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Posted on March 30, 2022 by Editorial Staff -

Annexus and State Street partner on TDF with income rider

Annexus Retirement Solutions is partnering with State Street Global Advisors, the world’s fourth largest asset manager to develop a target date fund (TDF) with an embedded income solution for the defined contribution (DC) plan marketplace.

“This will become the second TDF income solution on the market that leverages the Annexus Retirement Solutions patent-pending Lifetime Income Builder design, which has successfully redefined how the industry can deliver in-plan lifetime income solutions in a TDF,” an Annexus release said.

The investment solution embeds Lifetime Income Builder (a product that employs group fixed indexed annuities (FIAs) with a guaranteed lifetime withdrawal benefit or GLWB) – within the automatic structure of a TDF.

State Street will manage the solution’s underlying assets and provide the index for the group fixed indexed annuity. The TDF will be available across multiple recordkeeping platforms. The new DC plan product offering is scheduled to launch in the first half of 2022.

By integrating Lifetime Income Builder into a TDF, the solution gives DC plan sponsors an efficient investment option which a plan sponsor could consider to be Qualified Default Investment Alternative (QDIA)-compliant. For participants, it offers a combination of liquidity, portability and ease of use leading to and in retirement.

The TDF design anticipates using three of the nation’s top-tier insurance providers to deliver lifetime income. This multi-carrier model allows the insurance providers to bid on pricing each month, which can help lower participant costs and deliver higher income benefits and better outcomes.

Annexus Retirement Solutions is providing its Lifetime Income Builder product and the Annexus Retirement Data Exchange (ARDX), a proprietary middleware solution that streamlines data communication and administration. ARDX also enables fund implementation and processing capabilities for the recordkeeper and all other parties.

SEC seeks more SPAC disclosure

The Securities and Exchange Commission has proposed new rules and amendments to enhance disclosure and investor protection in initial public offerings by special purpose acquisition companies (SPACs) and in business combination transactions involving shell companies, such as SPACs, and private operating companies.

“Nearly 90 years ago, Congress addressed certain policy issues around companies raising money from the public with respect to information asymmetries, misleading information, and conflicts of interest,” said SEC Chair Gary Gensler. “For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations.

“Today’s proposal would help ensure that these tools are applied to SPACs. Ultimately, I think it’s important to consider the economic drivers of SPACs. Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.”

The proposed new rules and amendments would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution. They also would require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions. Further, the new rules would address issues relating to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in Commission filings and in business combination transactions.

If adopted, the proposed rules would more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an initial public offering.

The proposal also includes a new rule addressing the status of SPACs under the Investment Company Act of 1940, which is designed to increase attention among SPACs about this important assessment. Under the proposed rule, SPACs that satisfy certain conditions that limit their duration, asset composition, business purpose, and activities would not be required to register under the Investment Company Act.

The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

RetireOne hires McNeela and Cusack

RetireOne, the independent platform for fee-based insurance solutions, today announced the appointment of Tom McNeela and Jeff Cusack to two key leadership positions.

As the new Director of Client Experience, McNeela will provide Registered Investment Advisors and their clients with retirement solutions. His 25-year career includes experience as a life insurance and annuity wholesaler, operations back-office leader, and leader at a national sales education team for a Fortune 100 company.

Cusack brings expertise in product development, marketing, and distribution as RetireOne’s new Senior Managing Director, Strategic Accounts. He has more than 30 years of experience in financial services, at JPMorgan, Charles Schwab, Smith Barney’s Consulting Group (now Morgan Stanley) and, most recently, Nuveen Investments.

McNeela and Cusack join RetireOne shortly after the launch of Constance, a new, zero-commission contingent deferred annuity created in partnership with Midland National Life Insurance Company.

SEC aims to regulate securities dealers, market makers

The Securities and Exchange Commission (SEC) has proposed two rules that would require proprietary (or principal) trading firms, who assume certain dealer functions, and who act as liquidity providers in the markets, to register with the SEC, join a self-regulatory organization (SRO), and comply with federal securities laws and regulations.

“Requiring all firms that regularly make markets, or perform important liquidity-providing roles, to register as dealers or government securities dealers could help level the playing field among firms and enhance the resiliency of our markets,” said SEC Chair Gary Gensler in a release.

If adopted, the proposed rules would further define the phrase “as a part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Act to identify certain activities that would cause persons engaging in such activities to be “dealers” or “government securities dealers” and subject to the registration requirements of Sections 15 and 15C of the Act, respectively.

Under the proposed rules, any market participant that engages in activities as described in the rules would be a “dealer” or “government securities dealer” and, absent an exception or exemption, required to:

Register with the SEC under Section 15(a) or Section 15C, as applicable;
Become a member of an SRO
Comply with federal securities laws and regulatory obligations, including as applicable, SEC, SRO, and Treasury rules and requirements

The proposal will be published on SEC.gov and in the Federal Register. The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

‘Thematic Funds’ database available to Morningstar clients

Over the three years ending December, 31, 2021, assets managed by “thematic funds” more than tripled to $806 billion worldwide, according to Morningstar’s Global Thematic Funds Landscape Report, published this week. Thematic funds’ share of all equity fund assets worldwide was 2.7% at the end of 2021, up from 0.8% 10 years ago.

A record 589 new thematic funds debuted globally in 2021, more than double the previous record of 271 new fund launches in 2020. These funds attempt to harness secular growth themes ranging from artificial intelligence to Generation Z.

More than half of thematic funds globally survived and outperformed the Morningstar Global Markets Index over the three years to the end of 2021. However, this success rate drops to just one in ten thematic funds when looking at the trailing 15-year period. More than three-quarters of the thematic funds that were available to investors at the onset of that 15-year period were closed.

Europe is the largest market for thematic funds, accounting for 55% of global thematic fund assets, having expanded from 15% since 2002. In the US, thematic funds’ market share shrank to 21% from 51% over the same period.

Funds tracking Multiple Technology Themes, with $105 billion in combined assets, represent the most popular thematic grouping globally. These funds’ tendency to favor disruptive technology companies influences where they land on the Morningstar Style Box. In the US, 70% of thematic funds fit on the growth side of the Morningstar Equity Style Box, while just 7% landed on the value side.

Morningstar Direct users can access the Thematic Funds Dataset through the firm’s “Analytics Lab” to understand the Morningstar thematic funds landscape. They can see which open-end funds and exchange-traded funds are classified to a specific theme, where they fall in the thematic taxonomy, what their growth rate has been and which are most popular.

Personalized SMAs: A new product class

The latest issue of The Cerulli Edge—U.S. Monthly Product Trends, analyzes mutual fund and exchange-traded fund (ETF) product trends as of February 2022, assesses the future trajectory of personalized separately managed accounts (SMAs), and explores why asset managers are expanding their ETF and SMA capabilities.

Highlights from this research:

Outflows from mutual funds accelerated into February, with funds suffering $32.1 billion in net negative flows vs. just $13.0 billion in January. Assets fell more than 2% to $19.3 trillion; they are now down nearly $1.5 trillion from year-end 2021 ($20.8 trillion). ETF assets declined 1.1% to $6.8 trillion, but net flows remained positive at $79.7 billion.

Asset management firms are applying the algorithmic portfolio construction techniques of direct indexing to fixed income and active equity strategies, opening a broader class of products known as personalized SMAs.

Personalized SMAs offer customized investor solutions. Cerulli expects them to challenge mutual funds and other ’40-Act’ products. Asset management firms will need to integrate these solutions with managed account sponsors and position them with advisers and their clients.

The process of creating a vehicle-agnostic lineup, with products that fit the needs of distribution partners, is a process that does not stop when ETFs and SMAs go to market. Asset managers must continuously evolve their offerings to fit the changing needs and technologies of partner firms. “The more that an asset manager’s new vehicle offerings dovetail with a sponsor’s technology, and the more that they solve a problem for financial advisors using the platform, the better the chance of distribution success,” Cerulli said.

Goldman Sachs acquires NextCapital

Posted on March 30, 2022 by Editorial Staff -

Goldman Sachs Group Inc. is buying robo-adviser NextCapital Group, hoping that the online platform will help Goldman Sachs Asset Management offer managed accounts and digital advice to defined contribution plan participants, the New York-based bank said this week.

Terms of the deal, to be completed in the second half of the year, weren’t disclosed. Upon closing, NextCapital’s platform will join GSAM’s Multi-Asset Solutions business of Goldman Sachs Asset Management, led by Greg Calnon.

That group has about $220 billion in assets under supervision, making it the largest Outsourced Chief Investment Officer (OCIO) provider in the US and second largest globally by outsourced assets under management. It has offered custom multi-asset portfolios from Goldman Sachs and third-party asset managers for over 20 years.

NextCapital, based in Chicago, is an open-architecture digital retirement advice provider that partners with US financial institutions to deliver “personalized, customizable retirement planning and managed accounts through workplace retirement plans and IRAs.”

According to a release, the NextCapital’s “flexible, open-architecture” platform will enable “asset managers, plan sponsors, advisors and recordkeepers to meet individual investor demand for more digitalization, retirement income solutions, tailored strategies and insights.”

Goldman Sachs Asset Management says it supervises about $350 billion in defined benefit (DB) and defined contribution (DC) assets.

Goldman Sachs also partners with Chief Human Resources Officers (CHROs) and other wellness programs through its workplace wealth offering, Goldman Sachs Ayco Personal Financial Management. NextCapital’s managed account platform currently powers the Goldman Sachs Workplace Retirement Solution, a retirement program for small and mid-sized businesses.

“We will continue to invest in technology to improve the experiences and outcomes of retirement investors and better serve the employers, advisors and financial institutions that support the growing $10 trillion DC market and the even larger IRA segment.” said Luke Sarsfield, co-head of Goldman Sachs Asset Management.

‘SECURE 2.0’ Passes House, Moves to Senate

Posted on March 30, 2022 by Editorial Staff -

By a 414 to 5 vote this week, the House of Representatives approved the Securing a Strong Retirement Act of 2022 and sent it on to the Senate. Sponsored by Richard Neal (D-MA), the lengthy bill grants several long-sought items on the retirement industry’s wish-list.

Of the 414 voting yea, there were 216 Democrats and 198 Republicans. Five Republican congressman were opposed: Andy Biggs (AZ), Dan Bishop (NC), Thomas Massie (KY), Tom McClintock (CA), and Chip Roy (TX). The bill needed only a two-thirds majority to pass.

The legislation, widely known as SECURE 2.0 because it fills in some of the gaps left by a previous bipartisan retirement bill, the SECURE Act of 2019, does the following, among other things:

Makes auto-enrollment mandatory in private-sector retirement plans
Increases tax credits for costs associated with creating a plan at a small firm
Allows employers to match their workers’ student loan repayments with retirement account contributions
Raises catch-up contribution limits for older retirement savers
Delays required minimum distributions
Increases options to create lifetime income through annuities

Retirement industry stakeholders and their representatives praised the passage of the bill, HR 2954. In public statements, TIAA observed that the bill “builds on the SECURE Act, which took significant steps to expand access to lifetime income.” The Investment Company Institute hailed it for “increasing the age for required minimum distributions from retirement accounts.”

The American Council of Life Insurers CEO and president Susan Neely said, “Passage of this bill comes at a critical time for all savers but especially minorities.” The Insured Retirement Institute said the bill advanced its “primary public policy objectives—expanding access to workplace retirement plans and protecting lifetime income products.”

Below are 10 of the major provisions in the bill:

Expands automatic enrollment in retirement plans. Requires 401(k) and 403(b) plans to automatically enroll participants in the plans upon becoming eligible (and the employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but no more than 10 percent. And then each year that amount is increased by 1 percent until it reaches 10 percent. All current 401(k) and 403(b) plans are grandfathered.

Modifies credit for small employer pension plan startup costs. The three-year small business start-up credit is currently 50% of administrative costs, up to an annual cap of $5,000. Section 102 makes changes to the credit by increasing the startup credit from 50% to 100% for employers with up to 50 employees.

Allows 403(b) custodial accounts to invest in collective investment trusts. It also amends the securities laws to treat 403(b) plans like 401(a) plans with respect to their ability to invest in collective investment trusts, provided that: (1) the plan is subject to ERISA, (2) the plan sponsor accepts fiduciary responsibility for selecting the investments that participants can select under the plan, (3) the plan is a governmental plan, or (4) the plan has a separate exemption from the securities rules.

Increases the required minimum distribution (RMD) age. Currently age 72, the RMD age will be 73 starting on January 1, 2022. It will increase to age 74 starting on January 1, 2029 and age 75 starting on January 1, 2032.

Indexes the current allowable increase on IRA contributions after age 50 ($1,000) to inflation, starting in 2023. Also, the current limit on catch-up contributions for those over age 50 is $6,500 ($3,000 for SIMPLE IRAs). The new law increases these limits to $10,000 and $5,000 (both indexed), respectively, for individuals who have attained ages 62, 63 and 64, but not age 65.

Allows offering de minimus financial incentives to 401(k) participants. Lifts the prohibition against offering modest cash incentives such as gift cards to encourage contributions.

Eliminates certain barriers to the availability of life annuities in qualified plans and IRAs. Annuities that provide rising benefits are currently prohibited from tax-deferred plans. This change allows annuities that offer annual increases of only 1 or 2%, or return of premium death benefits, or period certain guarantees.

Removes the cap on contributions to Qualified Longevity Annuity Contracts (QLACs), a type of deferred income annuity. The cap is currently 25% of tax-deferred savings. The new law also facilitates the sales of QLACs with spousal survival rights and clarifies that free-look periods can be as long as 90 days.

Facilitates the creation of a new type of exchange-traded fund (ETF) that is “insurance-dedicated.” This change would allow ETFs to be offered as investment options within individual variable annuities.

Creates a national online “lost and found” for Americans’ retirement plan accounts. The section also directs the Department of Labor, in consultation with Treasury, to issue regulations on what plan fiduciaries must do to help find missing participants and reunite them with their accounts.

Allow sponsors of 401(k), 403(b) and 457(b) plans to provide employer matching contributions on a Roth basis. Under current law, plan sponsors are not permitted to provide employer matching contributions in their 401(k), 403(b) and governmental 457(b) plans on a Roth basis. Matching contributions must be on a pre-tax basis only. Section 604 allows defined contribution plans to provide participants with the option of receiving matching contributions on a Roth basis.

Top 25 Companies and Groups for Annuity Considerations, 2021

Posted on March 30, 2022 by No Author -

Who Runs EBSA? It Matters

Posted on March 24, 2022 by Kerry Pechter -

Cherry blossoms decorated the nation’s capital this week—pink flowers on a white birthday cake. Suppose, while admiring the florescent trees, I ran into a guy who never votes. The major political parties are like the Tweedle brothers, he says. It doesn’t matter who wakes up in the West Wing.

That’s not necessarily so, I’d say. I would suggest that we walk over to the Francis Perkins Building at 200 Connecticut Avenue NW, where the Department of Labor (DOL) lives.

A model of mid-1960s modernism, the steel-and-limestone Perkins Building has the charm of an IBM punch-card. It is named for the first woman cabinet member—appointed by Franklin Delano Roosevelt as Secretary of Labor in 1933. Perkins helped craft the New Deal.

The building also houses the Employee Benefit Security Administration, or EBSA. EBSA’s career attorneys write regulations that follow the laws that Congress passes. But EBSA’s chief is a political appointee, so his or her initiatives and rules tend to reflect the political predilections of the incumbent president and Labor Secretary.

That’s why any adviser who recommends rollovers to plan participants, or any asset manager that wants its unconventional funds placed as options in 401(k) plans, or any life insurer that favors annuities in defined contribution plans, should care who runs EBSA at any given time.

In the Trump administration, for instance, Labor Secretary Eugene Scalia and EBSA chief Preston Rutledge shelved the Obama Administration’s strict “fiduciary rule” and discouraged the use of ESG (Environmental, Social and Governance) funds in 401(k) plans. But they are gone, replaced by Biden’s team.

Ali Khawar

What policies is Biden’s EBSA likely to favor? It’s probably going to resemble Obama’s. We don’t know for sure, because EBSA is currently led by an acting Assistant Labor Secretary, Ali Khawar. (The Senate has not yet confirmed President Biden’s EBSA nominee, labor lawyer Lisa M. Gomez.)

Last week, Khawar, a veteran DOL attorney, was the featured speaker in a webinar hosted by the American Academy of Actuaries. To learn about EBSA’s current initiatives, we tuned in. Here are some of the themes Khawar touched on, followed by his comments:

Conflicts of interest

EBSA has a “Conflict of Interest” project. As we move from the defined benefit plan universe to a defined contribution and also an IRA universe, it’s important that people can trust and rely on the advice they receive. That’s even more important in a universe where they are responsible for making their own financial decisions.

Most Americans are not actuaries. They need advice on how much to save, how to invest, and how to take Social Security. We don’t have a system that equips individuals well enough to make these decisions on their own.

In spite of a lot of changes and efforts made over the years by DOL and others, it’s still the case that you may not be getting advice you can rely on. It depends largely on the product or the firm you’re dealing with. It’s important that there’s a level set of parameters across the board.

As a consumer, you shouldn’t have to figure out, ‘Which exemption [from a prohibited transaction] is the adviser I’m talking to using. Are they regulated by the NAIC? FINRA? Am I in a state that has adopted the fiduciary corollary rule?’ So we are focused on leveling the regulatory playing-field for the nation. We’re trying to bring more trust to the system, and we’re trying to address equity issues and get more people to participate. Some communities have lack of trust in financial services industry. That’s the Conflict of Interest project.

ESG investing

The issue of “Environmental, Social and Governance” or ESG investments is a long-running DOL focus. On President Biden’s first day in office, he asked the DOL to review the Trump administration’s actions on ESG. We had heard feedback on ESG from ERISA stakeholders. Their message was that the previous administration’s policy statements had a chilling effect, to the point where sponsors felt there was reason to exclude ESG investments.

We proposed an ESG rule last year. The comment period is closed and now we’re working on the final rule. We don’t think the DOL should say whether defined contribution plan sponsors should or shouldn’t take ESG into account when choosing investments. ESG is going to be financially material in some situations but not in others. We think the prior administration’s rules, which are still in effect, put a ‘thumb on the scale’ and took that decision-making power away from the plan sponsors. [That power] is critical to their analysis of risk and return; we expect them to take all of that into account. Our proposed rule is meant to straddle those concepts and to allow ESG investments but not to force them on anyone. That rule is a priority for us. We are currently digesting comments on that and hope to issue a final rule as soon as possible.

Prohibited Transaction Exemptions (PTEs) and Cryptocurrencies

We’re also accepting comments on prohibited transaction exemptions. We have proposed a way to look at processing applications for PTEs. We’re hoping to introduce some efficiency into the process, and hoping that people can give us more complete PTE applications.

As of March 10, we published Compliance Assistance Release 2022-01 on cryptocurrencies. We’ve been thinking about cryptocurrencies for months. We had received reports that certain retirement plan service providers were encouraging plan sponsors to make cryptocurrency investments directly available to their participants, so that they could buy Bitcoin or other cryptocurrencies through their plans. We found that concerning.

There are custodial, valuation, and financial literacy issues around offering cryptocurrencies to participants. What exactly are the messages that participants are getting? Do they see cryptocurrencies with their eyes fully open? Fiduciaries aren’t necessarily following these issues. On March 9, the president put out an executive order on cryptocurrencies. It asks a number of federal agencies, including DOL, to think about what a regulator framework for cryptocurrencies might look like. We think that the US must play a leadership role in establishing that framework and setting up a regulatory structure. We need to get the consumer protections right. As we’ve seen with other asset classes and innovations, they have been harmful for consumers and especially for diverse communities. The Biden administration is concerned about consumer protections in crypto. We believe 401k fiduciaries should be quite skeptical before they allow investments in cryptocurrencies and that they should exercise caution especially regarding direct investments in crypto.

Retirement income

We think it’s important to talk about lifetime income as lifetime income. Annuity is just one form of lifetime income. We don’t favor securities over insurance. We’re focused on making sure that plan participants have the income they need so that they don’t rely on public programs. There are a lot of different paths to achieve that goal.

Can we establish a national retirement policy for the whole country? I’m an optimist so I want to say yes. There have been conversations ever since ERISA was passed [in 1974] on how to ensure broader coverage. That conversation thread has never gone away. Today we’re having a conversation about Pooled Employer Plans.

In the past we had a similar conversation about SIMPLE IRAs. The question is the same: How do you get more employers into the system and how do you make it easy for them to set up a retirement plan? Everyone is coalescing around these important questions. To make that a reality, we’re having meetings like our meeting here today. That’s happening across the board. We especially want to pay attention to people who’ve been left out of the discussion in the past. The situation we’re in creates important conditions for needed improvements.

Investor education

Individuals need to make decisions about how much to save and whether they’re on track for secure retirement, and they have to know how to make their money last a lifetime. Most people don’t have those skills. So the question is, how to educate them about what it means to maximize the employer’s matching contribution, or what will be the impact of increasing contributions? How do we convey to young people the importance of saving early, and how to help the near-retiree think about retirement income. Disclosure is helpful to a point.

Then comes decumulation. At retirement, an element of choice paralysis can set in. Many people don’t know what to do with the money that they’ve accumulated. Taking a lump sum or a phased distribution from a defined contribution plan are common solutions. But we need to make other options more broadly available. Take-up of lifetime income solutions is low. The ‘fear element’ is a problem. Health also plays into it. In talking about retirement security, we tend to think in purely financial terms. But the amount of money that you will need in retirement depends in part on your personal health and on your level of health care spending. That makes the lifetime income issue especially interesting and challenging.

Europe’s Borderless New DC Plans

Posted on March 24, 2022 by Kerry Pechter -

Citizens of any of the 30 countries in the European Economic Area can work at jobs in any of the other member countries. As of last Tuesday, March 22, they can participate in equally border-agnostic retirement savings plans, called Pan European Personal Pensions, or PEPPs.

Not to be confused with the “Pooled Employer Plans” in the US, Europe’s PEPPs don’t require sponsorship or supervision by an employer, and don’t use an employer’s payroll system. Instead, each participant chooses a PEPP provider and contributes to their account on their own.

Banks, insurance companies, and asset managers can offer PEPPs. They must register their offerings with a central registry at the European Insurance and Occupational Pension Association (EIOPA), and agree to maximum 1% annual investment fees. Annuities may entail additional fees. Participants can switch providers, but only once every five years.

Europe’s retirement regulations are just now catching up with European labor trends. “In 2015, 11.3 million Union citizens of working age (20 to 64 years old) were residing in a Member State other than the Member State of their citizenship and 1.3 million Union citizens were working in a Member State other than their Member State of residence,” according to a July 2019 article in the Official Journal of the European Union. About 447 million people live in the EU.

“[EU] households are amongst the highest savers in the world, but the bulk of those savings are held in bank accounts with short maturities,” the Journal added. “More investment into capital markets can help meet the challenges posed by population aging and low interest rates.”

PEPPs can be offered by credit institutions, direct life insurance companies, institutions for occupational retirement provision (IORPs, which are authorized and supervised to provide also personal pension products), investment firms, asset managers, and EU alternative investment fund managers.

But there was a sign this week that insurance companies, for one industry category, may choose not to implement PEPPs. Hugh Prenn of the Capital Markets division of UNIQA Group, a major insurer in central and eastern Europe, who appeared in a webinar introducing PEPP this week, told RIJ that “There will be no PEPP from our side.”

He added, “I guess my opinion is representative for many if not all insurance companies.” Asked why he was on the webinar, he said, “Because I have been a member of the expert panel at EIOPA.” On EIOPA’s registry, no PEPP offerings are listed. Prenn noted an industry study showing that the consumer protections required on PEPPs will make it difficult to offer a product. [Note: We will update this story as more information becomes available.]

“Certainly higher interest rates could help us to become more interested,” Prenn said in the webinar. “That would make complying with these rules much easier. We would need benchmark rates of about 2%, and we are halfway there.” Without more yield, he noted, it would be impossible for an insurance company to meet the PEPP’s specific requirements for minimum returns and maximum losses.

He also expressed concern about potential legal liabilities. “How will a civil court see this regulation? In a negative market scenario, we will have unhappy customers pursuing us with skillful lawyers. This creates legal risks that will have to be covered by the 1% return on this product.”

European investors are famously averse to market risk. So a capital preservation feature was added to the default version of PEPP (Basic PEPP). “For the Basic PEPP with a guarantee, PEPP savers will have a legal obligation to ensure that PEPP savers recoup at least the capital invested. The guarantee on the capital shall be due only at the start of the decumulation phase and during the decumulation phase,” according to a PEPP fact sheet. Such guarantees will be difficult for providers to offer when yields are low.

In an aging, low birth-rate Europe, where a declining worker-to-beneficiary ratio is putting pressure on social insurance programs with tax-based, pay-as-you-go funding mechanisms, governments want to encourage individuals to save more on their own. European workers face many of the same retirement challenges that Americans do—insufficient savings, incomplete access to savings plans, and unconventional careers.

Contributions to PEPP funds could also help the investment industry in Europe. Europeans traditionally save at banks, and PEPPs could draw savings toward capital markets investments in exchange-listed companies. A larger market could also give PEPP providers greater efficiencies and economies of scale.

The idea for Europe’s PEPPs was hatched in July 2012 when the European Commission, eager for individual savers to shoulder more of their own pension burden, asked EIOPA to gather information on a personal, private pension option for EU workers. The project advanced slowly through the European bureaucracy until, in 2020, a package of new regulations and services was submitted for the European Commission’s approval.

RIJ submitted the following questions to the EIOPA this week and received the following answers:

Q. How do PEPP participants make contributions, especially if contributions aren’t facilitated by employer payroll mechanisms?

A. The PEPP is a pillar three product. It is separate from the state pensions and the occupational pensions. Savers make contributions on their own without facilitation by payrolls.

Q. Is there any limit to the number of companies that can offer plans?

A. No. Eligible providers are credit institutions, insurers, institutions for occupational retirement provisions as well as investment or management companies. Each provider can offer as many PEPPs as they want. There is a limit on the number of investment options. Providers can offer basic PEPP and six other investment options.

Q. How are plans distributed and payments made? Purely online? Is there an emphasis on smartphones?

A. It is not prescribed to use online distribution only. However, the PEPP Regulation aims to put ‘digital first’ and allows a fully digital disclosure and distribution. Digital disclosure may include more engaging forms of media (such as video) or interactive elements which makes it more appealing and easier to understand for consumers.

PEPP providers and distributors are obliged to give advice. The PEPP Regulation, in addition to traditional advice, allows either fully automated or semi-automated advice. Content of the pre(contractual) information to consumers has to be presented in a way that is adapted to the PEPP saver’s device used for accessing the document. Font size, size of the different elements should be adjusted depending on the device being used for accessing the information.

Q. Is there any limit to the kinds of savings vehicles—such as annuities, mutual funds, collective investment trusts—that PEPPs can offer?

A. Providers can offer different forms of out-payments, which can be modified by savers free of charge one year before the start of the decumulation phase, at the start of the decumulation phase and at the moment of switching providers. The forms of retirement income can be an annuity and life-long pay-out, a lump sum payment, drawn down payments or a combination of the aforementioned.

Q. How is the conversion to decumulation handled?

A. PEPP providers should inform PEPP savers two months before the dates on which PEPP savers have the possibility to modify their pay-out options about the upcoming start of the decumulation phase, the possible forms of out-payments and the possibility to modify the form of out-payments. Where more than one sub-account has been opened, PEPP savers should be informed about the possible start of the decumulation phase of each sub-account.

National competent authorities are required to publish national laws, regulations and administrative provisions governing the conditions related to the decumulation phase. These also are published on our website.

Tuesday’s webinar panelists included Til Klein, founder of Vantik, which puts credit card rewards into a personal pension, Christian Lemaire of the Occupational Pensions Stakeholder Group, Hugo Prenn of Uniqa Insurance, Tim Shakesby of EIOPA, and Peter Ohrlander, Directorate General for Financial Stability, Financial Services and Capital Markets Union at the European Commission.

Breaking News

Posted on March 23, 2022 by Editorial Staff -

Equitable to buy CarVal, a $14.3bn alt-assets manager

Equitable Holdings, Inc., (NYSE: EQH) announced that its AllianceBernstein (NYSE: AB) subsidiary has agreed to acquire CarVal Investors L.P., an established global private alternatives investment manager with $14.3 billion in assets under management (AUM).

The transaction is expected to close in the second quarter of 2022. It will make CarVal a wholly owned subsidiary of AllianceBernstein L.P. It will be rebranded as AB CarVal Investors. The transaction is subject to customary regulatory and closing conditions. CarVal and its employees will continue to operate from its Minneapolis, Minnesota headquarters and offices around the world.

Equitable Holdings has ~12,200 employees and financial professionals, ~$908 billion in AUM (as of 12/31/2021) and more than five million client relationships globally, offering retirement, asset management and affiliated advice services. As of February 28, 2022, AllianceBernstein had ~$739 billion in AUM.

CarVal Investors focuses on “opportunistic and distressed credit, renewable energy infrastructure, specialty finance and transportation investments,” an Equitable release said.

The transaction is expected to expand AB’s “higher-multiple private markets platform to nearly $50bn in AUM and elevate AB into a leading private credit provider with direct origination capabilities,” the release said.

AB will pay an upfront purchase price of $750 million and a multi-year earnout if certain targets are reached. The deal will be funded primarily through the issuance of AB Holding L.P. units, which are traded on the New York Stock Exchange. Equitable will allocate $750 million of general account assets into CarVal strategies to improve risk adjusted returns to policyholders; CarVal will have access to AB’s global distribution platform.

The acquisition is part of Equitable’s previously announced strategy to drive increased returns while growing AB’s private markets business through a $10 billion capital commitment, by allocating $750 million of General Account assets to CarVal strategies.

Equitable cited its strong capital position, year-end cash of $1.6 billion at Equitable Holdings, and the design of the acquisition, which includes a significant portion to be paid through an earnout structure, as supportive of the transaction.

Life/annuity industry capital and surplus at year-end 2021: $444.5 bn

The US life/annuity (L/A) industry saw a 61% increase in net income to $36.2 billion in 2021 despite higher expenses and benefit payouts, according to a new Best’s Special Report, titled, “First Look: 2021 Life/Annuity Financial Results.”

The data is derived from companies’ annual statutory statements received as of March 14, 2022, representing an estimated 93% of the total L/A industry’s net premiums written.

According to the report, total expenses for the industry grew 7.6%, as an additional $10.6 billion transferred to separate accounts minimized the increases in death, annuity and surrender benefits. Pretax net operating gain for the industry was $51.8 billion, up 38.2% over the prior year. A $3.3 billion increase in tax obligations and $2.7 billion reduction of net realized capital losses contributed to the higher net income result.

Capital and surplus rose 9.0% from the end of 2020 to $444.5 billion, as the net income result plus contributed capital, changes in unrealized gains and other changes in surplus were reduced by a $15.1 billion change in asset valuation reserve and $33.3 billion of stockholder dividends.

HealthView Services reports on rising medical costs

Driven by the coronavirus pandemic and rising inflation rates, medical expenses are likely to consume larger amounts of retirees’ incomes, according to HealthView Services’ annual Retirement Healthcare Costs Data Report.

The report is based on data from 530 million healthcare cases, inflation rates of individual healthcare-cost variables, government data, and Medicare projections.

“Current data reveals that even if consumer prices were rising at historical average inflation (of around 3%), a significant portion of retirees’ Social Security benefits would be needed to cover healthcare costs,” according to HealthView Services.

“With inflation rising to a 40-year high of 7.9% in 2022, the impact on future expenses will be significant. The 2022 Medicare Part B premium increase of nearly 15% (a record-high $518 annually for a married couple) may be a harbinger for future healthcare cost increases.”

Assuming healthcare costs grow at 1.5 to 2 times Consumer Price Index for the next two years, a healthy 55-year-old couple may be subject to anywhere from $160,000 to $267,000 in additional retirement healthcare costs, according to HealthView.

This will pose challenges for current and pre-retirees, and investment strategies and savings targets may need to be adjusted to reflect this new normal. Ultimately, a long-term strategic approach that focuses on in-retirement distributions to cover healthcare costs offers a path to ensure these expenses can be addressed.

Assumptions in the report are based on the expectation that the current period of high inflation is temporary and will revert to projections more consistent with historical averages. HealthView’s primarily focuses on the long-term impact of high healthcare inflation for a one-to-two-year period, and highlights the link between rising consumer prices and higher healthcare costs. The paper also reviews how increased use of medical services and other critical factors will drive healthcare inflation.

PBCG licenses insurer data on pension risk transfers

The Pension Benefit Guaranty Corporation (PBGC) has agreed to license annuity buyout pricing data from BCG Pension Risk Consultants I BCG Penbridge, as of January 1, 2022, according to a BCG release.

The data will be used to support PBGC liability measurements that are intended to replicate pricing in the US group annuity market. The PBGC oversees US defined benefit pension plans.

The BCG annuity buyout pricing data includes summary statistics (mean and standard deviation) of annuity pricing rates that are collected via a monthly BCG survey of participating insurance providers.

The data is provided for predetermined case sizes and durations of defined benefit pension plan annuity buyouts. The data is used to estimate the premium that an insurance company would charge for a buyout of a defined benefit plan.

In addition to licensing the annuity buyout pricing data to third parties, BCG uses the data that it collects from participating insurers to maintain The BCG PRT Index, which was established in 2011 and is the longest standing pension buyout index in the United States.

The Index provides easy comparisons of annuity buyout pricing to various pension liability measures and can also be customized to a specific defined benefit plan for ongoing buyout price monitoring.

“The group annuity pension risk transfer market [saw] record sales volume of $38.1 billion in 2021, and key market indicators are pointing to continued growth in the years to come,” said Steve Keating, managing director of BCG.

There are currently 18 insurers active in the US pension risk transfer annuity buyout market, with 10 new entrants since 2014 that remain in the market. Of the 18 currently active insurers, 13 currently participate in BCG’s monthly survey as follows:

PBGC insures single-employer and multiemployer private sector pension plans with over 33 million American workers, retirees, and beneficiaries. The agency’s two insurance programs are legally separate and operationally and financially independent. PBGC is directly responsible for the benefits of more than 1.5 million participants and beneficiaries in failed pension plans. BCG, based in Braintree, MA, specializes in assisting defined benefit plan sponsors with managing the costs and risks associated with their pension plans.

PCN to distribute Jackson National fee-based annuities

Jackson National Life Insurance Company and Producers Choice Network (PCN) are partnering to offer Jackson National’s fee-based advisory annuity products to the more than 6,500 investment advisor representatives (IARs) at Registered Investment Advisors (RIAs) served through PCN’s outsourced insurance desk, according to a release this week.

Bill Burrow, senior vice president, Private Wealth & Insurance Professionals, Jackson National Life Distributors LLC, and Jamie Kosharek, president, Producers Choice Network, are key executives in the initiative.

PCN is a subsidiary of Raymond James. It distributes annuities to fee-based advisers through its One Insurance Solution for RIAs program. www.1insurancesolution.com.

Jackson Financial Inc. is a US holding company and the direct parent of Jackson Holdings LLC (JHLLC). Wholly owned subsidiaries of JHLLC include Jackson National Life Insurance Company, Brooke Life Insurance Company, PPM America, Inc. and Jackson National Asset Management, LLC.

Bermuda annuities firm under scrutiny from plaintiff’s attorney

The law firm of KlaymanToskes reports that it continues to investigate potential FINRA arbitration claims on behalf of investors who sustained losses exceeding $100,000 in Northstar Financial Services (Bermuda) purchased through full-service brokerage firms, including Truist Investment Services (NYSE: TFC).

Northstar was a Segregated Accounts Company regulated by the Bermuda Monetary Authority, and marketed its fixed and variable annuity products as offering segregated account protection, allowances for liquidity and a variety of commitment periods, as well as the benefits of a Bermuda trust structure.

Northstar Financial Services (Bermuda) is currently in bankruptcy proceedings in both the Supreme Court of Bermuda and the United States while investors are claiming that their financial advisors misrepresented the investment as a safe, low risk product like a CD that had guaranteed monthly income with principal protection. Full-service brokerage firms besides Truist Investment Services that sold Northstar Financial Services (Bermuda) products include:

Bancwest Investment Services
Bankoh Investment Services
Cetera Investment Services
Community America Financial Solutions
Hancock Whitney Investment Services
J.P. Morgan Chase Co.
Morgan Keegan Bank
Ocean Financial Services
Raymond James Financial Services
Raymond James & Associates
Unionbank Investment Services
United Nations Federal Credit Union (UNFCU)

KlaymanToskes is investigating potential FINRA arbitration claims relating to Truist Investment Services’ sales practices concerning Northstar Financial Services (Bermuda) products.

The firm wishes to contact former and current customers of Truist Investment Services who suffered losses exceeding $100,000 from Northstar investments, and who have information related to the handling of their investments.

Lincoln Financial promotes Darrel Tedrow, Jim Tierney

Lincoln Financial Group (NYSE: LNC) has named Darrel Tedrow as Senior Vice President, Mergers and Acquisitions and Jim Tierney as Senior Vice President, Strategy, both reporting to Chris Neczypor, who leads the Chief Strategy Office.

The Chief Strategy Office focuses on enterprise-wide long-term strategic planning, potential mergers and acquisitions and competitive intelligence.

Tedrow returns to the Chief Strategy Office after two years as the Director of Advancement at Worldlink International Ministries. He has spent more than 15 years at Lincoln Financial in the life insurance business and corporate finance organization.

Tierney will work across the organization to develop broad-based, innovative strategies to further enhance Lincoln’s value for shareholders and complement the company’s organic growth. He joins from Lincoln Financial’s Information Technology organization. Tierney has more than 20 years of industry experience – 11 of them at Lincoln Financial. Tedrow and Tierney have both been named members of Lincoln Financial’s Corporate Leadership Group.

Target-date fund assets grow to $3.27T: Morningstar

Posted on March 23, 2022 by Editorial Staff -

Morningstar, Inc., published its annual Target-Date Strategy Landscape Report this week. It shows that total assets in target-date strategies grew to a record $3.27 trillion at the end of 2021, nearly a 20% increase over the previous year.

“Assets in target-date strategies reached a record high in 2021 as investors poured net contributions of $170 billion into the space,” said Megan Pacholok, manager research analyst at Morningstar (NASDAQ; MORN).

“We are also seeing the remarkable advance of collective investment trusts, which made up roughly 86% of 2021’s net inflows. Plan sponsors are attracted to the lower costs of these vehicles, and we expect their growing popularity to persist.”

The largest five providers control roughly 79% of the target-date market. They are: Vanguard, Fidelity, American Funds, BlackRock, and State Street.

The 2022 report examines the growing trend of collective investment trusts (CITs) as plan sponsors’ preferred target-date vehicle, how fees continue to be a key driver in target-date selection, and primary differences between “to” versus “through” glide paths.

The Target-Date Strategy Landscape Report is available here. Key findings from the report include:

CITs are on pace to overtake mutual funds as the most popular target-date vehicle in the coming years. In 2021, net contribution to CITs far outpaced mutual funds ($146 billion to $24 billion) and accounted for 86% of target-date strategy net inflows. These vehicles now make up 45% of total target-date strategy assets, up from 32% five years ago.

Fees continue to influence target-date fund flows. The cheapest quintile of target-date share classes amassed $59 billion in 2021, up from $41 billion in 2020. Collectively, the three more-expensive quintiles had outflows of more than $38 billion.

Vanguard Target Retirement collected the most net new money after slipping from the top spot last year for the first time since 2008. It accumulated more than $55 billion of net inflows in 2021, with Fidelity Freedom Index collecting the second most with approximately $45 billion.

Target-date managers have become more comfortable with higher equity stakes over the last decade. In 2021, portfolios 20 years to retirement had a median equity weighting of 82%, roughly one-fifth larger than ten years ago.

Firms’ preference for “through” retirement glide paths over “to” retirement is one reason for the shift toward higher equity weightings, as “through” retirement glide paths’ gradual de-risking after the target-retirement date allows for more equity risk during savers’ working years.

Morningstar today published a Fund Spy article on Morningstar.com that reviews the latest ratings for target-date fund series that Morningstar covers, available here.

Morningstar Target-Date Fund Series Reports
Morningstar Target-Date Fund Series Reports (the Reports) are designed to help individual investors, financial advisors, consultants, plan sponsors, and other interested fiduciaries make informed decisions when selecting a series of target-date funds. The methodology for the Reports is available here.

Morningstar Target-Date Fund Series Reports and Morningstar’s Analyst Ratings for target-date series are available in Morningstar Direct, the company’s global investment analysis and reporting platform for financial professionals, and in Morningstar Office, Morningstar Advisor Workstation, and Morningstar Analyst Research Center, the company’s investment planning and research platforms for financial advisors.

https://www.morningstar.com/lp/tdf-landscape

Tough Fed talk on inflation, little bite

Posted on March 23, 2022 by Kerry Pechter -

The Fed last week signaled a large and rapid increase in its policy rate over the next two years and struck a surprisingly hawkish tone, indicating it’s ready to go beyond normalizing to try to tame inflation.

It’s easy to talk tough, and we believe the Fed is unlikely to fully deliver on its projected rate path. The reason? It would come at too high a cost to growth and employment. We do now see a higher risk of the Fed slamming the brakes on the economy as it may have talked itself into a corner.

The Federal Reserve has kicked off its hiking cycle with a quarter-point increase—the first since 2018. The decision was expected. What surprised was the Fed’s stated goal to get the fed funds rate to 2.8% by the end of 2023 (see the pink dots on the chart).

This level is in the territory of destroying growth and employment, in our view. [Click here for the extended version of this commentary, with charts.]

At the same time, the Fed’s latest economic projections pencil in persistently high inflation but low unemployment – even as it has called current labor conditions tight. We believe this means the Fed either doesn’t realize its rate path’s cost to employment or—more likely—that it shows its true intention: to live with inflation.

We think this is necessary to keep unemployment low because inflation is primarily driven by supply constraints and high commodities prices.

The Bank of England (BoE), the first major developed market (DM) bank to kick off the current hiking cycle, increased its policy rate for the third time to 0.75%. Like the Fed, the BoE recognized additional inflation pressures from high energy and commodity prices. It also signaled that it may pause further rate increases, with rates back at pre-pandemic levels. We believe this means the BoE is willing to live with energy-driven inflation, recognizing that it’s very costly to bring it down.

The BoE provides a glimpse of what other DM central banks may do once they get back to pre-pandemic rate levels and the effect of rate rises on growth become apparent. The Fed’s tone may change as the consequences for growth become more apparent after aggressively hiking this year.

The Fed last week perhaps wanted to appear tough by implying even more rate increases in future years to keep inflation expectations anchored, in our view, without expecting to deliver those hikes. To be sure: The Fed will normalize policy because the economy no longer needs pandemic-induced stimulus.

It has also signaled it will start reducing its balance sheet, marking the start of quantitative tightening. Finally, we expect the Fed to raise the fed funds rate to around 2% this year—close to pre-pandemic neutral levels—and then pause to evaluate the effects.

What are the risks? Central banks are in a tough spot. First, they may start to believe some of their own rhetoric—and think they can raise rates well above neutral levels without damaging growth. They could hike too much, too fast as a result—and plunge economies into recession. We think this risk has risen since last week’s Fed meeting.

Second, inflation expectations could de-anchor and spiral upward as markets and consumers lose faith that central banks can keep a lid on prices. This could force them to act aggressively amid persistently high inflation.

Our bottom line

Last week’s central bank actions reinforce our views. We see more pain ahead for long-term government bonds even with the yield jump since the start of the year. We expect investors will demand more compensation for the risk of holding government bonds amid higher inflation. We stick with our underweight to nominal government bonds on both tactical and strategic horizons.

We think the hawkish repricing in short-term rates is overdone and prefer short-maturity bonds over long-term ones. We prefer to take risk in equities over credit in the inflationary backdrop because we expect real—or inflation-adjusted—yields to stay historically low. We added to the DM equity overweight two weeks ago. We still like the overweight in this environment but see a differentiated regional impact from higher energy prices.

Market backdrop

Stocks rallied and government bond yields climbed last week after the Fed raised rates and Chinese policymakers soothed beaten-down Chinese markets. Chinese equities rebounded after officials suggested an end to the crackdown on tech companies and announced a relaxation of Covid restrictions to hit growth targets. We believe China’s ties to Russia have created a risk of geopolitical stigma, including potential sanctions.

Changes in US Household Income, YE2019 to YE2021

Posted on March 23, 2022 by No Author -

401(k)s Are a ‘Fraud,’ and Other New Research

Posted on March 17, 2022 by Kerry Pechter -

The most provocative of the five research papers in this March edition of RIJ’s Research Roundup has to be Michael Doran’s “The Great American Retirement Fraud.” A professor at the University of Virginia School of Law, Doran faults US tax policy for subsidizing what, in his opinion, is a deceptively regressive defined contribution system of thrift.

We also feature recent research by the Urban Institute, whose economists show that millions of Americans won’t have adequate income in retirement if the Social Security system doesn’t avoid its anticipated insolvency in 2034. Another paper, co-authored by the principal economist at the Federal Reserve, measures how the cost of managing interest rate risk and offsetting “adverse selection” affects the prices of income annuities.

Two Harvard economists, David M. Cutler and Noémie Sportiche, show that the mental and emotional stresses of the Great Financial Crisis in the US were not evenly distributed across demographic groups. Finally, Danish economists, collaborating with an American, try to solve a mystery: Why do so many people gain wealth during their “decumulation” years?

Preparing for Retirement Reforms, by Karen E. Smith, C. Eugene Steuerle, and Damir Cosic of the Urban Institute, October 2021.

Unlike the helmsmen of the ill-fated HMS Titanic, who didn’t foresee any icebergs ahead, economists watching over Social Security know that the program approaches a political-regulatory-financing iceberg of its own, circa 2034.

That’s the year that actuaries predict the Social Security program will have enough payroll tax revenue to pay only about 75% of its promised benefits. If Congress doesn’t change the rules of the program before then, every beneficiary of the Old Age and Survivors Insurance program would take a 25% benefits haircut.

In this study, economists at the Urban Institute in Washington, DC, use their Dynamic Simulation of Income (DYNASIM) microsimulation model to forecast the impact of such a reduction on the America’s overall financial readiness for retirement. The authors defined readiness as the ability to replace 75% of pre-retirement income in retirement.

The share of Social Security beneficiaries with inadequate income will increase from 26% in 2020 to 45% by 2090 without any reforms to the program, they found, and to 39% if Congress enacted reforms proposed by the Bipartisan Policy Center. The BPC proposes a roughly equal blend of benefit cuts and tax increases to restore Social Security to solvency.

Americans can prepare for the worst by working longer or saving more. “Working longer by one year, by two years, or in line with increases in life expectancy, would reduce the share of Social Security beneficiaries unable to replace 75% of their preretirement earnings by two to five percentage points. A person with a 50% replacement rate, for example, might increase that number to 54% with an extra year of work,” the economists wrote.

Among top-quintile lifetime earners, one more year of work could close 25% of the savings gap, while saving 10% more of earnings could close 60% of the savings gap. For bottom-quintile lifetime earners, one more year of work could close 9% of the savings gap, while saving 10% of earnings more could close 19% of the gap.

Alternately, a person could save more over the course of their working lives. But they would have to save substantially more. “The average projected income gap among those Social Security beneficiaries with income below our adequacy standard in 2065 is $13,330 in 2018 price-adjusted dollars. To fill this gap, vulnerable workers would need to save about $272,700 more on average to close their income gap for 20 to 25 years of expected retirement,” the study said.

For those, such as women who raised children at home, who had too few years of earned income to qualify for benefits, the authors noted the possibility of a minimum Social Security benefit equal to the 2025 single-person poverty income level. If enacted, it would close 41% of the savings gap among bottom-quintile lifetime earners and 25% of the gap for second-quintile lifetime earners in 2065, the report suggested.

Does Social Security face an existential financial crisis? Not necessarily. Unless offset by higher immigration or changes in the way the program is financed, a falling worker-to-retiree ratio in the years ahead will require higher taxes per worker or lower payments per beneficiary. But defenders of the program say that simple remedies, such as raising the amount of earned income subject to the payroll tax, would solve the problem. That might raise costs for highest earners, but they benefit disproportionately from tax expenditures [a tax expenditure is a tax the government doesn’t collect or defers collection of] on defined contribution plans.

The Great American Retirement Fraud, by Michael Doran, University of Virginia School of Law.

Most Americans save for retirement by buying mutual fund shares with tax-deferred contributions to accounts in employer-sponsored, defined contribution plans. But the program has a weakness. Millions of workers whose employers don’t choose to sponsor plans are left out.

In a recent paper, a University of Virginia law professor calls the defined contribution system a “fraud.” He argues that its benefits accrue mainly to the wealthy: Because they save the most and pay the highest marginal tax rates, they benefit the most from tax incentives for saving.

“Over the past twenty-five years, the retirement savings of middle-income earners have remained flat or increased only modestly, and the retirement savings of lower-income earners have actually decreased,” writes Michael Doran. “But the increases in retirement savings among higher-income earners have been so large that average retirement savings as a whole have increased, making it appear that retirement security has improved across the board.”

“The supposed interest in helping lower-income and middle-income earners has been a stalking horse for the real objective of expanding the tax subsidies available to higher-income earners. The legislation has repeatedly raised the statutory limits on contributions and benefits for retirement plans and IRAs, delayed the start of required distributions, and weakened statutory non-discrimination rules—all to the benefit of affluent workers and the financial services companies that collect asset-based fees from retirement savings.

“The result has been spectacular growth in the retirement accounts of higher-income earners but modest or even negative growth in the accounts of middle-income and lower-income earners. Despite the benign but misleading rhetoric about enhancing retirement security for everyone, the real beneficiaries of the retirement-reform legislation have been higher-income earners, who would save for retirement even without tax subsidies, and the financial-services industry, whose lobbyists have driven the retirement-reform legislative agenda.”

Doran argues that the system isn’t making America more retirement-ready. “The most recent update of the National Retirement Risk Index, published in January of 2021, indicates that approximately 49% of all households are at risk of being unable to maintain pre-retirement living standards during retirement,” he writes. “And the distribution of at-risk status is not even across different levels of household wealth: among low-wealth households, 73% are at risk; among middle-wealth households, 45% are at risk; and among high-wealth households, 29% are at risk… The number of at-risk households has increased since 2004, the first year for which the National Retirement Risk Index was calculated.”

What’s Wrong with Annuity Markets?, by Stephane Verani, the Federal Reserve Board, and Pei Cheng Yu, University of New South Wales, Australia.

It’s a truism in the annuity industry that when prevailing interest rates go down and stay down for long periods, that life/annuity companies earn less on their bonds and must raise the prices (i.e., lower the payout rates) of single premium immediate annuities (SPIAs). (Variable annuities and index-linked annuities are not as rate-sensitive.)

It’s also known that healthier people buy life annuities. Known as “adverse selection” (AS), this phenomenon compels annuity issuers to charge more for SPIAs than they would if more people with average longevity expectations purchased life annuities.

The principal economist at the Federal Reserve in Washington, DC, Stephane Verani, and an Australian business school professor, Pei-Cheng Yu, assert that the frictions from managing these two risks—interest rate risk and AS—raises the cost and lowers the supply of lifetime income annuities. Indeed, the two risks interact; rising annuity prices discourage all but the healthiest customers.

“A large share of the notoriously high life annuity price markups can be explained by the cost of managing interest rate risk. We propose a novel theory of insurance pricing that reflects both informational frictions and interest rate risk.

“We develop an algorithm for annuity valuation to decompose the contribution of demand- and supply-side frictions in annuity markups using over 30 years of annuity price data and a novel identification strategy that exploits bond market shocks and the US insurance regulatory framework.

“Our main result is that interest rate risk significantly constrains the supply of life annuities. A corollary is that the best time to sign up for a life annuity is during a time of overall financial market stress, as annuity prices are lower when investment grade bond spreads are higher!,” the authors write.

“The average AS-adjusted markup is substantial and around 16%. We show that the cost of managing the interest rate risk associated with selling life annuities accounts for at least half of the AS-adjusted markup or eight percentage points,” they add. “That is, in addition to the well-known cost of adverse selection, the supply of private longevity insurance is constrained by life insurers’ own vulnerability to uninsurable aggregate shocks.

“A substantial fraction of annuity markups reflects insurers’ cost of managing interest rate risk. The effect of interest rate risk, a supply-side friction, is likely to add to the adverse effects of other noted demand-side frictions on annuity demand including, for example, bequest motives, behavioral biases, and pre-existing annuitization, such as Social Security.”

Economic Crises and Mental Health: The Effects of the Great Recession on Older Americans, by David M. Cutler Noémie Sportiche.

Can you remember your mental state during the Great Recession of 2008? Was your home foreclosed on? Did you lose your job? Were you distressed by the drop in the financial markets? Two Harvard economists searched the data to see if older people suffered more emotional pain or mental anguish that others during that difficult period.

David M. Cutler and Noemie Sportiche searched through house price data in the Health and Retirement Study and studied rates of depression, chronic pain severity and functional limitations, and the use of medications to treat sleep, depression, and anxiety. They found no sign that the elderly suffered. They found ample evidence that homeowners of color did.

“The mental health impacts of the Great Recession were heterogeneous and unequally distributed,” Cutler and Sportiche wrote. “We find that mental health was not impacted on average, either for older adults aged 51 to 61 or for seniors aged 65 to 74.

“Instead, we find that falling house prices worsened only the mental health of those in economically vulnerable households… Black and other non-white homeowners show signs of worsened mental health across most measures. White homeowners did not exhibit worsened mental health but became more likely to take medication.”

The authors were “not able to clearly identify the pathway through which house prices affected the mental health of populations.” They concluded, “The mechanisms underlying mental health effects extend beyond housing wealth or foreclosures.”

“As the mental health of seniors aged 65 to 74 was not affected, it is possible that mental health effects are mediated through features of the labor market or have smaller impacts among seniors because of reasonably generous social insurance programs available to this age group.”

Consumption and Saving After Retirement, by Bent Jesper Christensen and Malene Kallestrup-Lamb of Aarhus University, Denmark, John Kennan, University of Wisconsin-Madison.

The wealth of retirees tends to go up rather than down, on average. That’s contrary to the life-cycle hypothesis, which holds that retirees will spend down their savings to maintain their pre-retirement consumption level. An American economist and two Danish economists decided to explore the inconsistency.

“One would expect that wealth accumulated before retirement would be used to augment consumption in later life, with the implication that wealth should decline over time,” wrote researchers Bent Jesper Christensen and Malene Kallestrup-Lam of Denmark’s Aarhus University, and University of Wisconsin’s John Kennan.

So why, they ask, do “many people choose to work full-time for about 40 years, and not work at all for the remaining 15 years or so, rather than taking more time off when they are younger, and working more when they are older”

They had more than an idle interest in this topic. Social security systems around the world might cost trillions of dollars less to finance (in the long run) if more people worked longer, paid taxes longer, and received their pension payments for fewer years. That is: if it were known why so many people retire early, perhaps incentives for working longer could be developed.

The trio analyzed data for Denmark’s 1927 birth cohort, for which the old-age pension (OAP) claiming age was 67. To simplify the research, they focused on single people neither married nor cohabiting. They followed at group from 1995, at which point almost all of them had retired, to 2016.

Their conclusion: Some individuals are saving because they are currently in a low marginal utility state, but expect to move to a “high marginal utility state” in the future. In other words, they believed that they’d get more enjoyment out of their money by spending it later rather than sooner.

Note: The life-cycle hypothesis (LCH) is an economic theory that describes the spending and saving habits of people over the course of a lifetime, according to Investopedia. The theory states that individuals seek to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high. The concept was developed by economists Franco Modigliani and his student Richard Brumberg in the early 1950s. Its applicability for over-leveraged Americans in the 21st century is open to debate.

Marginal utility is the enjoyment a consumer gets from each additional unit of consumption. It calculates the utility beyond the first product consumed. If you are hungry and eat three Big Macs in a row, you are likely to enjoy the first more than the second and the second more than the third. And so on until you regret it. It’s akin to the principle of diminishing returns.

Deferred annuity sales reach $243 billion in 2021: Wink

Posted on March 17, 2022 by Editorial Staff -

Total fourth quarter sales for all deferred annuities were $60.9 billion, up 1.7% from the previous quarter and an increase of 8.1% when compared to the same period last year, according to Wink’s Sales & Market Report for 4th Quarter 2021.

Total 2021 sales all deferred annuity sales were $243.6 billion, up from $209.1 billion in 2020. All deferred annuities include the variable annuity, structured annuity, indexed annuity, traditional fixed annuity, and MYGA product lines.

Total sales for fixed or variable index-linked annuities in 2021 was $103.6 billion, or about 40% of all deferred annuity sales. Fixed indexed annuity (FIA) sales accounted for $65.5 billion. Sales of structured annuity (aka RILAs, or registered index-linked annuities) accounted for $38.1 billion. Traditional variable annuity (VA) sales were $87.7 billion.

[Note: Structured annuities can be thought of as variable annuities or as indexed annuities. They are registered and SEC-regulated, like variable annuities. But, like FIAs, they are general account products, not separate account products.]

Sixty-three indexed annuity providers, 46 fixed annuity providers, 69 multi-year guaranteed annuity (MYGA) providers, 15 structured annuity providers, and 45 variable annuity providers participated in the 98th quarterly edition of the report.

Jackson National Life was the leading seller of deferred annuities with a market share of 8.1%. Equitable Financial moved into second place, followed by Massachusetts Mutual Life Companies, Allianz Life, and AIG. Jackson National’s Perspective II Flexible Premium Variable and Fixed Deferred Annuity, a variable annuity, was the top selling contract for the twelfth consecutive quarter.

Total fourth quarter non-variable deferred annuity sales were $28.6 billion; down more than 1.9% from the previous quarter and down more than 0.4% from the same period last year.
Total 2021 non-variable deferred annuity sales were $117.7 billion. Non-variable deferred annuities include the indexed annuity, traditional fixed annuity, and MYGA product lines.

Massachusetts Mutual Life Companies ranked as the top seller of non-variable deferred annuity sales, with a market share of 12.3%, followed by Athene USA, AIG, Allianz Life, and Global Atlantic Financial Group. MassMutual’s Stable Voyage 3-Year, a MYGA, was the top-selling non-variable deferred annuity, for all channels combined.

Total fourth quarter variable deferred annuity sales were $32.2 billion, up 5.2% from the previous quarter and up 17.2% from the same period last year. Total 2021 variable deferred annuity sales were $125.9 billion. Variable deferred annuities include the structured annuity and variable annuity product lines.

Jackson National Life ranked as the top seller of variable deferred annuity sales, with a market share of 15.2%, followed by Equitable Financial, Lincoln National Life, Allianz Life, and Brighthouse Financial. Jackson National’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity, a variable annuity, was the top selling contract.

Indexed annuity sales for the fourth quarter were $16.9 billion; down 2.3% from the previous quarter, and up 12.3% from the same period last year. Total 2021 indexed annuity sales were $65.5 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.

Athene USA ranked as the top seller of indexed annuities, with a market share of 14.1%, followed by Allianz Life, AIG, Sammons Financial Companies, and Fidelity & Guaranty Life. The Allianz Benefit Control Annuity was the top-selling indexed annuity, for all channels combined for the fifth consecutive quarter.

“Indexed annuity sales are down, but don’t count them out. With the markets steadily rising and fixed interest rates so depressed, I anticipate that sales of this line will bounce back by the second quarter of the new year,” said Sheryl Moore, CEO of Wink, Inc., and Moore Market Intelligence.

Traditional fixed annuity sales in the fourth quarter were $486.9 million. Sales were up 34.9% from the previous quarter, and up about 2.6 % from the same period last year. Total 2021 traditional fixed annuity sales were $1.7 billion. Traditional fixed annuities have a fixed rate that is guaranteed for one year only.

Global Atlantic Financial Group ranked as the top seller of fixed annuities, with a market share of 20.6%, followed by Modern Woodmen of America, American National, EquiTrust, and Brighthouse Financial. Forethought Life’s ForeCare Fixed Annuity was the top-selling fixed annuity, for all channels combined, for the sixth consecutive quarter.

Multi-year guaranteed annuity (MYGA) sales in the fourth quarter were $11.2 billion; down 2.5% from the previous quarter, and down 15.1% from the same period last year. Total 2021 MYGA sales were $50.4 billion. MYGAs have a fixed rate that is guaranteed for more than one year.

MassMutual ranked as the top carrier, with a market share of 23.3%, followed by New York Life, AIG, Pacific Life Companies, and Western-Southern Life Assurance Company. MassMutual’s Stable Voyage 3-Year was the top-selling multi-year guaranteed annuity for all channels combined for the third consecutive quarter.

Structured annuity sales in the fourth quarter were $10.1 billion; up more than 10.9% from the previous quarter, and up 20.2% from the previous year. Total 2021 structured annuity sales were $38.1 billion. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccounts.

Allianz Life ranked as the top seller of structured annuity sales, with a market share of 20.7%, followed by Equitable Financial, Brighthouse Financial, Prudential, and Lincoln National Life. Pruco Life’s Prudential FlexGuard Indexed VA was the top-selling structured annuity for all channels combined, for the second consecutive quarter.

“This was both a record-setting quarter and a record-setting year for structured annuity sales,” said Moore. “The 2021 sales topped the prior year’s record by nearly 59%! And soon, more companies will enter this growing market.”

Variable annuity sales in the fourth quarter were $22.1 billion, up 2.8% from the previous quarter and up 15.9% from the same period last year. Total 2021 variable annuity sales were $87.7 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 was the top seller of variable annuities, with a market share of 21.7%, followed by Equitable Financial, Nationwide, Lincoln National Life, and Pacific Life Companies. Jackson National’s Perspective II was the top-selling variable annuity for the twelfth consecutive quarter, for all channels combined.

‘Private equity’s insurance innovation needs a risk check’: Risk. net

Posted on March 17, 2022 by Kris Devasabai -

All innovations have their downsides. From the bicycle to social media, inventions that provide great benefits to their users can leave others behind. Private equity’s new brainwave for the insurance industry – reinsure everything in Bermuda, boost allocations to structured credit and discount liabilities – is no different. [This article appeared today at Risk.net.]

Private equity money is flowing into insurance, bringing with it new ideas and new risks. Last year saw a slew of deals, including the purchase of Global Atlantic by KKR, and the acquisition of Allstate’s life unit by Blackstone, which also took a 9.9% stake in AIG’s life and retirement business. A subsidiary of Ares Management acquired F&G Reinsurance at the end of 2020, renaming it Aspida Re.

These firms are following a path blazed by Apollo, which has turned Athene, the insurance platform it established in 2009, into a profit engine for its credit business. Apollo’s big idea was to allocate a larger share of fixed income investments to higher-yielding asset-backed securities (ABS), and away from corporate bonds, which account for the bulk of traditional insurers’ assets. Athene had 20% of its portfolio in ABS as of June 2021, with more than half of this in collateralised loan obligations (CLOs). The average insurer allocates 7% to ABS, with 2.6% in CLOs.

Athene’s assets are reinsured in Bermuda, where corporate bonds and CLOs with the same credit rating receive similar capital treatment. In the US, they receive the same capital treatment. But Bermuda also allows excess spread to be booked as up-front profit. This reduces an insurer’s liabilities and required reserves and boosts available capital.

The capital benefits can be substantial. In recent years, CLOs have generated 175 basis points of additional spread compared with similarly rated corporate bonds. Athene holds $17 billion of CLOs, which could translate to nearly $1.5 billion of excess yield over five years. One veteran insurance risk manager describes this as “manufacturing capital.”

That’s not all. Athene sources a large share of its private credit investments from Apollo and its affiliates, generating additional fees for its owner. CLOs are stuffed with levered loans originated by private equity sponsors, such as Apollo. Apollo’s strategy is, in many ways, brilliant. Rock-bottom rates hurt insurers and made them vulnerable to takeovers. Apollo gave the sector new life. But its emphasis on alternative assets and offshoring risk has also split the industry.

There are two ways of viewing the new entrants, according to the chief risk officer at a large US insurer: the private equity firms are doing something that is in some way unsustainable, or they are providing a useful jolt of competition into a sector that had run out of new ideas. “We should get on with it,” he says.

Others are more wary of piling into CLOs. Regulators have been sounding the alarm about leveraged loans for years. The National Association of Insurance Commissioners, which sets capital standards for US insurers, is now taking a closer look. Last month, it released a list of 13 “regulatory considerations” related to private equity-owned insurers.

These include “material increases in privately structured securities” and “potential conflicts of interest and excessive and/or hidden fees” in investment products – “for example, a CLO which is managed or structured by a related party.” The regulator is also reviewing “insurers’ use of offshore reinsurers (including captives) and complex affiliated sidecar vehicles to maximize capital efficiency, reduce reserves, increase investment risk, and introduce complexities into the group structure.”

Private equity-owned insurers now manage more than $500 billion of US life and retirement assets. There is little doubt they have brought innovation to a sector that was struggling to meet return goals in an era of low interest rates. But not every innovation is appropriate for financial institutions with long-term liabilities. Insurance regulators need to properly assess the private equity model, preferably before the next credit crisis hits.

Energy Costs Drive Euro-Area Inflation

Posted on March 17, 2022 by No Author -

Consumer Groups Urge DOL to Tighten “Reg BI”

Posted on March 17, 2022 by Kerry Pechter -

A coalition of three dozen consumer advocacy groups is urging the Department of Labor to “update and eliminate loopholes in the current definition of ‘fiduciary investment advice’ …and protect retirement savers who are predominantly covered by individual account plans.”

In a press release and letter, the groups asked Acting Assistant Secretary of Labor Ali Khawar—a place holder for Lisa M. Gomez, whose nomination to lead the DOL’s Employee Benefit Security Administration has met opposition in the Senate—to, in effect, reject the more investment industry-friendly “Reg BI” that was developed by the Securities and Exchange Commission during the Trump Administration for use by both insurance and investment product distributors.

The rule has special implications for insurance agents. It will determine whether they are eligible for a “prohibited transaction exemption” (PTE) from a law that would otherwise prevent them from advising prospective clients to “roll over” savings from a 401(k) account to an IRA—to an annuity in an IRA, for instance—when getting paid a commission by a life insurer to sell the annuity. It also involves the life/annuity companies that issue the annuities, and their potential responsibility for representations made by those who sell their products.

Does that commission payment represent a fatal conflict of interest for the agent—a conflict between the client’s welfare and the agent’s financial welfare? Reasonable people have been disagreeing for years.

The advocacy groups’ letter comes as the Biden DOL is still working on a proposal to change the rule back to the Obama administration’s version (PTE 84-24)—more consumer-protective—or leave it in the Trump administration’s version (PTE 2020-02), which was open to interpretation.

Like most pension-related regulations, the regulations under debate here are complex, opaque to outsiders, but fraught with commercial implications for the sale of financial products that involve the exchange of tax-deferred, DOL-regulated savings accounts, like 401(k)s and IRAs.

The following description of the current state of affairs, written by the ERISA law firm of Faegre Drinker for a recent webinar, is plainer than most:

The Department of Labor’s (DOL) expanded interpretation of fiduciary status for recommending Plan-to-IRA rollovers and IRA-to-IRA transfers means that many more insurance agents will be fiduciaries for making those recommendations — and, as such, will need the protections of a prohibited transaction exemption (PTE) due to their compensation, both cash and non-cash. PTE 2020-02 provides the most flexibility, but requires that insurance companies be “co-fiduciaries.” PTE 84-24 is more limited, but imposes less of a burden on insurance companies.

Countless billions of dollars are at stake, because 401(k) participants collectively hold trillions of dollars of assets in their accounts. The rules under question here have been in play—in the DOL bureaucracy and in the federal courts—for at least six years. Issuers of fixed indexed annuities (FIAs) and variable annuities (VAs) are among the most interested parties. Insurance agents compete with financial advisers for rollovers, and don’t want to face special restrictions merely because they take commissions from annuity issuers. In the race for rollover dollars, the advisers and their brokerages have been winning. (Organizations signing the letter are listed below.)

A long and winding paper trail

In 2016, the Obama DOL, after years of study, passed a “best interest” rule that narrowed the ability of insurance agents to recommend rollover annuities to participants and get paid commissions by annuity companies for doing so.

In the competition for rollover dollars, this would have put agents at a disadvantage relative to financial advisers, such as Registered Investment Advisors, who do not take commissions from product manufacturers.

The debate over this hung on a long-standing “five-part test” that determines whether a financial intermediary can conduct him- or herself like a mere broker toward the client (and clearly a sales representative with only a passing relationship to the client) or must meet the high ethical standards of trusted “fiduciaries” who must acts “solely” in the “best interest” of their clients.

After the Trump administration froze the Obama rule, a bevy of financial services industry lobbying groups filed a lawsuit to have the rule vacated and a Texas federal appeals court judge ruled in their favor. (The lead plaintiffs’ attorney, Eugene Scalia, was appointed Secretary of Labor in 2019.) Subsequently, the Securities and Exchange Commission, established a vague compromise rule, called “Reg BI.” It established that advisers or agents are equally free to pitch rollovers to participants as long as they don’t put their own pocket-book interests ahead of the participant’s financial well-being.

Investment and insurance companies can live with this compromise; it gives them flexibility in marketing rollovers to participants. Consumer advocates believe that it allows agents to make sales recommendations in the guise of unbiased investment advice.

As their new letter to Acting Assistant DOL Secretary Khawar noted, the current rule:

frames the retirement advice provider’s basic obligation in comparatively weak terms. It provides that advice is in the retirement investor’s “best interest” as long as it does not place the retirement advice provider’s financial or other interests “ahead” of the retirement investor’s interests, or “subordinate” the retirement investor’s interests to those of the advice provider.

This formulation of ‘best interest,’ which establishes a kind of parity between the interests of the two parties, because neither interest is placed ahead of the other, is contrary to the statutory mandate that fiduciaries must discharge their duties “solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries.”

There are lots of side issues that add nuance to this controversy. The Obama-era Employee Benefit Security Administration, led by Phyllis Borzi, preferred, all things being equal, that more retirees would leave their money in 401(k)s, where they enjoy the low fees and consumer protections encoded in the federal Employee Retirement Income Security Act of 1974 (ERISA), which governs retirement plans and pensions.

But they were fighting the tide of history. Defined contribution 401(k) plans were never designed to hold employee savings after the employees retire; they were created as profit-sharing plans, not as pensions. So participants often have no incentive to keep their money there—especially if their particular plan offers few investment options and/or has high costs. Only recently have employers expressed a desire to keep retiree money in their plans, mainly to preserve the economies of scale that keep costs down.

In addition, consumer groups have an abiding suspicion of deferred annuities and the commissioned agents who sell them. Twice in the past 20 years, they’ve urged the federal government to regulate annuities more closely. Both times, they failed. In 2007, the SEC tried to reclassify FIAs as securities, and therefore subject to federal regulation (instead of as state-regulated insurance products).

In 2016, the Obama DOL’s rule which would have required agents selling FIAs and VAs to pledge that they were acting solely in their prospective clients’ best interests when recommending those products to retired plan participants. It made agents subject to class-action federal lawsuits if they violated the pledge.

As noted above, the annuity industry sued to overturn this rule, and a Fifth District Circuit Court of Appeals judge vacated it, ruling against the DOL. The Trump DOL—then led by Secretary Scalia—chose not to contest the ruling.

New MassMutual VA features RetirePay, an income rider

Posted on March 16, 2022 by Editorial Staff -

MassMutual has launched a new variable annuity (VA) contract with an optional guaranteed lifetime withdrawal benefit. The contract is called Envision. The income benefit, exclusive to the Envision contract, is called RetirePay.

“RetirePay offers guaranteed income in the form of the Annual Lifetime Benefit Amount that will never lose value due to negative market performance and that offers opportunities for higher income through step-ups and higher withdrawal rates by age and years of deferral, according to a MassMutual release.

MassMutual had $11.7 billion in variable annuity assets under management as of September 30, 2021, according to Morningstar. It was ranked 20th in VA AUM, with a market share of less than six-tenths of one percent. By comparison, TIAA had group VA assets of $547 billion and Jackson National had individual VA assets of about $246.9 billion at the end of the third quarter of 2021. Industry-wide, the market value of VA assets under management exceeds $2 trillion.

Envision is aimed at individuals “nearing or in retirement including when they are approaching key retirement and milestone ages of 62, 67 and 72,” the release said. Under the RetirePay option, 62-year-olds who bought this product and delayed income until age 72 would be able to withdraw 7.35% (6.45% for married couples) of their benefit base (premium plus growth) per year. There are two versions of the option.

The premium version, for an annual fee of 1.60% of the benefit base, would step up the benefit base every quarter to capture new high-water marks (if any) in the values of the separate accounts that the client has invested in. For 1.45% of the benefit base per year, there’s a step-up on each account anniversary. The insurer can adjust the rider fee up to 2.50% per year. The cost of the step-up benefit is the same for one or two persons.

There are investment restrictions for the RetirePay GLWB. The contract’s mortality and expense risk charge (typically used to cover distribution costs) is 1.15%. There’s an administration charge of 0.15%. The surrender fee is 7% for the first three years, gradually dropping to zero in the eighth year. Fund expenses range from 52 basis points to 165 basis points per year. If the account value ever drops to zero while the annuitant(s) are living, the issuer may adjust the withdrawal rates. According to the current rate sheet, withdrawal rates do not change when the account value drops to zero.

Life/annuity industry moving toward equilibrium: AM Best

Posted on March 11, 2022 by Editorial Staff -

US life insurance and annuity writers achieved record levels of capitalization, maintained strong liquidity and posted improved earnings in 2021 despite historically low interest rates, inflationary headwinds and continued pandemic uncertainty, according to a new AM Best report.

The annual Review & Preview Best’s Market Segment Report, “U.S. Life/Annuity: Record Capitalization, Strong Liquidity, and Improved Earnings in 2021,” notes that although initial fears about the effects of the pandemic on the life/annuity industry have subsided, COVID-19 cases and death claims continued in 2021, further impacting the mortality book of business that is core to life insurers. At the same time, according to the report, many companies benefited from their prior investments in enterprise risk management, took advantage of the opportunity to shed legacy businesses and saw realized and unrealized gains from strong financial markets.

The industry’s capital and surplus showed solid growth through third-quarter 2021, up $26.2 billion to $480.9 billion, and is likely to continue to grow for full-year 2021. The life/annuity segment recorded net income of $27.0 billion in the nine-month period, up 105% from the same prior-year period, with overall sales of life insurance and annuities seeing strong growth.

“The pandemic drove home the importance of life insurance and consumers adjusted to life during a pandemic,” said Michael Porcelli, senior director, AM Best. “Companies also became acclimated to the remote work and sales environment, which was needed to compete during COVID-19.”

Other highlights in the report include:

Schedule BA assets continued to grow, to 8.4% of total invested assets at third-quarter 2021, compared with 6.2% in 2016, although some insurers have securitized Schedule BA assets and sold them to institutional investors as a way to diminish exposure and capital risk charges.

Although the commercial mortgage loan market has seen increases in delinquencies, exacerbated by the pandemic, life/annuity insurers’ allocations still grew, albeit with a modest shift to industrial properties and multifamily housing from office and retail.

Overall headwinds from the low interest rate environment, as evidenced by an investment yield that has declined each year of the past decade and was 4.1% in 2020, are likely to continue to create drag on margins until longer-term interest rates and credit spreads return to more-historical levels.

New capital continues to enter the life/annuity market, driven by private equity firms with an ability to source and manage fixed-income assets and greater interest in the pension risk transfer market. Additionally, with insurers willing to shed certain blocks of business, merger and acquisition activity ramped up in 2021.

AM Best expects the life/annuity industry to reach an equilibrium between companies seeking opportunities to build a less capital-intensive business, minimize the pressure of persistent low interest rates on profitability and diversify earnings; and companies with fixed-income asset management sourcing, evaluation capabilities and a capital-intensive business appetite.

“As 2021 has shown, life/annuity insurers will seek to unload interest-sensitive lines of business, including variable and fixed annuities, as well as capital-intensive lines of business, such as long-term care and universal life with secondary guarantees,” said Porcelli. “Also, given consumers’ growing awareness of the need for financial security, companies looking for scale and efficiency may make investments in and partnerships with insurtechs a higher priority.”

AIG, Innovator, and Reliance Standard announce new products

Posted on March 11, 2022 by Editorial Staff -

New AIG/Annexus indexed annuity offers gaudy bonuses for those who stay the course

AIG Life & Retirement and Annexus, a designer and marketer of indexed annuities, have partnered to issue and distribute a new fixed indexed annuity (FIA), the “X5 Accelerator Annuity.” The contracts will be issued by American General Life Insurance Company and marketed through the Annexus network of independent distributors.

The product features a bonus that immediately increases the benefit base (the notional amount on which retirement income payments would be based) to 135% of the initial premium. There’s also a “multiplier” that can “increase lifetime income by 250% of net interest earned every year during the accumulation phase,” an AIG release said.

The lifetime income rider is available for a fee of 1% of the benefit base. That fee includes the potential for an enhanced death benefit and a disability benefit that doubles the annual payout, contingent on the policyholder becoming confined to a nursing home or other qualified facility. The minimum initial premium is $25,000. The contract runs for 10 years; the surrender fee starts at 10% in the first year.

In the brochure’s hypothetical illustration, a client invests $100,000 at age 60. By age 70, the hypothetical premium has grown to $171,000 (at an assumed annual compound rate of about 5.5%) and the income base has grown to about $480,000. At age 70, the payout percentage would be 4.85% a year for one life and 4.35% a year for a joint and survivor contract. The starting annual income for one person would be $23,280. Money would stay invested after income begins, and the income level can rise after income begins. On the $480,000 income base in the illustration, the rider fee at age 70 would be $4,800.

The product’s market performance depends mainly on how the premium is allocated among the available indices, and how the indices perform. The index choices include the Morgan Stanley Expanded Horizons Index, the PIMCO Global Elite Markets Index, and the S&P 500 Daily Risk Control 7% US Excess Return Index. All three are “Excess Return indexes,” which means their returns are net of short-term interest rates.

Innovator ‘Step-Up’ ETFs may adapt to rising markets

Innovator Capital Management, LLC (Innovator) the creator of Defined Outcome ETFs, this week launched the Innovator Buffer Step-Up Strategy ETF (BSTP) and the Innovator Power Buffer Step-Up Strategy ETF (PSTP) on NYSE Arca.

The new “Step-Up” Strategy ETFs will seek tax-efficient upside in “directionally positive markets while continuously refreshing buffers against loss in the SPDR S&P 500 ETF Trust (SPY) during down markets,” Innovator said in a release.

Using a rules-based methodology, a Step-Up Strategy ETF will reset its options portfolio; it will sell the existing contracts and enter into new 12-month contracts if the Fund’s NAV rises or falls within a pre-determined range.

The planned ETFs are intended for advisors who would like professional management of the process of evaluating return parameters and investing in buffered equity strategies.

“As we completed monthly issuance on our flagship US Equity Buffer ETF lineup in May 2020, ‘stepping-up’—selling one Buffer ETF for another monthly series—became a popular strategy amongst some advisors who used the Defined Outcome ETFs in non-taxable retirement accounts,” said Bruce Bond, CEO of Innovators ETFs, in a release.

“These new funds in our Managed Outcome ETF lineup will seek to provide advisors with tax-efficient strategies that manage the process of ‘trading up’ from the set of return parameters of one monthly series of US Equity Buffer ETF to the current month’s opportunity set, depending on market movements and conditions,” he said.

The Step-Up Strategy ETFs will consist of three layers of customized 12-month FLEX Options contracts that seek upside participation to SPY, to a cap, with downside buffers against SPY losses of 9% (in the BSTP) or 15% (in the Power version). It is similar to Innovator’s flagship US Equity Buffer and US Equity Power Buffer ETFs.

The Step-Up Strategy ETFs are designed to continuously seek market gains in positive markets, or provide potential outperformance relative to SPY in down markets, while refreshing buffers against the market’s downside and resetting the Funds’ upside caps to capture more of the market’s potential upside. The ETF’s step-up investment strategies may offset the timing risks inherent in owning an options package for one year.

Investors can purchase shares of a previously listed Defined Outcome ETF throughout the entire Outcome Period, obtaining a current set of defined outcome parameters, which are disclosed daily through a web tool.

Reliance Standard launches Accumulator, a new FIA

Reliance Standard Life Insurance Company has introduced the Reliance Accumulator, a fixed indexed annuity product. It joins Reliance Standard’s legacy Keystone Index annuity, which will continue to remain available, a Reliance release said.

The Reliance Accumulator offers five-, seven- and ten-year durations, a fixed interest strategy and five index interest strategies based on two specific indices from Standard and Poor’s. Similar to the Keystone, the product will offer three index interest strategies tied to the S&P 500:

Annual Point to Point Capped
Annual Point to Point Participation Rate
Annual Monthly Average Capped

The Accumulator will also offer two index strategies tied to the S&P MARC (Multi-Asset Risk Control) 5% Excess Return index: an Annual Point to Point Participation Rate and an Annual Point to Point Spread Strategy.

“The increase in S&P 500 index volatility over the last few years has been challenging for many of our clients and partners,” said David Whitehead, senior vice president of sales and marketing for Reliance Standard’s Retirement Services business, in the release. “So we added a volatility control index to our menu of index interest strategies.”

The S&P MARC 5% ER Index uses a volatility control strategy to ensure more predictable hedge costs and offers diversification through exposure to equities, gold, and 10-year Treasury bonds.

In addition to offering a participation rate index interest strategy, Reliance Standard will offer a higher participation rate strategy with a spread that will then be deducted to calculate the index interest amount. Because the index manages volatility to 5% daily, Reliance Standard said it will rate-lock the MARC 5% participation rate and spread strategies for exchanges and transfers.

For Jackson National Life, 2021 was a pivotal year

Posted on March 11, 2022 by Editorial Staff -

Jackson National Life reported net income of $585 million, or $6.19 per diluted share for the three months ended December 31, 2021, compared to net income of $76 million, or $0.80 per diluted share for the three months ended December 31, 2020, according to the company’s earnings release.

Adjusted operating earnings for the three months ended December 31, 2021 were $707 million, or $7.48 per diluted share, compared to $645 million or $6.83 per diluted share for the three months ended December 31, 2020.

The increase in adjusted operating earnings was primarily the result of increased fee income due to higher average separate account balances and lower death and other policyholder benefits, partially offset by higher operating expenses and a higher effective tax rate in the current quarter.

The Company reported net income for the full year 2021 of $3,183 million, or $33.69 per diluted share, compared to a net loss of $(1,634) million, or $(24.14) per diluted share for the full year of 2020.

The change was primarily due to improved net hedging results from higher interest rates in 2021 compared to 2020, as well as the $2,082 million loss on the Athene reinsurance transaction in 2020.

Full year 2021 adjusted operating earnings were $2,398 million, or $25.38 per diluted share, compared to $1,880 million or $27.79 per diluted share for the full year of 2020. The change was primarily due to increased fee income from a higher average separate account balance, partially offset by higher operating expenses and a higher effective tax rate in 2021 compared to 2020.

Retail annuities

Retail Annuities segment reported pretax adjusted operating earnings of $750 million in the fourth quarter of 2021 compared to $601 million in the fourth quarter of 2020. The current quarter benefited from improved fee income resulting from higher average variable annuity account values, as well as the benefit of the recovery of claims on previously reinsured policies. The current quarter also benefited from DAC deceleration resulting from a 5.9% separate account return in the quarter, though this benefit was smaller than the deceleration benefit realized in the fourth quarter of 2020, when the separate account return was approximately 13.1%. In periods where separate account returns are higher than our long-term assumption, amortization is shifted to future years driving deceleration of DAC amortization in the current period.

Full year 2021 pretax adjusted operating earnings for the segment were $2,528 million, compared to $2,006 million in full year 2020. The full year results were driven by the higher fee income and recapture adjustments noted above, partially offset by higher operating expenses.

Total annuity sales of $5.0 billion were up 1% from the fourth quarter of 2020. Variable annuity sales were flat compared to the fourth quarter of 2020, with higher sales of variable annuities without lifetime benefit guarantees offset by lower sales of variable annuities with lifetime benefit guarantees. The current quarter also reflects $108 million of sales of RILA products, which were launched in October 2021. In total, annuity sales without lifetime benefit guarantees represented 37% of total annuity sales, up from 27% in the fourth quarter of 2020. We continue to expand our fee-based sales, with current quarter advisory annuity sales up 19% from the fourth quarter of 2020 to $358 million.

For the full year 2021, annuity sales of $19.3 billion were up 8% from the full year 2020, reflecting higher sales of variable annuities, partially offset by lower sales of fixed and fixed indexed annuities.

Closed life and annuity blocks

Closed Life and Annuity Blocks reported pretax adjusted operating earnings of $21 million in the fourth quarter of 2021 compared to $(35) million in the fourth quarter of 2020. The current quarter benefited from lower death and other policyholder benefits resulting from the continued decrease in the size of the closed blocks.

For the full year 2021, pretax adjusted operating earnings of $224 million were up from the full year 2020 earnings of $0, with the difference primarily due to higher death and other policyholder benefits and lower net investment income in the prior year. Net outflows totaled $57 million in the fourth quarter of 2021 and $267 million in the full year 2021.

Total shareholders’ equity was $10.4 billion or $114.78 per diluted share as of December 31, 2021, up from $9.4 billion or $99.81 per diluted share as of year-end 2020. Adjusted book value2 was $8.9 billion or $98.69 per diluted share as of December 31, 2021, up from $6.8 billion or $72.21 per diluted share as of year-end 2020.

Beware the Risks of ‘Pension Risk Transfer’

Posted on March 11, 2022 by Edward Stone -

Connecticut Senator Chris Murphy took a bold first step to protect retirees impacted by pension risk transfer deals by introducing the Pension Risk Transfer Accountability Act of 2021 this week.

The Act directs the Secretary of Labor to review its guidance on fiduciary standards under the Employee Retirement Income Security Act of 1974 (ERISA) when selecting an annuity provider and to report to Congress on the findings of such review, including an assessment of risk to participants.

Since 2012, more than $200 billion in retiree liabilities have been transferred to insurance companies in pension de-risking transactions, also referred to as a pension risk transfer (PRT). Once a PRT is complete, retirees lose all of the uniform protections intended by Congress under ERISA and become subject to non-uniform state laws.

Meanwhile, insurance companies are selling off blocks of business to private equity firms at an unprecedented pace. Apollo owns 100% of Athene. Prudential Financial recently sold off $31 billion in variable annuity contracts to Fortitude Re. Blackstone Group recently acquired most of Allstate’s life insurance business. History suggests that private equity firms are more concerned about generating a return for their investors than policyholder security.

Given the fact that retirees lose so much in terms of ERISA protections post-PRT, it is critically important that pension plan sponsors undertake rigorous and thorough evaluations of both the claims paying ability and financial security of any insurer being considered for a PRT in a manner that is consistent with ERISA’s fiduciary requirements.

Defined Benefit Plan Sponsors should consider the following:

Is the selected insurer is properly reserved under Statutory Accounting Principles (SAP) in all States where the insurer does business, taking into consideration the extent to which the selected insurer has taken credit for reinsurance with wholly owned captive reinsurers or affiliates that do not file annual statements in accordance with SAP?
Does the selected insurer have significant exposure to affiliated reinsurers located outside of the United States?
Has the selected insurer segregated assets into a separate account that is managed solely for the benefit of the retirees?
Does the selected insurer maintain an appropriate level of capital and surplus that is not dependent in any way upon conditional letters of credit, surplus notes or circular parental guarantees?
Is the selected insurer is rated A or better by two or more nationally recognized rating agencies?

Retiree earned benefits are not handouts. Many of today’s retirees worked for decades based upon promises made by their employers about their benefits packages, often trading higher salaries for pensions, life insurance and health care for life. These benefits need to be protected consistent with ERISA’s original protective purpose. With literally hundreds of billions in pension liabilities at stake, retirees and their families who did not choose a pension risk transfer need to know that the chosen insurer was fully and completely vetted by a defined benefit plan sponsor that is held to ERISA’s highest fiduciary standards. Thank you, Senator Murphy, for introducing this important legislation.

Edward Stone is the Executive Director of Retirees for Justice, Inc., a 501(c)(4) dedicated to protecting and preserving the earned benefits of America’s retirees.

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