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Posted on March 23, 2022 by -

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.

© 2022 RIJ Publishing LLC. All rights reserved.

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

Posted on March 23, 2022 by -

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.

© 2022 Morningstar, Inc.

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

Tough Fed talk on inflation, little bite

Posted on March 23, 2022 by -

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. 

© 2022 BlackRock, Inc.

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

Posted on March 17, 2022 by -

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.

© 2022 RIJ Publishing LLC. All rights reserved.

Deferred annuity sales reach $243 billion in 2021: Wink

Posted on March 17, 2022 by -

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. 

© 2022 RIJ Publishing LLC.

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

Posted on March 17, 2022 by -

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.

Copyright Infopro Digital Limited. Used by permission.

Consumer Groups Urge DOL to Tighten “Reg BI”

Posted on March 17, 2022 by -

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. 

© 2022 RIJ Publishing LLC. All rights reserved.

New MassMutual VA features RetirePay, an income rider

Posted on March 16, 2022 by -

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.

© 2022 RIJ Publishing LLC. All rights reserved.

Life/annuity industry moving toward equilibrium: AM Best

Posted on March 11, 2022 by -

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.”

© 2022 AM Best. 

AIG, Innovator, and Reliance Standard announce new products

Posted on March 11, 2022 by -

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.

© 2022 RIJ Publishing LLC. All rights reserved.

For Jackson National Life, 2021 was a pivotal year

Posted on March 11, 2022 by -

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. 

© 2022 RIJ Publishing LLC. All rights reserved.

Beware the Risks of ‘Pension Risk Transfer’

Posted on March 11, 2022 by -

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.

What’s the Deal with (Annuity) Reinsurance?

Posted on March 10, 2022 by -

What is annuity reinsurance, and how did it become one leg of the three-legged Bermuda Triangle strategy, as we call it? 

To put it another way, how did an esoteric tool for repairing the balance sheets of life insurance companies evolve, especially when big buyout firms apply it, into a nearly essential ingredient for sales leadership in the half-trillion-dollar fixed indexed annuity business?

Attempts to explain this arcane phenomenon are complicated by the fact that several versions of annuity reinsurance exist. It is used by different kinds of life/annuity companies, with different kinds of counter-parties, for different reasons, across domiciles with different accounting standards. 

But you can’t understand the direction of the annuity business today without understanding a certain type of annuity reinsurance, especially modified coinsurance, or “modco.” 

Back when most life insurers were policyholder-owned, mutual companies, a life insurer sold life insurance or annuities, collected installment or single premiums from policyholders, invested the premiums mainly in corporate bonds on public markets. The company paid out either a lifetime income (to an annuity owner) or a lump sum benefit (to a life insurance policyholder’s beneficiaries). 

If the life insurer invests the premiums conservatively and predicts mortality rates and life expectancies more or less accurately, then the premiums themselves, plus the earnings they yield when invested, will cover all claims and costs and generate a profit for owners of the life insurance company. The company’s owners or shareholders add their own capital to the premiums as a buffer against losses, or against the mere threat of potential losses.

The risky part, for the life insurer, is that the investments might lose money, and require the life insurer to add more capital to the pot as a buffer against losses. The insurer experiences a kind of margin call. Regulators react by requiring the life insurer’s owners to put up more capital.

The Great Financial Crisis made this situation a reality—suddenly, when stocks crashed, and slowly, when the Fed lowered interest rates. To raise new capital, a life insurer’s owners can reach deeper into their own pockets. Or they can solicit capital from new investors. They could also try to increase sales and attract more premiums, or invest in riskier investments in hopes of greater returns. But they can dig even deeper holes for themselves if they do those things.

Another solution is to contact a reinsurer—an insurance company for insurance companies—that can provide capital in return for full or partial ownership of the assets and liabilities that comprise blocks of annuity contracts. This form of refinancing in effect returns some or all of the owner’s capital—the buffer against losses—backing the annuities to the pockets of the life insurer’s owners. 

During and after the financial crisis, some life/annuity companies worked with third-party reinsurers. Some larger firms practiced a kind of self-reinsurance with internal, “captive” reinsurers. Some sold their annuity businesses and repositioned themselves. Some sought buyers for the whole life insurance company—at attractive discounts.

Large, deep-pocketed “alternative” asset managers saw an opportunity here to enter the life/annuity business. The fixed indexed annuity business, the most vigorous part of the annuity business, requires the management of more than $500 billion in Americans’ retirement savings. Asset managers believed they could manage those assets to better returns than insurers could. 

In addition, the sale of indexed annuities is a source of leverage—the incoming premiums don’t have to be paid back for up to 10 years, in some cases, and can be invested in the kinds of high-yielding private, illiquid real estate and loan securitizations that the alternative asset managers themselves create and sell. 

It was also clear that reinsurance could be used to reduce the amount of capital needed to run the annuity business. That strategy could be especially effective if the reinsurer was based in jurisdiction—Bermuda, for example, where it could use Generally Accepted Accounting Principles (GAAP) instead of the more stringent Statutory Account Principles (SAP) required of life insurers in US. Bermuda is also less strict about the types of assets that a reinsurer can hold.

Some alternative asset managers created “Insurance Solutions” departments to show life insurers how to use private credit to increase their yields, how to reduce or shift their capital burdens, and how to increase their profits (a factor of huge importance to publicly traded life insurers). And some alternative asset managers decided to go all in: buying their own life/annuity companies, issuing their own annuities, setting up their own reinsurers in a GAAP jurisdiction, and managing all the assets.

RIJ  calls this three-way business model the “Bermuda Triangle.” 

A Bermuda Triangle strategy involves:

  • A US-domiciled life insurer with a focus on the sale of fixed-rate and/or fixed indexed annuities as a way to gather five-figure, six-figure or even seven-figure lump sums from savers—annuity premiums—for subsequent investment.  
  • A global asset management company with expertise in the origination of “leveraged loans” to borrowers with predictable revenue streams (think subscription businesses like Spotify, or cell tower leasing companies), as well as the bundling of those loans into opaque and illiquid securities.    
  • A reinsurer that has expertise in complex types of reinsurance called modified coinsurance or funds withheld reinsurance. The insurer needs to be based in Bermuda, the Cayman Islands, or one of the US states that allow the use of Generally Accepted Accounting Principles (GAAP).  
  • The exercise of “regulatory arbitrage” between the tight capital requirements of SAP and the relatively flexible requirements of GAAP.  

These ingredients can be used for financial alchemy. The “modco” or “funds withheld” reinsurance reduces the life insurer’s liabilities and releases some of its excess capital—but without reducing the life insurer’s assets or shrinking its business. The life insurer becomes more profitable, the asset manager gets billions of new dollars to manage and/or lend, and the reinsurer solicits outside capital to back the liabilities that the original life insurer no longer holds. 

But is it proper? Is the Bermuda Triangle an insurance business-model or an investment business-model masquerading as insurance, in which selling annuities is simply a way to gather “permanent capital,” as Triangle practitioners call it, for translation into loans that are subsequently bundled into illiquid collateralized loan obligations (CLOs)? 

Or is this a case where alternative asset managers are in effect declaring to US state regulators, by employing complex offshore reinsurance strategies, that SAP accounting standards are obsolete—that they are too strict for regulating fixed indexed annuities? Either way, it may be time for regulators to act, or to revisit the regulations.    

© 2022 RIJ Publishing LLC. All rights reserved.

Meet MassMutual’s Bermuda Reinsurer

Posted on March 10, 2022 by -

“If you’re going to be in the annuity space, you will need a reinsurance strategy in order to be competitive,” Dennis Ho told RIJ recently. Ho is the CEO of Martello Re, a new Bermuda-based reinsurer that just reinsured $14 billion worth of fixed-rate and fixed indexed annuities (FIAs) for Massachusetts Mutual Life Insurance Company.

Competing with the likes of FIA industry leaders Athene Life & Annuity, F&G Guaranty Life, American Equity, Global Atlantic and others for a bigger share of leadership in the fixed indexed annuity market appears to be what MassMutual intends. Athene led the industry with FIA sales of $7.8 billion last year.

In early 2021, MassMutual bought FIA-issuer Great American Life, helped finance Martello Re and recruited Ho to run it. MassMutual and other investors capitalized the reinsurer with $1.65 billion. In 2021, MassMutual ranked 11th in FIA sales in 2021, according to WinkIntel, with $2.45 billion. 

“MassMutual is an investor in Martello Re and helped set us up,” Ho said during a call from his US headquarters in New Jersey. “But we’re wholly independent. They wanted a real company with whom they could do an arms-length transaction. None of our managers are from MassMutual.” 

Last week, MassMutual announced that, in addition to reinsuring $14 billion worth of annuities in Bermuda, it has engaged the services of $25 billion private credit expert Centerbridge Partners to help MassMutual’s in-house asset manager, Barings, sharpen the life insurer’s investment game. 

MassMutual has now assembled all three elements of what RIJ calls the “Bermuda Triangle” business strategy. The triangle’s three corners are a US-based life insurer that issues or has issued FIAs, a global asset manager with expertise in private credit and alternative asset management, and a reinsurer domiciled in a jurisdiction where the reinsurer can use GAAP instead of SAP accounting; GAAP offers life insurers opportunities to estimate liabilities at lower values and conserve capital. 

“Reinsurance helps you manage your risk. It can also give you access to broader investing and underwriting capabilities,” Ho told RIJ. “When I look at the FIA or FA space, if you’re working on your own [without reinsurance], you won’t have as broad a toolkit as others, and you may not have the capital you need to grow at the rate you want. The annuities can also overtake the other business on your books and make you overweight. Reinsurance helps you address both of those issues.”

Dennis Ho

Annuity issuers that can orchestrate the financial, accounting, regulatory, and legal subtleties of this complex strategy have steadily climbed the annuity sales leaderboard over the past decade. As traditional annuity issuers have retreated from or exited annuity sales, Bermuda Triangle practitioners have filled the vacuum they left behind.   

Apollo Asset Management was a pioneer in this strategy, using life insurers Athene Annuity and Life in Iowa, Athene Annuity and Life Assurance in Delaware, and reinsurer Athene Re in Bermuda. Since 2013, other asset managers—notably KKR, Blackstone, Carlyle Group, Brookfield, Ares—have followed Athene into this space, acquiring, creating or partnering with life insurers and reinsurers. A few smaller companies have tried to emulate the strategy, with mixed success. 

“In some cases, insurers use reinsurance to partner with somebody who has investing capabilities they don’t have,” Ho told RIJ. “They might be able to invest in things you can’t source. In most cases, even though the liability is reinsured, the original insurer still wants to make sure that the reinsurer isn’t taking too much risk. So the insurer and reinsurer will set investment guidelines that the insurer’s state regulator is comfortable with.”

Ho’s career and the evolution of the Bermuda Triangle strategy have grown almost in lockstep. An actuary with a degree from the University of Manitoba (1999), he was the life insurance solutions team leader at Deutsche Bank, then head of North America Insurance Strategy for BlackRock’s Client Solutions Team. In 2015, he was recruited by Willis Towers Watson to be CEO of WTW’s Longitude Re in Bermuda.

In 2018, Ho departed Longitude Re to start and run Saturday Insurance, an online insurance agent. “We sold all kinds of income annuities. We had eight insurers on the platform. But we didn’t have enough capital to grow quickly. That’s when MassMutual said, ‘Will you come work with us?’ I was a consultant for MassMutual last year, and once we launched Martello Re in January, I became CEO.”

Martello Re Limited is a licensed Class E Bermuda-based life and annuity reinsurance company. Its initial equity of $1.65 billion was provided by MassMutual, Centerbridge Partners, Brown Brothers Harriman, and HSCM Bermuda (the re/insurance business of Hudson Structured Capital Management Ltd.), and a group of institutional investors and family offices.

Barings, which is part of MassMutual, and Centerbridge will manage the assets within the strategy. Centerbridge will provide access to “public and private asset origination and underwriting capabilities across all asset classes,” according to MassMutual’s press release.

MassMutual didn’t report the amount of excess capital that the reinsurance deal with Martello Re would release, or how MassMutual would use the cash. Many insurers use released capital to buy back stock from shareholders. As a mutual insurer, MassMutual has no equity shareholders. It is owned by its policyholders.

In addition to their current reinsurance deal, MassMutual and its life insurer subsidiaries will also enter into a “flow arrangement” with Martello Re to reinsure new annuity business, according to MassMutual’s release.  

Martello Re plans to serve a wider client. It will initially focus on providing MassMutual and its subsidiaries with reinsurance capacity on current product offerings, after which it will offer its services selectively to other top insurers in the life and annuity space, the release said.

In addition to Ho, Martello Re’s leadership team includes

  • Jeremy Coquinco, Head of Investment Strategy
  • Justin Mosbo, Chief Actuary 
  • Alana Rathbun, Chief Risk Officer
  • Gregory Tyers, Chief Financial Officer 

The initial members of the Martello Re board of directors include Chairwoman Ellen Conlin from MassMutual and Michael Baumstein of Barings, Matthew Kabaker and Eric Hoffman from Centerbridge, Jeff Meskin and Taylor Bodman from Brown Brothers Harriman, and Mr. Ho.

“It’s an attractive space for a lot of folks,” Ho told RIJ, but “you need a certain amount of scale to be good. We’re building a reinsurer that can stand the test to time.”

© 2022 RIJ Publishing LLC. All rights reserved.

How RIAs can stay ahead of the competition: Cerulli

Posted on March 3, 2022 by -

A confluence of competitive threats is eroding the registered investment adviser (RIA) channels’ key differentiating factors, according to the latest report from consulting firm Cerulli Associates: US RIA Marketplace 2021: Meeting the Demand for Advice. 

The threats to RIAs include an industry-wide shift away from brokerage, broader adoption of financial planning, and the popularity of independent business models. In response, more RIAs are considering whether to extend their service offerings to deepen their impact with existing and prospective clients. 

“To unlock the RIA channels’ success formula and protect against adviser movement to independence, broker/dealers (B/Ds) are increasingly developing independent affiliation options, promoting financial planning, and creating more opportunities for advisers to conduct fee-based or fee-only business,” a Cerull release said.

By 2023, 93% of advisers across all channels expect to generate at least 50% of their revenue from advisory fees. Likewise, over the past five years, the number of financial planning practices across all channels grew at a 5.3% compound annual growth rate (CAGR). As a result, B/Ds are impinging on what has historically been viewed as largely unique to the RIA channels—an independent, fee-based business centered on financial planning. 

In addition to this convergence of business models, investor influence, democratization of services, and client acquisition challenges are encouraging RIAs to reevaluate their position in the marketplace. For some, this means expanding their service offerings to combat value differentiation concerns and capture emerging opportunities.

According to the research, trust services (19%), digital advice platforms (17%), and concierge/lifestyle services (16%) rank as the top-three areas of anticipated service expansion for RIAs within the next two years. 

“While implementing these additional services may help RIA firms move upmarket and generate greater revenue, RIAs will need to reinvest in the business by hiring more staff, adding technology tools, producing marketing materials, or paying a third-party provider for outsourced support,” said Marina Shtyrkov, associate director, in a release. “These expenses typically lower the firm’s profit margins, so by expanding their purview, RIAs find themselves at risk of profit margin compression unless they are able to offset expenses with higher fees, new client acquisition, or additional revenue streams.”

To preserve profitability levels as they add services, advisers can either adjust their fees upward or implement alternative pricing structures. These nontraditional fees (e.g., fixed financial planning fees, monthly subscription fees) are not correlated to portfolio performance and can help RIAs offset the increased costs of delivering additional services, thereby reducing profit margin pressure. 

For RIAs that offer financial planning, nontraditional fees also ensure that the firm’s pricing is more closely aligned with its value proposition.

Ultimately, value differentiation challenges will become a question of firm economics—one that RIAs must be ready to answer. While Cerulli does not believe that all RIAs must expand their service set to remain competitive, under the right circumstances, additional offerings can help firms capture new opportunities and tackle competitive challenges. 

“Like any business decision, the addition of a service should allow advisers to better address their target market and achieve stronger alignment between that segment’s needs and the firm’s offerings,” wrote Shtyrkov. “RIAs will need to consult their strategic partners (e.g., RIA custodians, asset managers, service providers) to help them navigate these choices, weigh the tradeoffs of service expansion, and mitigate the risks of thinning profit margins.”

© 2022 RIJ Publishing LLC.  

Raising Social Security age may be necessary, actuaries say

Posted on March 3, 2022 by -

Raising the age at which Social Security recipients become eligible to receive unreduced retirement benefits—Social Security’s “normal retirement age”—will likely be among the reforms Congress considers for addressing the program’s long-term financial challenges, the American Academy of Actuaries explains in a new issue brief.

“Raising the normal retirement age may be considered as part of a reform package in addressing the increased costs to Social Security as a result of greater longevity,” said Amy Kemp, chairperson of the Academy’s Social Security Committee, which developed the issue brief, Raising the Social Security Retirement Age. 

The report says: 

“The fact that increased longevity is among the root causes of Social Security’s financial problems suggests that raising the normal retirement age is a likely—perhaps even necessary—component of any package of program changes that addresses them. The American Academy of Actuaries issued a public policy statement in 200810 advocating for an increase in Social Security’s normal retirement age as part of a package of reforms designed to restore the system’s long-term financial health.

“The Academy provides a necessary actuarial perspective for public policymakers in evaluating such an option, including discussion of important considerations when developing a reform package, such as variations in longevity increases across socioeconomic status.”

An increase in the normal retirement age would reduce benefits payable at any given claiming age while providing an incentive for delayed retirement and longer working lifetimes. It also has significant precedent as a public policy approach. 

In 1983, Congress enacted a series of phased increases in the normal retirement age, recognizing that life expectancy had increased substantially since the program’s inception. But while the age for collecting unreduced benefits thus increased by two years since Social Security began paying monthly benefits to retired workers in 1940, life expectancy at age 65 has increased by roughly 6½ years in that time. Social Security is currently projected to be able to pay only about 75% of scheduled benefits starting in 2034.

“This issue brief allows the unique expertise of the actuarial profession to assist in addressing Social Security’s financial condition, so the financial health of this vital public program is preserved for future generations,” said Kemp.

The Academy’s objective analysis presents actuarial rationales and potential approaches and challenges to raising the normal retirement age, including assessing a differential impact on lower-income beneficiaries whose longevity expectations differ from higher-income beneficiaries.

© 2022 RIJ Publishing. 

Our retirement system needs work: Morningstar

Posted on March 3, 2022 by -

The newly launched Morningstar Center for Retirement and Policy Studies has released a “Retirement Plan Landscape Report,” the first in a planned series of original reports on the status of the US defined contribution (DC) retirement plan system and the US retirement system as a whole.

The content and tone of Morningstar’s new Retirement Plan Landscape Report, from a new Morningstar retirement research group, reflects a crisp, business-like approach to the topic–one well-suited to Morningstar’s broad audience. Other resources in this space include the Employee Benefit Research Institute and the Vanguard, the Investment Company Institute, and Vanguard’s annual “How America Saves” reports.

The executive summary of the new report says quite bluntly that the domestic DC system needs help. It hemorrhages assets, and not all plans are equal. If you work at a big, profitable company, your DC plan is likely cheap and generous. The implication is that semi-skilled worker at small companies have expensive plans or none at all.  

The report explores four aspects of the US retirement system, including: trends across coverage, assets, and numbers of defined-contribution plans; costs to workers and retirees within these plans, as well as their investments; the kinds of investments held by these plans; and the continued role of defined-benefit plans for today’s retirees. Key takeaways include: 

  • Almost $5 trillion flowed out of defined-contribution plans from 2011 to 2020. These constant outflows, due mostly to rollovers and cash-outs, reduce plan assets. The US DC system relies on new employers to offer retirement plans every year to compensate for the more than 380,000 plans that closed over the period from 2011 to 2020. New contributions and strong returns have masked outflows of more than $400 billion a year since 2015. The decline reduces the leverage that plan sponsors might otherwise have to bargain for lower fees from asset managers and lower costs for participants.
  • The largest plans in the US today hold nearly 45% of their assets in collective investment trusts (CITs). These pooled vehicles resemble mutual funds but are less regulated and can be much less expensive for participants. Small and mid-sized plans continue to invest the majority of their assets in actively managed funds, with more assets in active strategies among smaller plans. 
  • People who work for smaller employers and participate in small plans pay around double the cost to invest as participants at larger plans, around 88 basis points (bps) in total compared with 41 bps, respectively. Small plans also feature a much wider range of fees between plans, with more than 30% of plans costing participants more than 100 bps in total.  
  • Defined benefit pension plans accounted for more than 30% of distributions paid to participants in 2019. About 12.8 million people, between family beneficiaries and retired participants, are collecting traditional pension benefits today. About 8.8 million people who are no longer working are still entitled to future benefits, and 11.7 million people who are still working will eventually receive benefits. 
  • US defined-contribution system in the aggregate tilted toward investments with more ESG risk—which is the degree to which companies fail to manage ESG risks, potentially imperiling their long-term economic value. Plan sponsors may wish to reexamine their investment choices using an ESG lens.

The Center’s primary research team includes Aron Szapiro, head of retirement studies and public policy at Morningstar, Jack VanDerhei, director of retirement studies for Morningstar Investment Management LLC, and Lia Mitchell, senior analyst of policy research for Morningstar, Inc.

VanDerhei joined Morningstar Investment Management LLC on March 1, 2022, after many years as research director of the Employee Benefit Research Institute. He’ll be responsible for modeling the impact policy changes and proposals might have on US retirement preparedness, as well as the effects of plan sponsors’ decisions on participants.  

The Center is planning to shed light on a range of topics in the coming year, including lifetime income in defined-contribution plans, the new anticipated fiduciary package, and the state of overall retirement preparedness among older workers. For more information about the Morningstar Center for Retirement and Policy Studies, please visit

© 2022 RIJ Publishing.