strategy, the U.S. life insurer’s British parent has decided to sell a minority position in Jackson via an initial public offering (IPO) in the U.S.

Prudential plc said in a March 11 release that it sees a “substantial opportunity for Jackson’s products” in the U.S., “the world’s largest retirement savings market and the continuing transition of millions of Americans into retirement.”

Prudential plc appears to have acted under shareholder pressure. The Financial Times reported February 24 that Dan Loeb, leader of Third Point, the $14 billion US hedge fund that has a stake in Prudential worth nearly $2bn, had urged the insurer’s board to separate Prudential’s US and Asian businesses and eliminate its UK head office. Prudential no longer has any operations in the UK, but it remains the largest insurer listed on the London market, with a value of £37bn.

Jackson National emerged as the U.S. variable annuity sales leader about seven years ago—especially since Prudential and MetLife throttled down their sales pace. More recently, Jackson, AIG and other life insurers have diversified their product offerings for greater stability.

According to Prudential plc:

US adjusted operating profit increased by 20% to $3.07 billion, reflecting the impact of lower market-related amortisation of deferred acquisition costs. Higher equity markets also led to US separate account assets increasing by 19% to $195.1 billion. Our US business continued its long-term track record of delivering cash to the Group, remitting a dividend of $525 million during the year.

Prudential plc bought Michigan-based Jackson for $610 million in 1986. The business, which has four million U.S. customers, accounts for half of the group’s operating profit.

The British insurer, which is not related to Newark, NJ-based Prudential Financial, acknowledged the potential impact of the pandemic and financial crisis on its industry.

Strong equity markets drove the company’s 2019 results, Falcon said. Variable annuity separate account assets, which generate asset-based fees, totaled a record $195.1 billion in 2019.

How to Avoid H.R. Mistakes Stemming from COVID-19

Posted on March 18, 2020 by No Author -

Turn 401(k)s into Bond Ladders

Posted on March 18, 2020 by Kerry Pechter -

Bond ladders or certificate-of-deposit ladders are tried-and-true techniques for establishing predictable yearly income in retirement. But they currently have drawbacks. CD rates are too low, and bond ladders require large investments. Neither can be built by 401(k) plan participants prior to retirement.

One easy alternative is to use defined maturity funds (DMFs). These diversified bond funds combine the best features of a bond ladder and a bond fund, either as insulation from interest rate risk or as a safe stairway of annual income in retirement. Invesco and BlackRock offer them as exchange-traded funds (ETFs). Fidelity offers them as municipal bond funds.

Franklin Templeton distributes its defined maturity bond funds through retirement plans. The firm brought its first DMF to market in 2015, but it got little traction. The passage of the SECURE Act in December could change that by helping to reframe the 401(k) as a generator of retirement income.

“Prior to the passage of the SECURE Act, plan sponsors were broadly reluctant to embrace the income challenge,” said Drew Carrington, senior vice president and head of Institutional Defined Contribution at Franklin Templeton, in a recent interview with RIJ. “That was primarily because of the annuity selection liability issue.”

Carrington was referring to plan sponsors’ concerns that they could be sued if a life insurer who sold annuities to their participants later defaulted. “Decisions about products like ours, that have no insurance component, have also been held up [by those concerns],” he said.

Drew Carrington

“We’re hoping that passage of the SECURE Act will drive renewed interest and spur action. We’ve seen a couple RFPs [requests for proposals] from plan sponsors. We hope that this may represent a turning point in the acceptance of retirement income options in 401(k) plans.”

Franklin Templeton’s institutional DMFs are liquid, actively managed diversified mutual funds containing a mix of investment-grade, non-callable bonds that all mature in the same year. There are no mortgage-backed securities or floating-rate bonds. They are structured so that plan participants who have retirement spending needs in 2021 might invest in a 2021 Fund, a 2022 Fund, etc. The current expense ratio is 32 basis points (0.32%) per year.

The DMFs are intended to fit the contribution and accumulation pattern of a 401(k) participant. “Every two weeks a person could purchase small slices of a fund. Other people might reach age 60 and decide to buy a five-year bond ladder all at once. Other people might say, ‘I’ll buy a new fund every year for five years,’” Carrington said. “You can go either way. The funds have liquidity and a daily price. The closer they get to maturity, the less volatile their value will be. If you sell the fund prior to maturity, there could be a market value decline. But barring a default the fund should mature at its par value,” he added.

DMF ladders can be extended indefinitely, but Franklin Templeton envisions ladders of five years. “Our theory was that that’s about as far out as most people have a sense of planning for. If you ask them what their income needs will be in a year, they can usually tell you. But if you ask them how much they’ll be spending in 12 years, they don’t know. So we created a five-year program, with one fixed maturing fund for each of the five years.”

There’s a stereotype of rank-and-file retirement plan participants as largely disengaged from their retirement savings. Franklin Templeton also wondered if most people are too focused on yield and internal rates of return to appreciate the predictability of a ladder. “Some initial feedback from plan sponsors was that participants wouldn’t understand this, so we held focus groups,” Carrington told RIJ. “To ensure a broader swath of the US population, we made a point of conducting them in states such as Texas and Illinois instead of focusing on financial hubs like New York. The groups consisted of people over age 50 and currently participating in a 401(k) plan. Otherwise, they were as demographically diverse as possible.

“The interesting finding was that people immediately grasped that this was like a CD. They weren’t hung up on the yield component. They understood that you’d dedicate a portion of your savings today to the payment of certain expenses in the future. People thought of it as bucketing.

“We often heard people say, ‘I could set aside dollars to pay for a certain expense, like property taxes. Then I wouldn’t have to worry about that expense and I could spend my other money as I wish. One person asked, ‘Can I do this in different amounts each year?’

“As a general rule, the defined contribution industry tends to underestimate participants’ financial literacy. However, from our focus groups, we found that people intuitively grasped this product. I am now more inclined to think that participants close to retirement have a better sense of what they need than the industry gives them credit for.”

Franklin Templeton envisions participants using a bucketing strategy, where one income bucket consists of a DMF ladder and a later income bucket of a deferred annuity, or QLAC, or qualified longevity annuity contract. Created by the U.S. Treasury in 2014, QLACs allow Americans to buy late-life deferred income annuities with up to 25% of their tax-deferred savings (to a maximum of $135,000 for 2020) without violating the requirement to start taking distributions from tax-deferred accounts after reaching age 72.

The asset management firm asked retirement experts from The American College to run Monte Carlo simulations of the hypothetical performance of a Franklin Templeton DMF ladder, a portfolio of growth funds, and a MetLife QLAC during retirement to see if it outperformed the traditional 4% “safe withdrawal rule” established by William Bengen in 1994.

“We asked Michael Finke and Wade Pfau to answer the question, ‘If we think about risks like volatility and longevity risk in retirement, would a combination of a bond ladder, a QLAC and a growth portfolio outperform the 4% rule on those two metrics, and their answer was ‘Yes,’” Carrington said.

“The research is compelling on that point. If your goal is wealth maximization on average and you care only about that, the answer is ‘No.’ Higher equity allocations create the potential for higher ending wealth. But they create a wider dispersion of outcomes in terms of income variability and longevity risk.”

Carrington sees the potential to partner with an annuity issuer on products that combine DMFs and QLACs. “We’re not officially co-marketing with an insurance company, but we are certainly open to joining into a conversation with others. That’s why we did the joint project with MetLife and The American College,” he told RIJ.

Carrington imagines the following scenario. “Most people will retire in their early 60s, draw down Social Security in their mid-60s and buy a QLAC that starts in their mid-80s. So we’re looking at a 10- to 15-year window for these bond funds,” he said.

“In that framing, if you make a back-of-the-envelope assumption that people can put up to 25% of their qualified savings into a QLAC, and put five percent into each year of your five-year bond ladder. That’s a total of 50%. The other half of the portfolio is left to address income needs and inflation risk in the years [between the end of the bond ladder and the beginning of the QLAC income].

“HR departments tell us, my participants aren’t asking for income products. But we say, there will be second order effects. Think about rearview cameras in cars. Nobody knew they wanted rearview cameras until they had them. Now they get in a car without one and say, ‘Where’s the rearview camera?’”

A response to last week’s cover story

Posted on March 12, 2020 by David Babbel -

Thank you for including a synopsis of the Shoven et al. study in Retirement Income Journal. In your summary comment on the Shoven article, you stated:

“The paper suggests that it doesn’t make much sense for people in the bottom half of the income distribution to defer Social Security benefits until age 70 or to buy life annuities.”

Much of what Shoven et al. observe is correct. But I don’t agree that negative real interest rates necessarily imply that there’s no reason to defer Social Security benefits until age 70 or to buy life annuities (particularly deferred life annuities).

Let me explain.

Under current practices, Social Security benefits beyond 62 years of age tend to increase by roughly 8% per year of delay up to age 70. This is due to the mortality assumptions and the assumed interest rate embedded in those increments. Because the 8% yearly increment (which remains inflation-adjusted throughout the remainder of life) is higher than can be justified on economic and actuarial grounds, it still may be a good choice to delay Social Security until later years, even 70.

In addition, the tontine nature of life annuities, and particularly deferred income annuities, means that their high “mortality credits” should continue to attract new buyers, despite very low or even negative embedded real rates of interest.

Arrow, Debreu and Hirshleifer provided the theoretical basis for that attraction in their Nobel Prize elaborations of “state-preference theory.” They showed that the value that one places on money depends upon the state of nature, including the individual circumstances, under which money is received.

In such states, one may use negative discount rates to assess annuities’ future value, thereby leading to potentially attractive returns. Thus, annuity payments that are “loaded up” with mortality credits can be particularly valuable, especially when someone can’t work or is dependent on assistance from a possibly insolvent government.

Even if the government is able to honor its promises without debasing its currency, the mortality credits will create impressive returns for those who survive beyond the average lifetime.

Dave Babbel Professor Emeritus, Finance and Insurance The Wharton School, University of Pennsylvania

Vanguard reboots a managed income fund

Posted on March 12, 2020 by Editorial Staff -

Vanguard has changed the name of its Vanguard Managed Payout Fund to Vanguard Managed Allocation Fund. The fund also added a new portfolio manager to its team, effective immediately, and eliminated monthly payouts in favor of an annual distribution. The last monthly payment will be made in May.

The fund’s structure, composition, and investment advisor won’t change. It remain a fund-of-funds, investing in equities, fixed income, commodities, and alternative assets through other Vanguard funds. Vanguard Quantitative Equity Group (QEG), the firm’s internal active fund advisory arm, will continue to manage it.

The fund currently invests 52% of its assets in stocks, 23% in bonds, and 25% in alternatives. The fund is expected to retain an expense ratio of 0.32%.

Vanguard introduced three managed payout portfolios in 2008, each with its own target payout rate in retirement. But the financial crisis hurt the launch and the product sputtered. In 2014, the portfolios were merged into a single Managed Payout Fund with an annual target distribution rate of 4%. The fund has attracted only $1.9 billion. Most shareholders reinvested their distributions instead of taking monthly income.

Vanguard advised investors who want a regular stream of cash distributions to establish an automatic withdrawal plan from their Vanguard accounts.

Vanguard Managed Allocation Fund will continue to invest in a diversified portfolio of Vanguard funds, including but not limited to:

Vanguard Total International Stock Index Fund
Vanguard Alternative Strategies Fund
Vanguard Total Bond Market II Index Fund
Vanguard Total Stock Market Index Fund
Vanguard Global Minimum Volatility Fund
Vanguard Commodity Strategy Fund
Vanguard Total International Bond Index Fund
Vanguard Ultra-Short-Term Bond Fund
Vanguard Value Index Fund
Vanguard Market Neutral Fund
Vanguard Emerging Markets Stock Index Fund

Vanguard is positioning the revised fund for several audiences: As a cash-flow management tool for endowments and foundations, as an in-plan retirement income solution, or as part of a retirement income strategy for individual investors and their advisors, or as a diversified asset for institutional investors.

Vanguard’s Quantitative Equity Group was created in 1991. It is comprised of 37 portfolio managers, strategists, and analysts, and manages assets worth more than $44.5 billion. It is led by John Ameriks.

Fei Xu and Anatoly Shtekhman, managers of Vanguard Alternative Strategies Fund and Vanguard Commodity Strategy Fund, will manage the Managed Allocation fund’s portfolio.

Shtekhman earned a B.S. in mathematics from the University of Scranton, an M.S. in finance from Boston College, and an M.B.A. from the Wharton School of the University of Pennsylvania. Xu received a B.S. from Beijing University, an M.S. in geophysics from UCLA, and an M.B.A. from the Fuqua School of Business, Duke University.

Stay Calm, But Nimble

Posted on March 12, 2020 by Wade Pfau, Steve Parrish and David Littell -

For retirement income planning in this chaos, the years before you retire should be the key consideration:

If you’re at or near retirement, “selling out” of the market is going to make the “sequence of return” issue a reality rather than a mere risk. Still, these market moves can be a wake-up call to put a strategy in place to make sure it doesn’t derail your retirement. (At left: Wade Pfau.)

If you’re years away from retirement, and have the stomach for it, there are some opportunities for loss harvesting and discounted stock buying. (Just remember that you could also be taking a bad thing and making it worse.)

We’ve been financial services witnesses to all the U.S. financial crises beginning with the near-hyperinflation of the early 1980s. These are the lessons we learned:

No two situations have been the same.
This one’s been a somewhat predictable disturbance to the supply chain; the 2008 crisis was more related to a liquidity crunch.
The “dot.com bubble” was consumer overconfidence followed a correction scenario. So, the exit out of this situation may be very different from the past.

What the financial crises of the past had in common was the tendency of too many people to sell low and buy high. A page from the financial playbook suggests not to do panic selling.

At the tactical level, there are opportunities in retirement planning:

Be prudent about how much conservatism you want to bake into your approach. Given today’s low interest rate environment, you’ll need to save even more in bonds if you shift away from stocks.
A simple rule to follow is to look at your portfolio balance on the date you retired, and whenever the current balance is less than that number, draw down from the buffer asset. Otherwise, you withdraw from your portfolio.
Investors with a whole life insurance policy can also potentially borrow from the cash savings component of their plan, since it is later repaid by deductions when the death benefit is paid out.
If you believe the market will correct, particularly if the current situation is hurting your income, now may be a great time to make conversions to Roth IRAs (and pay a lower tax).
If you have the time and stomach for it, harvesting losses now with a reinvest in a correlated asset may work for you. It may give you a tax deduction without changing your economic position.

On the flip side of this, particularly if your income is temporarily down, realizing income may make sense. For example, surrendering some of the IRA that you were going to surrender next year anyway could work. If you own a business, collecting on receivables or selling appreciated inventory (especially if that inventory is in demand) might generate some lower-taxed income.

A Reminder that Market Risk Is Real

Posted on March 12, 2020 by Kerry Pechter -

Panic is not a productive response to any situation, no matter how serious. Panic attacks are often abject cries for help that, by themselves, are purely counter-productive. Better to remind yourself that “intelligence is knowing what to do when you don’t know what to do.”

Then relax and wait for your brain to suggest the next move. It will.

But what about your panic-stricken clients? A lot depends on how old they are. One adviser I know faced a phone meeting this week with a fairly new client whose assets he hadn’t yet had a chance to reallocate. The client, a 62-year-old business owner, had had $700,000 in equities until 10 days ago.

“I’ll tell him three things,” the adviser said. “‘First, at your age, you should have been more diversified. Second, you can do nothing and ride it out. Or you can move 40% of that account to a fixed indexed annuity right now.'”

I don’t know yet how the client reacted. The client apparently also owns a fair amount of whole life insurance. This particular adviser often recommends life insurance for affluent retirees, both as a source of cash during moments like these and as a counterweight to a life-only single premium immediate annuity.

Of course, there’s an upside to downturns. “Stay the course” is the Boglehead response. But the bigger the drop, the bigger the opportunity for those with cash or near-cash. We love other products when they’re “on sale”: why not equities? If you were 50:50 in stocks and bonds before this correction, maybe you should rebalance toward stocks. Think of it this way: the market just regained a lot of equity risk premium.

Life insurers/annuity issuers can use this crisis to gently remind retirement savers and investors that risk is still real—and that insurance products and managed volatility products can help them sleep easier. (The Alliance for Lifetime Income should be busy this week with a follow-up to its “M.U.G.” promotion.) For life insurers who are buying back their own stocks, I assume this slide to be a windfall. For firms with big books of variable annuity business, the slump probably hurts fee revenue. Another interest rate cut certainly won’t help the sale of new fixed annuities.

The retirement conference schedule is being disrupted as we speak. The March 22 Adviser2X conference in New Orleans has been postponed until late July. I’m waiting for updates from Investment News, LIMRA, and the American Retirement Association about their retirement summits, all of them set for late April.

For basketball fans, March Madness is turning into March Sadness. As a college hoops fan, I’m following developments this week. The Ivy League cancelled its tournament. So far, the NCAA appears to have decided that the show will go on, but not before live audiences. Victory over the virus is more important.

An Actuary Assesses COVID-19

Posted on March 11, 2020 by Matthew Edwards -

As the world grapples with the growing COVID-19 (coronavirus) threat, a useful reference point is the Spanish Flu of 1918. Given what we now know about COVID-19, are we looking at something of similar severity to the Spanish Flu, or materially less severe, or perhaps worse?

Up until now, the Spanish Flu has been generally regarded as a “worst case” reference point in pandemic modeling: This is as bad as it could get.

The thinking would be that healthcare is so much more advanced now, and we are not recovering from four years of strategic war as was the case then. These positive factors should more than compensate for the (then unimaginable) extent of international air travel and globalization of trade. But perhaps that rationale no longer holds, and we could be heading for something similar.

Plausible mortality impacts

Matthew Edwards

An actuary’s immediate reaction to COVID-19 is, of course, to model it. But even now, with more than two months of data, there are considerable obstacles to any plausible modeling using the typical pandemic modeling methods (e.g. the ‘SIR’ approach of splitting people into the states of susceptible, infected, and recovering, with age/gender-specific transition rates) and this article does not attempt any such modeling.

Most pandemic models involve a “spread” assumption, R0, which represents how many individuals an infected person will transmit the virus to (in an otherwise perfectly susceptible population). An R0 parameter of one, for instance, equates to a stable state; a value greater than one (at the start of an outbreak) implies growth in infections, with the potential for exponential growth in the absence of interventions. Normal influenza spread implies a parameter of two to three whereas measles is one of the most contagious viruses with an R0 of 12 to 16.

At the moment, even this fundamental element is uncertain by a wide range. Various publications so far have it ranging from 1.4 to over six, while even the World Health Organization’s (WHO’s) suggested range allows almost 100% variation (from 1.4 to 2.5).

In addition, as a further complication, the effective rate of reproduction will differ between countries and also vary over time as people shift their routines to avoid infection (hopefully decreasing as people and governments become more aware of the problems).

Then we have the problem of mortality, the case fatality rate (CFR), which measures the mortality of infected cases. Overall estimates are around 2%, but here there is wide variation between the experience in Wuhan (above 5%) and outside that area (of the order of 0.7%). Reporting and data issues add further uncertainty; even determining the number of cases is challenging, especially given the asymptomatic cases whose number cannot accurately be measured.

These figures compare with the following reference points:

The overall CFR in any country is likely to be heavily influenced by the availability of appropriate healthcare resources. However, the age variability seen so far is likely to be similar across countries.

The Chinese experience showed mortality rates varying broadly and exponentially by age, from circa 0.2% for ages up to 40, increasing to 4% for the 60 to 69 age band, 8% for the next decade of age, and roughly doubling again to 15% for anyone 80 or older. (This concentration of deaths at higher ages is supported by observation of the ages of reported European fatalities.)

So what sort of impact is plausible? To paint a very broad picture, if we assume a CFR in the 0.5% to 1.0% range (in line with the ‘outside Hubei’ COVID-19 figures to date, and the 1957/68 pandemics), this could lead to, as a plausible order-of-magnitude conjecture, a doubling of mortality in a country such as the U.K. for a period of several months. That is, an overall doubling of population mortality, not a doubling of mortality for infected cases. This would be a bad outcome (and is not a ‘best estimate’ prediction), but it is plausible.

Moreover, the above broad-brush perspective deliberately overlooks various likely and material indirect impacts. The likely surge in patient volumes at healthcare facilities related to a sustained COVID-19 outbreak in any country could mean a corresponding squeeze on access to care (and hence, increased mortality) for patients already suffering from other serious conditions in secondary care. There will be an equivalent but less severe effect at the primary care level.

Quarantine and self-isolation will also have a detrimental effect on those suffering from chronic conditions at home. The healthcare workforce will itself be depleted by absences. Furthermore, supplies of medicine taken for granted will potentially be adversely affected by production supply chain issues.

There is one material mitigating point from an insurance perspective, if not from that of the individuals affected: the coronavirus will disproportionately affect the less healthy (in particular, people already with chronic conditions), and hence the mortality impact does not consist entirely of ‘new’ deaths but will include a material proportion of ‘accelerated’ deaths (hence leading to correspondingly reduced mortality in later years).

A more positive point for insurers is the opportunity for innovative product design in the face of a very clear set of consumer concerns. By way of example, Generali announced in February a new product aimed specifically at providing coronavirus cover for healthcare costs and loss of earnings; other major insurers have launched similar products.

Impacts for insurers

The variability of the mortality impact by age makes the impact highly variable by type of insurer. Clearly, annuity writers will experience an unusually high mortality year (even under the more benign scenarios). Protection writers will see a mortality impact likely to be of similar order of magnitude to their capital allowance for life cat risk (for example, the Standard Formula of Solvency II sets this at 1.5 per mille, and internal model firms will have generally similar calibrations); the major question for them is the extent of their reinsurance.

The main losers will be firms with large whole of life books but low levels of reinsurance: there is likely to be a large amount of sum at risk for policyholders in their 50s and 60s, with a material mortality impact from the COVID-19 outbreak.

However, there are a range of other impacts that insurers with well-developed risk management functions and capital models should already be prepared for (one silver lining of the COVID-19 problem is that it does focus minds on real-life examples of complex interacting risks stemming from just one driver).

Asset markets are clearly badly affected, with (by way of example) the FTSE-100 down 12.7% and the S&P 500 down 8.6% from January 1 to February 28 this year. Operational risk will be a concern, with firms needing to prepare for significant staff absences, and absences in their suppliers (third-party outsourcers will not be “immune” to the problem themselves).

Occurring as this outbreak has immediately after most firms’ year-end means that insurers will have a couple more months to wait and see before finalizing their revised assumptions for mid-year reporting. By this time, mortality assumptions are likely to need increasing, probably with a short-term adjustment, while annuity writers might find it reasonable to wait and see as far as base assumptions go, noting that they can be fairly aggressive this year with improvement assumptions.

For instance, in the U.K., this is likely to mean no insurer will want to move to the latest mortality projection model CMI_2019, which gives slightly higher life expectancies than the previous versions. (In theory, the proper approach would be to combine a short-term adjustment to base tables with incorporation of CMI_2019, allowing for greater life expectancy for survivors. In practice, the uncertainties that will persist until even end 2020 will likely mitigate against this approach.)

In an ideal world, actuaries would wait for near-certainty before changing any major assumptions. In the first half of 2020, such an approach is unfortunately not feasible.

S&P500 vs. High Quality Bonds (2007-2020)

Posted on March 11, 2020 by No Author -

The ‘R.U.B’: Rider Utilization Behavior

What should be done?

Overall sales leaders

All fixed annuities

All variable products (structured and conventional)

Conventional variable

Structured variable (Registered index-linked annuities)

Fixed indexed

Traditional fixed

MYGA

Report from Secure Retirement Institute

‘Don’t wait for the good news’

Time for ‘Series I Savings Bonds’

‘Who is selling and why?’

‘Flight to safety’

‘No one has pulled out of the [annuity] business’

‘Production will be crippled for some time’

The trend toward longer retirements will end

A moratorium on foreclosures, evictions and debt collection

‘We need something good to come out of this’

Volatile retirement income creates anxiety

‘A longer path to improvement’

Insurance has a unique advantage

‘Keep working, delay Social Security’

‘A mad scramble’

Plausible mortality impacts

Impacts for insurers

Data Connection

Lists*