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Weak growth expected for life/annuity industry: A.M. Best

The life industry overall can expect mid-single digit growth in 2018, on a mix of premiums and policy count growth, according to a new report from A.M. Best. Ongoing innovation should also bolster growth, as companies learn to make effective use of digital capabilities for future sales. Tax expenses are likely to decline further in 2018 as well, due to the recent tax reform.

Although interest rates should rise through 2018, continued pressures on spread-based businesses are anticipated. Nevertheless, potential rate hikes could make fixed annuities more attractive for consumers, driving modest premium growth in that category.

Low interest rates and equity volatility remain the largest macroeconomic hurdles for the industry; these factors not only lead to spread compression due to lower investment income, but can also make it more difficult for direct writers and agents to sell products with less attractive features.

Net income down 54.6%

The U.S. life/annuity (L/A) industry’s net income in the first quarter of 2018 declined 54.6% from the same period a year ago, to $3.5 billion from $7.6 billion, mainly due to a drop in pretax net operating income coupled with higher net realized capital losses.

These results are detailed in another new Best’s Special Report, titled, “First Look—First Quarter 2018 Life/Annuity Financial Results.” It was based on companies’ three months 2018 interim period statutory statements (as of May 22, 2018), representing an estimated 85% of total industry premiums and annuity considerations.

According to the report, Premiums and annuity considerations declined 11.7% from the prior-year period, driven by a $23.1 billion reduction in premiums at American General Life Insurance Company in connection with the execution of modified coinsurance agreements with a wholly owned Bermudan reinsurer, according to the report.

The L/A industry’s capital and surplus increased slightly from year-end 2017 to $376.3 billion as $4.7 billion in net income and contributed capital was negated by $1.6 billion in unrealized losses and a $3.3 billion in stockholder dividends. Pretax net operating gain for the industry declined to $10.6 billion in first-quarter 2018, down 26.1% from the prior-year period. Net realized capital losses of $5.7 billion, partially offset by a $1.9 billion reduction in federal and foreign taxes, helped to bring about the decline in net income.

For 2017, the U.S. life/annuity industry recorded full-year statutory pre-tax net operating gains of $62.0 billion in 2017, a 7.4% decrease from $67.2 billion in the previous year, according to a new A.M. Best’s “Year-End 2017 U.S. Life/Annuity Statutory Results Review.”

Overall underwriting performance remained favorable in 2017, although lower net investment yields dampened margins. Diminishing investment portfolio yields, lower annuity sales and a mature ordinary life and accident and health market continue to thwart earnings growth.

Post-tax earnings decreased just 2.4% to $49.9 billion in 2017, owing primarily to elevated tax expenses in 2016 related to variable annuity (VA) business recaptures. Net income results were favorable, however, up 7.5%, to $41.5 billion. Individual annuity direct written premiums declined again in 2017, down 22%, a steeper decline than in 2016.

Despite strong equity markets, variable annuity sales declined by 2% in 2017, as issuers continued to de-risk products and as companies modified their business models to comply with the Department of Labor’s fiduciary rule.

© 2017 RIJ Publishing LLC. All rights reserved.

Indexed annuity sales up more than 10% in 1Q2018: Wink

Sales of non-variable deferred annuities surpassed $23.1 billion in the first quarter of 2018, up 9.4% over the previous quarter and up 0.2% when compared to the same period last year, according to the 83rd edition of Wink’s Sales & Market Report.

The report covers fixed indexed and traditional fixed annuities, MYGA (multi-year guarantee annuities) products and, for the first time, structured annuities (aka registered index-linked annuities). Sixty indexed annuity providers, 64 fixed annuity providers, 74 MYGA providers, and six structured annuity issuers participated.

Structured annuity sales in the first quarter were $2.9 billion. Structured annuities have a limited negative floor and limited excess interest linked to the performance of an external index or subaccounts. At that quarterly sales rate, these products will easily surpass their $9.2 billion in sales for 2017.

AXA US, which created the structured annuity category in 2010, was the top-seller of those products, with a market share of 51.5%, but the top-selling contract in that space across all channels was the Brighthouse Life Shield Level Select 6-Year contract.

Sheryl Moore

“Some [insurance companies] call these products ‘buffered annuities,’” said Wink’s CEO, Sheryl J. Moore. “Others refer to them as ‘indexed VAs,’ and still, others refer to them as ‘collared annuities.’ The important thing to remember is that these aren’t indexed annuities, although some companies are marketing them in that manner,” she said.

LIMRA Secure Retirement Institute calls them “Registered Index-Linked Annuities,” to reflect the fact that these products are generally registered with the Securities & Exchange Commission.

New York Life ranked as the top-selling carrier overall for non-variable deferred annuity sales in 1Q2018, with a 9.6% market share. Allianz Life, AIG, Global Atlantic Financial Group, and Athene USA followed. Allianz Life’s Allianz 222 Annuity, an indexed annuity, was the overall top-selling non-variable deferred annuity.

Indexed annuity sales for the first quarter were $14.2 billion; up 4.4% over the previous quarter, and up 10.0% from the same period last year. (Indexed annuities have a floor of no less than zero percent and limited excess interest linked the performance of an external index, such as the Standard and Poor’s 500.

“We haven’t had an increase in indexed annuity sales this big in nearly two years,” said Sheryl J. Moore, president and CEO of both Moore Market Intelligence and Wink, Inc.

In the first quarter, Allianz Life retained its top ranking in indexed annuities, with a market share of 11.7%. Athene USA, Nationwide, American Equity Companies and Great American Insurance Group followed, respectively. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity, for all channels combined, for the fifteenth consecutive quarter.

Traditional fixed annuity sales in the first quarter were $729.7 million; down 3.3% when compared to the previous quarter, and down 32.1% when compared with the same period last year. Traditional fixed annuities have a fixed rate that is guaranteed for one year.

Jackson National Life ranking as the top-seller of fixed annuities, with a market share of 15.1%. Modern Woodmen of America, Global Atlantic Financial Group, Great American Insurance Group, and American National followed, in that order. Forethought Life’s ForeCare Fixed Annuity was the top-selling fixed annuity for the quarter, for all channels combined.

Multi-year guaranteed annuity (MYGA) sales in the first quarter were $8.1 billion; up 20.9% when compared to the previous quarter, and down 9.8% when compared to the same period last year. MYGAs have a fixed rate that is guaranteed for more than one year.

New York Life was once again the top-seller of MYGAs, with a market share of 27.2%.  Global Atlantic Financial Group, AIG, Symetra Financial, and Pacific Life followed. Forethought’s SecureFore 3 Fixed Annuity was the top-selling multi-year guaranteed annuity for the quarter, for all channels combined.

© 2018 RIJ Publishing LLC. All rights reserved.

Variable annuity deferral bonuses are working: Ruark

Owners of variable annuities with living benefits are using their riders more efficiently than ever, “with over half of all withdrawals now at or near the maximum benefit amount,” according to the results of Ruark Consulting’s Spring 2018 studies of variable annuity (VA) policyholder behavior.

The studies, which examine the factors driving surrender behavior, partial withdrawals, and annuitization, were based on the actions of 13.9 million policyholders from January 2008 through December 2017. Twenty-five variable annuity (VA) writers participated in the study, comprising $948 billion in account value as of December 2017.

Timothy Paris

“A variable annuity writer’s cost to provide guarantees depends on policyholder behavior, including surrender and income utilization,” said Ruark CEO Timothy Paris in a release this week. “Each company should ask itself the basic question: Is my own data enough?”

Study highlights include:

  • As the market for guaranteed lifetime withdrawal benefit (GLWB) riders matures, it is possible to see the effects of long-dated insurer incentives to delay benefit commencement. Commencement rates are low overall, 12% in the first policy year and falling to 6-7% annually thereafter. However, usage jumps over 5 points in year 11, with the expiration of ten-year bonuses for deferring withdrawals common on many riders. In this study, we see for the first time that commencement frequency thereafter falls to an ultimate rate of about 9%. The deferral bonuses appear to have the intended effect of delaying benefit utilization. Among contracts that take a withdrawal, nearly 90% continue withdrawals in subsequent years.
  • Overall living benefit annual withdrawal frequency rates have continued to increase, primarily as a result of increasing utilization efficiency. Withdrawal frequency for guaranteed lifetime withdrawal benefit riders is now 25%, up nearly two points over the rate reported in Ruark Consulting’s Spring 2017 study and three points over the Spring 2016 value. GLWB withdrawal frequencies have increased consistently at normal retirement age and above. Most of the increase is attributable to more efficient utilization of the rider benefit, with over half of withdrawals now at or near the maximum benefit amount.
  • The effects of moneyness (account value relative to the guarantee base) on partial withdrawal behavior differ depending on circumstances. When contracts with lifetime withdrawal benefits are at or in the money, policyholders increase the frequency of standard benefit withdrawals. This is consistent with greater benefit exercise when the benefit is more valuable. The effect is more pronounced after the expiration of deferral incentives. In contrast, when contracts move out of the money, withdrawals in excess of the maximum amount are more common. This is suggestive of policyholders taking investment gains out of the contract.
  • Overall variable annuity surrender rates in 2017 have returned upward to post-crisis levels, following a secular dip in 2016. We see three regimes in the study window: Surrenders at the shock duration (the year following the end of the surrender charge period) were nearly 30% at the onset of the 2008 economic crisis; shock rates below 10% were observed during 2016; and otherwise a post-crisis regime has prevailed, with shock rates in a range of 12-16% from 2009 through mid-2015 and 13% in 2017. The 2016 dip, first observed in Ruark’s fall 2017 study, is only partially attributable to benefits moving more in-the-money during the year; it is likely that uncertainty surrounding the Department of Labor’s proposed Fiduciary Rule and political factors encouraged a “wait-and-see” attitude among many policyholders and advisors.
  • The presence of a living benefit rider has a notable effect on surrender rates; contracts with a lifetime benefit rider have much higher persistency than those with other types of guarantees. Also, a contract’s prior partial withdrawal history influences its persistency. Contracts with a lifetime benefit rider that have taken withdrawals in excess of the rider’s annual maximum have surrender rates three points higher overall than other contracts with those riders. In contrast, those who have taken withdrawals no more than the rider’s maximum have the lowest surrender rates (three points lower at the shock, for example, compared to contracts who have taken no withdrawals).
  • When calculating relative value (moneyness) for lifetime withdrawal guarantees, use of a nominal measure can be deceiving. A nominal measure fails to reflect important aspects of living benefit design, and can be inflated over time as the benefit base remains unchanged even as the account value is reduced through regular withdrawals. It may be preferable in many cases to use an actuarial measure of moneyness that incorporates interest and mortality rates. Actuarial moneyness exhibits a similar dynamic effect on lapse though with notable differences in shape. As an actuarial basis pushes a contract toward out-of-the-money by discounting the guarantee, very little exposure exists for heavily ITM contracts: nominally, 77% of GLWB exposure is in-the- money, while only 10% is in-of-the-money when measured on an actuarial scale.
  • Annuitization rates on policies with guaranteed minimum income benefit (GMIB) riders continue to decline. The overall exercise rate for the riders with a 10-year waiting period is 2.1% by account value. Rates have been falling steadily since 2010, and quarterly observed rates have stayed at or below 2% since 2014. “Hybrid” rider forms that allow partial dollar-for-dollar withdrawals have much lower exercise rates than tradition forms, which reduce the benefit in a pro-rata fashion – less than 1% for hybrid, vs. 5% for pro-rata; the increasing share of exposure in the study from the hybrid type is a partial explanation for the decrease in annuitization rates over time.

Detailed study results, including company-level analytics, are available for purchase by participating companies.

Ruark Consulting, LLC, based in Simsbury, CT, is an actuarial consulting firm specializing in principles-based insurance data analytics and risk management. It has produced industry- and company-level experience studies of the VA and fixed indexed annuity markets since 2007. As a reinsurance broker, Ruark has placed and administers dozens of bespoke treaties totaling over $1.5 billion of reinsurance premium and $30 billion of account value.

© 2018 RIJ Publishing LLC. All rights reserved.

The Myth of the Aging Society

Economic doomsayers have long warned that the aging populations of industrial and post-industrial countries represent a “demographic time bomb.” Societal aging is bad news for the economy, they say, because it means that fewer people work and contribute to economic growth, and more people collect pensions and demand health care.

The argument that aging will weaken these countries’ economies stems from what economists call the old-age dependency ratio (OADR)—the proportion of the population over 64, relative to the working-age population (those aged 15 to 64). If one assumes that old people are unproductive consumers of government benefits, then a rising OADR implies slower economic growth and mounting pressure on public budgets.

Prof. Scott

But what if this assumption is mistaken? The average age of the US population has steadily increased since 1950, but the average mortality rate has trended down. In other words, the average US citizen has become chronologically older but biologically younger. And the same trends can be found in other advanced economies, including the United Kingdom, Sweden, France, and Germany.

As countries industrialize, they undergo a “demographic transition” from higher to lower birth rates. This shift implies that older cohorts of the population will increase in size, and that average overall mortality will rise, because mortality rates are higher for older people. But over the past few decades, this aging effect has been offset by a “longevity effect.”

Owing to medical advances and other factors (for example, lower rates of smoking), mortality rates at all ages have fallen. In actuarial terms, this means that people are younger for longer. Whereas the aging effect captures changes in the age distribution, the longevity effect addresses how we are aging. And in a country like the US, where the average age has increased while average mortality rates have fallen, it is clear that the longevity effect has more than offset the aging effect.

One consequence of this change is that the standard chronological measure of age makes less sense than ever. The divergence between biological and chronological age points to a familiar problem in economics: the confusion between nominal and real variables. A pint of beer that cost $0.65 in 1952 costs $3.99 today. To compare prices accurately across time, [however], one must adjust for inflation. And what one finds is that beer has actually gotten cheaper: The real (inflation-adjusted) price of a pint in 1952 was the equivalent of $5.93 in today’s money.

A similar problem occurs when one relies wholly on calendar years and a chronological conception of age. In the US, a 75-year-old today has the same mortality rate as a 65-year-old in 1952. Similarly, in Japan, 80 is the “new 65.” As an actuarial matter, then, today’s 75-year-olds are not any older than the 65-year-olds of the 1950s.

As with the price of beer, one can use changes in mortality rates to adjust for “age inflation” and determine an average real mortality age. In doing so, one finds essentially no increase in average “real” (mortality-adjusted) age in the UK, Sweden, or France, and barely any increase in the US.

Mortality-adjusted indicators of aging provide a radically different perspective on what is happening to OADRs in advanced economies. When using chronological age, the OADRs in the US, the UK, France, and Sweden have all been increasing; but in mortality-adjusted terms, they have all actually declined. The exception, once again, is Japan, where the dominance of the aging effect has resulted in a higher real OADR.

From this perspective, one can see the flawed assumptions underlying the conventional “demographic time bomb” narrative, which makes no distinction between aging and longevity effects. If one assumes that there is only an aging effect, a rapidly aging society bodes ill indeed. But if one recognizes the role of longevity, the picture becomes much brighter.

We must move away from nominal measures of age that treat older people as a problem. It is time to stop worrying about “aging societies” and start focusing on the type of demographic change that really matters. Governments should provide those in a position to reap the benefits of longer, healthier lives with opportunities to do so, while minimizing the number of people who are denied longevity. By investing in a longevity dividend, we can reduce the threat of an aging society.

A longer version of this article appeared recently in Project-Syndicate.

© 2018 Project Syndicate.

Don’t Fear the Trade Deficit with China

The good news this past week is that Treasury Secretary Mnuchin announced that the imposition of tariffs on many Chinese goods imported into the United States is “on hold” in exchange for a pledge that the Chinese would increase significantly their purchases of U.S. goods, primarily agricultural and energy products.

Any agreement that significantly expands the market for U.S. goods overseas is encouraging. However, the agreement does not address the primary issue: The Chinese lack of respect for intellectual property rights and their blatant stealing of U.S. technology. That is what manufacturers we talk to are concerned about.

We are unrepentant believers in “free trade”. The world has been steadily moving in that direction since World War II, and it is generally accepted that all countries have benefited from it. In each country there is a wider array of goods and services available at lower prices than if that country chose to go it alone.

Last year the U.S. had a trade deficit of $568 billion. But so what? All that means is that the U.S. imported more goods from overseas than we purchased globally. Thus, foreigners accumulated $568 billion of dollars because of trade. The counterpart of a $568 billion U.S. trade deficit is $568 billion of foreign capital inflows into the United States. That money will be invested here. Foreigners will start businesses in the U.S., they will create jobs, and/or they will invest it in the stock market. Those are all good things. Thus, in our mind, a laser-like focus on the magnitude of the trade deficit is misplaced. Keep in mind, too, that the U.S. has had a trade deficit of roughly its current size (or larger) since the early 2000’s and nothing bad has happened.

While we are staunch believers in “free” trade, we are equally adamant about our belief in “fair trade.” Therein lies the problem. Free trade works well if all players operate using the same playbook. That is not the case today. Some countries blatantly cheat, the most widely recognized cheater is China. It shows absolutely no regard for intellectual property rights. It routinely ignores patents and copyrights.  It steals our technology. These fairness issues are what we hear about most often in our discussions with manufacturers. The recently announced agreement between the U.S. and China does not address these issues which are critical. Hopefully, they will be addressed in subsequent negotiations.

Having said all that, we do not want to completely dismiss the importance of what transpired this week. Please note that the overall trade deficit of $568 billion consists of an $811 billion trade deficit for goods, and a $243 billion trade surplus for services. Of that $800 billion trade deficit in goods, almost half is with one country—China. We do not have trade issues with our neighbors, Canada and Mexico. Nor do we have a problem with Europe or even OPEC. We have a problem with China and a handful of other Asian nations.

Several months ago, President Trump proposed steep tariffs on aluminum and steel products across the board. The Chinese quickly retaliated with tariffs on a variety of U.S. goods and the U.S. was on the cusp of a trade war not only with China but with other countries as well. That was obviously not the desired solution. Nobody wins a trade war. All countries lose. And to impose penalties on our neighbors and allies with whom we do not have a trade issue made no sense. Given the concentrated nature of the trade deficit with just a handful of countries, the focus should have been on those countries with whom we have a problem. Target the measures you intend to take on them. Do not apply restrictions across the board.

What happened this week is vastly different. The agreement is for the Chinese to shrink the bilateral trade deficit by boosting their purchases of U.S. made goods— principally agricultural products and energy. This is not shrinking global trade, it is expanding it. While the Chinese would not agree to a specific target for the reduction in the size of the trade deficit the U.S. was seeking improvement of about $200 billion. Explicitly or implicitly, a $200 billion reduction in an $800 trade deficit in goods, is significant and will lead to an additional $200 billion of U.S. exports.

Some economists were disappointed that the fairness issues were not a part of the recent agreement and have criticized Treasury Secretary Mnuchin for not addressing them. However, Mnuchin said that the previously announced tariffs on steel and aluminum imports would remain in place. Presumably, he is using the imposition of the tariffs on those metals as a bargaining chip to crack down on the alleged trade abuses by China. We’ll see.

© 2018 Numbernomics.com

The Complex Truth about Retiree Medical Costs

Estimates of the amount of money that Americans will spend on health care during retirement range from the scary to the staggering. The numbers tend to obscure the fact that Medicare, Medicare supplements and Medicaid prevent most medical catastrophes from becoming financial catastrophes for US retirees.

Some of the projections of lifetime costs are nonetheless shocking. “The average couple [at age 65] will need $280,000 in today’s dollars for medical expenses in retirement, excluding long-term care,” says Fidelity’s website. Syndicated columnist Gail MarksJarvis has written, “The average 65-year-old couple retiring in a year can expect to spend $404,253 in today’s dollars on health insurance and other health care costs.”

Broken down into annual expenses, medical care looks much more affordable. The averages translate into $5,000 to $10,000 per year per retiree, not counting inflation. If you exclude the cost of long-term care (as most estimates do), medical costs in retirement consist largely of the insurance premiums, deductibles, co-pays and other out-of-pocket costs that come out of income rather than savings.

Any individual’s actual costs will likely be higher or lower than the average, of course. It depends on genes, luck, health status at retirement, eating and exercise habits, longevity, wealth level, gender, marital status, where you live, how much you can afford to spend, whether you come to rely on Medicaid or charity, how much insurance coverage you buy and whether, if you end up in a nursing home, you choose single or double occupancy.

Horror stories are common enough. Medical costs can easily bankrupt someone with catastrophic health issues who has chosen not to buy “gap” insurance to supplement Medicare. That person could either expect to suffer the indignities and deprivations common before the federal government started subsidizing health insurance for the elderly in the mid-1960s, or try to qualify for Medicaid and other forms of public assistance or charity.

“The Lifetime Medical Spending of Retirees,” a new article from the National Bureau of Economic Research, brings academic discipline to bear on this question. It finds that, from age 70 onward, households will on average face about $122,000 in medical spending in 2014 dollars, including what is received from Medicaid, over their remaining lifetimes.

The range is wide, however. Costs will surpass $330,000 (in 2014 dollars) for five percent of retirees. An unlucky one percent of retired households will face costs of more than $640,000 during retirement. (This article focuses on non-working retired households, either single or married. Single households will have lower costs than couples.)

“For a couple initially in good health and at the median of the income distribution, we find that mean lifetime out-of-pocket (OOP) + Medicaid spending at age 70 is $154K, while mean lifetime OOP age 70 is $127K,” one of the authors, John B. Jones of the Richmond branch of the Federal Research, told RIJ in an email.

“Of the measure of average total annual medical expenses we use in the paper, 14% represent insurance premia (including part Medicare Part B), 21% represents payments by Medicaid, 16% represent out of pocket death (e.g., funeral) expenses, 49% includes other payments for copays/deductibles for doctor visits/nursing home care/drug expenses/hospital visits/dental visits,” Eric French, of the University College London and another co-author of the paper, told RIJ in an email.

In the study, average medical spending (in 2014 dollars) rises from $5,100 per year on average at age 70 to $29,700 at age 100. At the 95th percentile in costs (one in 20 households), the range is $13,400 at age 70 to $111,200 at 100. Average funeral and burial expenses range from $11,000 at age 72 to $34,000 at age 100. In any given year, one in 1,000 households will suffer a health shock that costs more than $125,000 (in 1998 dollars), the NBER economists wrote.

Jones pointed out that his team’s paper involves spending by people who turned 70 about 25 years ago, while recent estimates such as Fidelity’s are based on people who turned 65 recently and will incur rising costs in the future.

“Health spending at all ages rises over time, so today’s 70-year would expect to spend more than 1992’s 70-year old,” he wrote. Adjusting for inflation, he calculated that households turning 70 today would face an estimated $235,000 for lifetime out-of-pocket costs and receive an additional $46,000 from Medicaid, on average.

For comparison, HealthView, a provider of health care cost-projection software, currently estimates that a 70-year-old couple today (assuming that the wife lives two years longer than her husband) can expect future lifetime health care expenses ranging from about $148,000 (if the husband lives to age 78 and the wife to age 80) to almost $399,000 (if the husband live to age 90 and the wife to age 92).

“Our data consists of forward projections based on 70 million pieces of claims data from range of health insurers, broken down by state,” said Ron Mastrogiovanni Sr., who founded HealthView in 2008. His numbers do not include the value of Medicaid coverage. Expenses are concentrated in the final years of life, he added; living an extra two years could mean $70,000 in addition outlays per person.

Although averages have little predictive value for any single individual, they give advisors a place to start when estimating clients’ future outlays for health insurance and out-of-pocket medical expenses.

Risks of needing nursing home care also vary. “Although high-income people are less likely to be in a nursing home at any given age, they live longer, and older individuals are much more likely to be in a nursing home,” the paper said.

Nursing home risks are different for men than women. “While 37% of single women and 36% of married women alive at age 70 will enter a nursing home [for more than 120 days] before they die, the corresponding quantities for single and married men are 26% and 19%, respectively,” the researchers added.

Gender, wealth level, and health status help determine life expectancy, which affects costs. To take the worst-case scenario, a 70-year-old poor man (bottom 10% of income scale) in a nursing home is likely to live only about three years on average. To take the best-case scenario, a 70-year-old woman in the 90th percentile of wealth, in good health, could expect to live more than 15 years.

Marriage improves life expectancy: The average life expectancy of a surviving spouse in good health at age 70 ranges from 16 years (for poor couples) to 19.4 years (for the most affluent couples), the study showed.

According to the Centers for Medicare and Medicaid Services website, per person health care spending for those 65 and older was $18,988 in 2012. Medicare spending grew 3.6% to $672.1 billion in 2016, or 20% of total national health expenditures (NHE). Medicaid spending grew 3.9% to $565.5 billion in 2016, or 17% of total NHE.

According to the Henry J. Kaiser Family Foundation, Medicare spending in 2013 ($575.8 billion) was financed by these sources: 41% general tax revenue, 38% payroll taxes, and 13% beneficiary premiums. The remaining eight percent came from taxes on Social Security benefits, state sources and interest.

Taxes on US retirees for health care will be going up, especially for those with higher incomes. “The floors for the Net Investment Income Tax and the Medicare surtax passed under the Obama administration aren’t indexed for inflation. Thus more taxpayers will owe both taxes over time,” Howard Gleckman, a senior fellow at the Urban Institute, told RIJ in an email.

“The Medicare story is much more complicated,” he added. “For about 70% of Medicare beneficiaries, a hold-harmless provision in the law means their Part B premiums cannot increase faster than their Social Security benefits. But for those with incomes above about $85,000, premiums will rise faster than Social Security benefits. The increases are tied to income, so the more you make the bigger your premium increase.”

The NBER article cited above was co-authored by John Bailey Jones and Justin Kirchner of the Federal Reserve Bank of Richmond, Mariacristina De Nardi of the Federal Reserve Bank of Chicago, and Rory McGee and Eric French of University College London. The research was based on data from the Health and Retirement Survey (HRS) collected from retired Americans between 1995 and 2014.

© 2018 RIJ Publishing LLC. All rights reserved.

The Old Allure of New Money

The cryptocurrency revolution, which started with bitcoin in 2009, claims to be inventing new kinds of money. There are now nearly 2,000 cryptocurrencies, and millions of people worldwide are excited by them. What accounts for this enthusiasm, which so far remains undampened by warnings that the revolution is a sham?

One must bear in mind that attempts to reinvent money have a long history. As the sociologist Viviana Zelizer points out in her 1994 book The Social Meaning of Money: “Despite the commonsense idea that ‘a dollar is a dollar is a dollar,’ everywhere we look people are constantly creating different kinds of money.” Many of these innovations generate real excitement, at least for a while.

As the medium of exchange throughout the world, money, in its various embodiments, is rich in mystique. We tend to measure people’s value by it. It sums things up like nothing else. And yet it may consist of nothing more than pieces of paper that just go round and round in circles of spending. So its value depends on belief and trust in those pieces of paper. One might call it faith.

Establishing a new kind of money may be seen as a community’s avowal of faith in an idea, and an effort to inspire its realization. In his book Euro Tragedy: A Drama in Nine Acts, the economist Ashoka Mody argues that the true public justification for creating the European currency in 1992 was a kind of “groupthink,” a faith “embedded in people’s psyches” that “the mere existence of a single currency…would create the impetus for countries to come together in closer political embrace.”

New ideas for money seem to go with the territory of revolution, accompanied by a compelling, easily understood narrative. In 1827, Josiah Warner opened the “Cincinnati Time Store” that sold merchandise in units of hours of work, relying on “labor notes,” which resembled paper money. The new money was seen as a testament to the importance of working people, until he closed the store in 1830.

Two years later, Robert Owen, sometimes described as the father of socialism, attempted to establish in London the National Equitable Labour Exchange, relying

on labor notes, or “time money,” as currency. Here, too, using time instead of gold or silver as a standard of value enforced the notion of the primacy of labor. But, like Warner’s time store, Owen’s experiment failed.

Likewise, Karl Marx and Friedrich Engels proposed that the central Communist premise – “Abolition of private property” – would be accompanied by a “Communistic abolition of buying and selling.” Eliminating money, however, was impossible to do, and no Communist state ever did so. Instead, as the British Museum’s recent exhibit, “The Currency of Communism,” showed, they issued paper money with vivid symbols of the working class on it. They had to do something different with money.

During the Great Depression of the 1930s, a radical movement, called Technocracy, associated with Columbia University, proposed to replace the gold-backed dollar with a measure of energy, the erg. In their 1933 book The A B C of Technocracy, published under the pseudonym Frank Arkright, they advanced the idea that putting the economy “on an energy basis” would overcome the unemployment problem. The Technocracy fad proved to be short-lived, though, after top scientists debunked the idea’s technical pretensions.

But the effort to dress up a half-baked idea in advanced science didn’t stop there. In 1932 the economist John Pease Norton, addressing the Econometric Society, proposed a dollar backed not by gold but by electricity. But while Norton’s electric dollar received substantial attention, he had no good reason for choosing electricity over other commodities to back the dollar.

At a time when most households in advanced countries had only recently been electrified, and electric devices from radios to refrigerators had entered homes, electricity evoked images of the most glamorous high science. But, like Technocracy, the attempt to co- opt science backfired. Syndicated columnist Harry I. Phillips in 1933 saw in the electric dollar only fodder for comedy. “But it would be good fun getting an income tax blank and sending the government 300 volts,” he noted.

Now we have something new again: bitcoin and other cryptocurrencies, which have spawned the initial coin offering (ICO). Issuers claim that ICOs are exempt from securities regulation, because they do not involve conventional money or confer ownership of profits. Investing in an ICO is thought of as an entirely new inspiration.

Each of these monetary innovations has been coupled with a unique technological story. But, more fundamentally, all are connected with a deep yearning for some kind of revolution in society. The cryptocurrencies are a statement of faith in a new community of entrepreneurial cosmopolitans who hold themselves above national governments, which are viewed as the drivers of a long train of inequality and war.

And, as in the past, the public’s fascination with cryptocurrencies is tied to a sort of mystery, like the mystery of the value of money itself, consisting in the new money’s connection to advanced science.

Practically no one, outside of computer science departments, can explain how cryptocurrencies work. That mystery creates an aura of exclusivity, gives the new money glamour, and fills devotees with revolutionary zeal. None of this is new, and, as with past monetary innovations, a compelling story may not be enough.

© 2018 Project-Syndicate.

Five senators want the fiduciary rule to return from ‘vacation’

In a letter to Labor Secretary Alexander Acosta, five Democratic senators have protested his department’s failure to appeal the Fifth Circuit Court of Appeal’s May 7 decision vacating the Obama-era fiduciary rule to the U.S. Supreme Court.

In the letter, Senators Cory Booker (D-NJ), Sherrod Brown (D-Ohio), Patty Murray (D-WA), Elizabeth Warren (D-MA), Ron Wyden (D-OR) asked Secretary Acosta to answer three questions:

  1. Since the Fifth Circuit’s ruling, what has the Department done to inform savers of their lack of protections from conflicted retirement advice, now that the Department is no longer enforcing the conflict of interest rule?
  2. Does the Department plan to defend its authority to protect retirement savers, as courts outside of the Fifth Circuit have affirmed, and appeal the Fifth Circuit’s ruling to the Supreme Court? If not, why not?
  3. If the Department does not appeal the Fifth Circuit’s decision, or it is not overturned on appeal, what will the Department do in the future to protect retirement savers from conflicted advice?

“Allowing the Fifth Circuit’s decision alone to dictate the Department’s policy sets a dangerous precedent by failing to acknowledge the clear difference of opinion among the courts of appeals regarding the Department’s authorities,” the senators wrote. “The Department should defend its authority and this important rule by appealing the Fifth Circuit’s decision to the Supreme Court.”

© 2018 RIJ Publishing LLC. All rights reserved.

It’s official: Lincoln’s indexed variable annuity has arrived

Lincoln Financial Group this week officially announced the introduction of Lincoln Level Advantage indexed variable annuity for near-retirees and retirees. Unlike many competing products—which LIMRA Secure Retirement Institute now calls “registered index-linked annuities”— it offers both variable and index-linked investment sleeves.

Designed for either commissioned or fee-based advisors, Lincoln Level Advantage offers four index options for growth, several levels of protection against loss and an option to convert the value of the contract into a variable income stream for life.

Sales of registered indexed-linked annuity sales increased 25% in 2017 and are expected to keep growing in 2018, according to LIMRA SRI. LIMRA said the products’ downside buffer and their upside potential through links to equity indexes appeal to investors in today’s uncertain investment environment. LIMRA expects sales to continue to grow throughout 2018.

Lincoln Level Advantage offers linkage to four indexes (the S&P 500, Russell 2000, MSCI EAFE Index, and Lincoln’s Capital Strength Index), three renewable term options (one-year, six-year, and a six-year annual lock option) and four protection options (against losses up to 10%, 20%, 30% or 100% of each contract year’s starting value).

Lincoln’s patented i4LIFE Index Advantage lifetime income rider is available for an additional charge. If selected, it lets clients turn their account value into a variable lifetime income stream and offers certain tax efficiencies.

© 2018 RIJ Publishing LLC. All rights reserved.

As the discount rate rises, so do pension funding ratios: Milliman

In April 2018, the 100 largest U.S. corporate pension plans experienced a $20 billion improvement in funded status, according to the results of the latest Pension Funding Index (PFI) from Milliman, the global actuarial and consulting firm. An increase in the corporate bond rates that are used to measure pension liabilities drove the change.

From March 31, 2018 through April 30th, the monthly discount rate increased 12 basis points, to 4.03% from 3.91%; as a result, pension liabilities decreased by $26 billion for the month. The funded ratio for the PFI plans increased to 91.6% from 90.6%, despite a 0.11% investment loss that reduced index assets by $6 billion.

“Corporate pensions continue to get some discount rate relief in 2018, despite volatile equity markets,” said Zorast Wadia, co-author of the Milliman 100 PFI. “Over the past 12 months, with the rise in rates and a 6.17% cumulative asset gain for these plans, we’ve seen the funded ratio climb from 85.5% to 91.6%.”

Under an optimistic forecast with rising interest rates (reaching 4.43% by the end of 2018 and 5.03% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 101% by the end of 2018 and 117% by the end of 2019.

Under a pessimistic forecast (3.63% discount rate at the end of 2018 and 3.03% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2018 and 81% by the end of 2019.

To view the complete Pension Funding Index, go to http://us.milliman.com/PFI. To see the 2018 Milliman Pension Funding Study, go to http://us.milliman.com/PFS/.

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

U.S. mutual fund assets down for third straight month

Mutual fund assets slid downward for the third straight month, dropping 0.2% in April to close with assets totaling just more than $14.5 trillion, according to the may 2018 issue of The Cerulli Edge – US Monthly Product Trends Edition.

While the mutual fund asset slide continued into April, ETFs reversed course during the month, increasing total assets by 1.2%. Propelling assets forward were net flows of $28.9 billion, which equate to 0.8% organic growth.

Across all affluent-focused advisory practices, which have a core focus of $2 million or greater, Cerulli finds that almost one-third (29%) of client assets are allocated to passive strategies. HNW-focused registered investment advisors (RIAs) continue to be the largest adopters of ETFs, with 93% of active and passive asset managers citing demand.

Advisors reported that strategic beta would grow from 17% of their allocation to ETF products in 2017 to 22% over the next two years. This is significant as ETFs continue to make up a growing part of client portfolios. Though ETF issuers tend to position strategic beta as a diversification tool and alpha generator, the primary reason financial advisors report choosing them is to mitigate risk in client portfolios.

Life insurers want to invest more in infrastructure, but…

While the Trump administration favors using public-private partnerships (P3s) alongside federal funds, private investment and municipal bonds to finance infrastructure projects, regulatory hurdles still discourage life insurers from investing in P3s and infrastructure, says a new TIAA white paper.

The paper suggests adopting consistent regulations, preserving key tax tools, and streamlining the project-approval process.

Infrastructure projects are attractive to life insurers because of their lower risk, longer, stable terms and generally predictable, steady returns. As of 2017, life insurers had collectively invested over $1 trillion in infrastructure projects.

But the current patchwork of federal and state P3 rules, regulations, structures and procedures often deters greater private-sector investment. TIAA, which manages more than $1.35 billion in municipal bonds, recommended four policy reforms:

Define consistent rules and methodologies across geographies. Harmonize the regulations governing P3s to create a more structured market.

Form an industry working group at the National Association of Insurance Commissioners (NAIC). Create new incentives, remove regulatory impediments, and expedite approvals for insurance companies’ infrastructure investments.

Preserve key tax tools. Maintain or broaden tax exemptions on certain governmental bonds.

Expedite approval processes. Streamline the permitting and review processes to ensure infrastructure projects advance in a more coordinated, efficient manner, while maintaining appropriate oversight.

Through Nuveen, TIAA’s investment manager, the life insurer today manages more than $135 billion in municipal fixed income assets.

To download a copy of TIAA’s white paper on opportunities for infrastructure investment by life insurers, visit http://www.tiaa.org/infrastructure.

John Hancock hires Infosys to digitize operations

John Hancock has engaged Infosys, the technology firm, for a four-year project that will give the insurer’s life and annuity customers a consolidated digital experience and will digitize operations generally, a John Hancock release said.

Upon completion, several legacy systems will be consolidated and John Hancock will be able to provide a more digitally enabled experience across insurance products. John Hancock will retain direct responsibility for all customer interactions, including through its contact center.

“Consolidating multiple legacy systems into a single, integrated platform will reduce the cost of supporting closed in-force blocks of business and increase opportunities to leverage advanced analytics to reengineer the customer experience,” said Naveed Irshad, head of North American Legacy business.

MassMutual publishes market research on Asian Americans

Asian Americans are more concerned about making mistakes with their retirement savings in the years just before and just after retirement, yet are more confident about their investments than other retirees and pre-retirees, new research from MassMutual finds.

Asian American retirees and pre-retirees worry more than other Americans about taking too much risk (69% vs. 44%) or making a poor investment decision (67% vs. 54%) within 15 years before or after retirement, according to the MassMutual Asian American Retirement Risk Study. Asian American pre-retirees (75%) are especially concerned about taking too much investment risk, the study shows.

More so than others, Asian American retirees and pre-retirees believe workers approaching retirement should reduce their investments in equities (64% vs. 53%). Asian Americans are more likely to have more conservative investment goals, aiming to “match the market” (43% vs. 32%) rather than outperform it (55% vs. 65%).

Asian Americans are much less likely than other Americans to reduce retirement savings by making withdrawals or hardship loans or suspending contributions, according to the study. While one in four American retirees and pre-retirees (25%) report engaging in those behaviors, on 11% of Asian American respondents say the same.

Compared to the general population of retirees, for instance, Asian American retirees are more likely to enjoy managing their own money (80% vs. 59%). Only two in five retired Asian Americans (42%) prefer an investment that allows them “set-it-and-forget-it,” compared with nearly three in four pre-retired Asian Americans (72%).

More than half of Asian Americans (53%) are uncertain about the length of their retirement compared to a little over one-third of Americans overall (36%). Fewer Asian American retirees (63%) are confident they know how to claim Social Security at the right time to maximize its benefits, than American retirees overall (75%), according to the study.

Greenwald & Associates conducted the internet-based study for MassMutual, polling 801 retirees who have been retired for no more than 15 years and 804 pre-retirees within 15 years of retirement. Pre-retirees were required to have household incomes of at least $40,000 and retired respondents had at least $100,000 in investable assets and participated in making household financial decisions. The survey included an oversample of Asian Americans for a total of 199 Asian Americans surveyed.  Asian American is defined in this research as Chinese, Asian Indian and Korean. The research was conducted January 2018.

Apple leads in stock buybacks with $100 billion in April/May 2018

U.S. companies announced $6.1 billion in daily stock buybacks this past earnings season, according to TrimTabs research. The rate was second only to the $6.6 billion daily announced in the previous earnings season.

New stock buybacks totaled $183.4 billion in the April/May 2018 earnings season, second only to the $191.4 billion in the January/February 2018 earnings season. The volume of buybacks in the latest earnings season was the second highest on record, although the average of 3.7 announcements per day was not much higher than the 3.5 per day in the previous eight earnings seasons.

Five companies—Apple ($100 billion), Broadcom ($12 billion), Facebook ($9 billion), Qualcomm ($8.8 billion), and T-Mobile ($7.5 billion)—accounted for 75% of the $183.4 billion volume.

“The buyback boom early this year confirms our view that the main use of corporate America’s tax savings will be takeovers and stock buybacks rather than capital investment or hiring,” said the TrimTabs release.

© 2018 RIJ Publishing LLC. All rights reserved.

Indexed annuities sales up in 1Q2018: LIMRA

Indexed annuity sales were $14.5 billion in the first quarter of 2018, up 11% from the first quarter 2017 and up 4% since last quarter, according to LIMRA Secure Retirement Institute’s (LIMRA SRI) First Quarter 2018 U.S. Retail Annuity Sales Survey.

This was the second strongest start for indexed annuity sales since LIMRA SRI starting tracking annuity sales. LIMRA SRI expects indexed annuity sales to increase 5-10% in 2018.

“For the first time in eight years, we saw [first quarter] growth in the indexed annuity market when compared to fourth quarter,” said Todd Giesing, annuity research director, LIMRA Secure Retirement Institute. “This uptick in sales is a combination of an improved outlook on a regulatory front, as well as rising interest rates creating the opportunity for more attractive rates.”

Overall, U.S. annuity sales were $51.8 billion in the first quarter of 2018, which was level with first quarter 2017 results.

“Due to the DOL fiduciary rule being vacated in April 2018 and the expectation for positive economic factors, we have revised our 2018 annuity forecast and now expect a 5-10% increase in annuity sales growth,” Giesing said.

In the first quarter, variable annuity (VA) sales totaled $24.6 billion, down 1% from the prior year. VA sales declined for the 17th consecutive quarter.

“While this quarter wasn’t strong for VAs, we are seeing some companies introduce new products, raise crediting rates for guaranteed living benefit products and loosen restrictions on investments, said Giesing. “Combined with the vacated Department of Labor fiduciary rule, we expect VA sales will improve throughout the year. As a result, LIMRA SRI is forecasting VA sales to be 0-5% higher in 2018, compared with 2017 results.”

Fee-based VA sales increased 70% to $780 million in the first quarter, but still represent just three percent of the total VA market.

As for structured annuities, LIMRA has chosen the term “registered indexed-linked annuities” to describe them and will include them in the overall VA sales figures. Registered index-linked annuity sales were $2.2 billion, an increase of 4% in the first quarter, compared with the first quarter of 2017. But sales declined 6% when compared with the prior quarter. These products represent about 9% of the retail VA market.

Total sales of fixed annuities remained flat in the first quarter at $27.2 billion. Fixed annuities have outperformed VA sales seven out of the last eight quarters. LIMRA SRI expects overall fixed annuity sales to increase 10-15% in 2018.

Sales of fixed-rate deferred annuities, (book value and market-value-adjusted) fell 14% in the first quarter, to $8.7 billion. After multiple quarters deviating from the 10-year treasury rate, this quarter the sales aligned with the treasury rate growth. LIMRA SRI expects fixed-rate deferred sales to increase 15-20% in 2018.

First quarter single premium immediate annuity (SPIA) sales rose to $2.1 billion in the first quarter, up 5% over the same quarter last year. SPIA sales have remained in the $2 billion to $2.2 billion range for the past two years.

Deferred income annuity (DIA) sales fell 6% in the first quarter 2018 to a five-year low of $515 million. Overall, LIMRA SRI believes that increasing interest rates and other economic factors will cause combined SPIA and DIA sales to grow 5-10% in 2018.

The first quarter 2018 Annuities Industry Estimates can be found in the LIMRA SRI’s updated Data Bank. To view variable, fixed and total annuity sales over the past 10 years, visit Annuity Sales 2008-2017.

To view the top twenty rankings of total, variable and fixed annuity writers for first quarter 2018, please visit First Quarter 2018 Annuity Rankings. To view the top twenty rankings of only fixed annuity writers for first quarter 2018, please visit First Quarter 2018 Fixed Annuity Rankings.

LIMRA Secure Retirement Institute’s First Quarter U.S. Individual Annuities Sales Survey represents data from 96% of the market.

© 2018 LIMRA.

Pressure to reinsure VA riders may ease: A.M. Best

To reduce the “non-economic volatility” associated with minimum guarantee benefit riders and to better align those risks with their hedging programs, variable annuity writers often reinsure this business with affiliated captives. But they may not need to do that as much in the future.

The National Association of Insurance Commissioners (NAIC) is considering steps to modify reserve and capital requirements so that non-economic volatility is diminished, according to “Current VA Reserve and Capital Requirements Challenging L/A Insurers,” a new report from the rating agency A.M. Best.

“The use of captive reinsurance is likely to decline significantly, as a result of the recommended changes,” said George Hansen, senior industry research analyst at A.M. Best, in a release. “So long as true economic values and those of various accounting regimes differ, the use of alternative financing methods will continue.”

“Of the four primary guaranteed benefit types, guaranteed minimum withdrawal benefit bases exceed the account value, while death benefits, income benefits and accumulation benefits have account values exceeding benefit bases as of year end 2016,” Hansen told RIJ in an email.

“The data is based on what companies submit in our Supplemental Rating Questionnaire (SRQ). Most VA writers offering guaranteed minimum withdrawal benefits have very strict limits on where policyholders allocate funds in order to reduce volatility. Therefore, the account value growth may be much lower than how the S&P 500 performs.”

Oliver Wyman has conducted two quantitative impact studies with large variable annuity writers and made recommendations to the NAIC in December 2017. Regulators and other industry groups are reviewing these recommendations with no fixed schedule for implementation.

A primary recommendation involves changing the accounting treatment for such hedges to better align them with the respective liability. Hedges are currently marked to market, leading to non-economic volatility. Amortizing the cost of hedges over a period closely matching the liabilities will minimize this volatility, according to the Best’s Special Report.

Although the recommended changes will help fix various flaws in the existing framework, the potential for greater volatility in the equity market will challenge variable annuity writers. Hedging is not the only answer, but the solutions available are limited, as reinsurance has dropped off, according to the report.

Data from A.M. Best’s supplemental rating questionnaire highlights the status of variable annuity reserve and capital components through 2016 and illustrates the conservative reserving relative to capital that can result under the current framework.

A.M. Best’s SRQ data also tracks the funding status of guaranteed minimum benefit riders attached to variable annuities, and with recent market gains, the guaranteed withdrawal amounts still exceed the account values on hand at year-end 2016 compared with other guaranteed benefits.

The report notes that variable annuity writers have increasingly hedged products with guaranteed minimum withdrawal benefits since 2011, but these have the least exposure when compared with three other types of guaranteed minimum benefits. Variable annuity products with guaranteed minimum death benefits remain the most exposed, creating more exposure to mortality risk.

© 2018 RIJ Publishing LLC. All rights reserved.

New tax law reveals imbalance in homeownership benefits

By roughly doubling the standard deduction and limiting the deduction from federal taxable income of state and local taxes (SALT), the Tax Cut and Jobs Act of 2017 (TCJA) significantly reduced the tax benefits of homeownership, especially for middle-income households.

Not only does it cap the deductibility of state and local taxes, including local property taxes, it also substantially reduces the number of taxpayers who will itemize deductions at all, including those who pay mortgage interest.

As a result, it raises important questions about the future viability of tax subsidies that primarily benefit higher-income taxpayers who own expensive, highly leveraged homes. These changes made homeownership tax subsidies even more upside-down than pre-TCJA tax law and provide a tax incentive to further concentrate the distribution of private wealth.

The Congressional Joint Committee on Taxation (JCT) recently released projections on the future distribution of some of the tax benefits of homeownership. Out of 77 million projected homeowners in 2024, only about one-fifth will make $50,000 or less. Yet, they’ll comprise about half of all households, homeowners and non-homeowners alike.

These taxpayers with annual incomes under $50,000 will get only about one percent (or less than $400 million out of $40 billion) of the overall tax subsidy for home mortgage interest deductions. Meanwhile, households with more than $100,000 of income will garner almost 90% of the subsidy. These estimates for the mortgage interest deductions understate the total value of tax benefits from homeownership. Property tax deductions are also skewed to the rich and the upper-middle class.

At the same time, it is more beneficial to build up home equity largely tax-free than to pay income tax on the returns from money kept in a savings account. This additional incentive also benefits the haves more than the have-nots because it is proportional to the amount of equity a homeowner possesses. So those with a large amount of home equity are far better off than new, usually younger, homeowners who rely heavily on borrowing to purchase a home.

There is something of a paradox to the new tax law, however. The increase in the standard deduction, and the caps on deductions for home mortgage interest and state and local tax payments are all steps that make the overall tax system more progressive. And the reduction in tax incentives probably put a small brake on inflation in the value of housing, making it a bit more affordable for both renters and homeowners.

Still, as a matter of homeownership policy, the result is that only a little over one-tenth of taxpayers—those who will still itemize after the TCJA—will have the opportunity to benefit from most tax subsidies for homeownership. And that will require advocates for extending ownership incentives to more low- and middle-income groups to make the case not simply for better distributing existing tax subsidies but for maintaining any at all. As the increase in the standard deduction shows, there are a lot of ways of promoting progressivity that do not entail subsidizing homeownership.

The case for homeownership subsidies in the tax code and elsewhere rests mainly on the following two grounds:

(1) Homeownership is a way of promoting better citizenship and more stable communities; and

(2) Homeownership helps improve wealth accumulation by nudging many who might not otherwise save to do so by paying off mortgages and making capital improvements on their houses.

The saving argument is one that does apply mainly to low-income and moderate-income households. Homeownership is the primary source of saving for these households, even more important than private retirement saving. If one cares about the uneven distribution of wealth, and related issues of financing retirement for moderate-income households, then encouraging wealth accumulation through housing may be an appealing strategy.

The bottom line: When it comes to homeownership, the TCJA has left the nation with an upside-down tax incentive that applies to only about one-tenth of all households—nearly all of them with high incomes.

Such a design doesn’t pass the laugh test for political sustainability. The new tax law’s crazy remnant of a homeownership tax subsidy should encourage policymakers to rethink housing policy, including tax benefits and direct spending programs for both renters and owners. Given the structure of the TCJA’s tax subsidies, the bar is relatively low for policymakers to find an improvement.

© 2018 The Urban Institute.

Annuity wholesalers should be consultants for advisors: Global Atlantic

If annuity issuers want to win hearts and minds in the fee-based advisory world—and they patently do—their wholesalers need to stop pushing one-product solutions for advisors and investors. A recent survey by Global Atlantic Financial Group supports this old (but often forgotten) wisdom.

In a survey of 400 advisors, Global Atlantic whose Forethought Life Insurance unit issues fixed, indexed, variable and income annuities, found that about half (56%) believe annuities are an important part of a retirement plan, with one important caveat.

Of the 56%, about 90% say they would likely increase their use of annuities if they had access to “a multi-product platform and distribution partners who could help select the best strategies based on client objectives.”

The survey findings support Global Atlantic’s position as an annuity company that provides open-ended consultative services to advisors about a variety of annuities, rather than advocating a particular type of annuity.

Global Atlantic also viewed the findings as support for the idea that advisors need to demonstrate objective expertise in a broad range of solutions if they want to be seen as acting in the clients’ best interests, as the new SEC fiduciary proposal requires.

“Advisors need to show clients that they have a full set of solutions at their disposal to meet income planning and retirement savings needs,” said Paula Nelson, president, Retirement at Global Atlantic Financial Group, in a press release. “We see this as a great opportunity considering Global Atlantic’s focus on taking a consultative approach in supporting advisors across all channels.”

Most of the advisors surveyed (57%) said that a multi-product annuity platform “allows for customizable retirement planning based on client need and lifestyle,” and half (51%) acknowledged the simplicity of a single point of contact for multiple product offerings, the survey showed.

In the survey, three-quarters of advisors (76%) said they understand annuities but 62% said their clients don’t. When asked how they educate their clients, 62% of advisors said they spend time to explain product features and answer questions.

About half (53%) use written materials supplied by partners or their company. When asked what would help them better use annuities among clients, 50% said better guidance and education from distribution partners on the differences between products while 46% said they would like the ability to withdraw from the annuity’s value for emergencies. Only 31% cited a desire for fee-based rather than commission-based annuities.

The 2018 Global Atlantic Financial Advisor Survey was completed online by Echo Research in March 2018, among 400 financial advisors who offer portfolio investment and retirement advice that includes annuities. The surveyed financial advisors work at full-service brokerages, wirehouses, banks, registered investment advisors, and independent and regional broker-dealers.

© 2018 RIJ Publishing LLC. All rights reserved.

US workers are willing to pay for better retirement benefits

Most US workers would accept a smaller paycheck for larger employer-provided retirement benefits, according to the 2017 Global Benefits Attitudes Survey by Willis Towers Watson.

Two-thirds of respondents (66%) would be willing to pay more each month for larger, more generous retirement benefits, while 61% would give up more pay for a guaranteed retirement benefit, the survey of nearly 5,000 US employees showed.

Far fewer would make a similar trade-off for health care benefits. Only 38% are willing to pay more each month for a more generous health care plan; 46% are willing to pay more to have lower, more predictable costs when using health care services.

Employees are even less open to paying for tools and services. Fewer than one in four would pay for tools and services that help them live healthier lifestyles (24%) or help improve their finances (19%).

“Employees continue to feel vulnerable about their long-term financial prospects and say they are willing to pay more for greater retirement security,” said Steve Nyce, senior economist, Willis Towers Watson. But on health care “they are basically saying ‘enough is enough.’ Far fewer are willing to pay more each month for more generous health benefits and more predictable costs.”

Employees would like more paid vacation time. Nearly six in 10 employees (58%) would take more time off in exchange for an equivalent change in pay, while the same number would take a more generous retirement plan for an equal change in pay. Just over half (55%) would accept a more generous health care plan in exchange for an equivalent change in pay.

Nearly half (48%) would welcome more financial protection benefits, reflecting a growing interest and need for benefits to help employees address their financial needs. In addition, access to decision support is valued by workers. Nearly nine in 10 employees with benefit choices and access to decision support say their benefit programs meet their needs, which is more than twice that of those without choice.

The 2017 Willis Towers Watson Global Benefits Attitudes Survey examines attitudes toward the health and retirement benefits of over 30,000 private sector employees in 22 countries. A total of 4,983 U.S. workers participated in the survey, which was conducted in July and August 2017.

© 2018 RIJ Publishing LLC. All rights reserved.

Auto-escalation begins in the UK, with ‘close monitoring’

The UK’s experiment with auto-enrollment in workplace defined contribution retirement plans and auto-escalation of minimum contribution for auto-enrolled workers is entering a new stage and getting new scrutiny from the British government, IPE.com reported.

In April, employees’ minimum contributions to auto-enrollment defined contribution (DC) plans rose to 3% of salary from 1%. The employers’ contribution rose to 2% from 1%. The UK government said that it is “closely monitoring” the impact on employers and employees.

Next April, the minimum will rise again to 8% in total, with the employer contribution reaching 3%.

Since auto-enrollment started in 2012, pension participation in the UK has reached record high levels. Auto-enrollment had brought 9.5 million people into pensions, according to the UK’s Office for National Statistics. As of 2017, nearly three-quarters of employees (73%) “had an active workplace pension scheme,” up from less than 47% in 2012, the ONS said.

Malcolm McLean, a senior consultant at Barnett Waddingham, an independent provider of actuarial, administrative and consulting services, warned that any delay to next year’s planned increase would be “a very retrograde step” and that “many commentators have already expressed concern at the low level of minimum contributions required for auto-enrolment purposes.”

“As of yet there appears to be no clear plan to increase them further beyond 8%. Even at this level, for many people, it will not deliver a meaningful pension income at retirement and will call into question the validity of the policy and consumer appreciation of it,” he said.

Nonetheless, the government is “closely monitoring the impact of the increases on both employers and individuals to inform our approach to supporting the second planned increase in contributions from April 2019,” said undersecretary Baroness Buscombe of the Department for Work and Pensions (the UK equivalent of the U.S. Labor Department) in response to a query from the House of Lords.

“There has been a long lead in time to enable employers and individuals to prepare for these increases, with support and communications from the Pensions Regulator and DWP,” Buscombe wrote. “The increased contributions were scheduled to coincide with changes to take-home pay [that] normally take place at the start of the tax year, to help minimize the administrative burden for employers.”

© 2018 RIJ Publishing LLC. All rights reserved.