Monthly Archives: February 2011

Annuities and interest rates

We’ve talked before about how interest rates affect pension funded status. There are also implications for annuities. Investment News picks up on the potential for interest rates to affect the demand for indexed annuities; here is an excerpt.

Last year was a mixed blessing for carriers that sell the products, which offer a guaranteed minimum return, as well as a return based on the performance of a stock market index. Customers flocked to indexed annuities, at least in part because of new living-benefit features, generating some $32.1 billion in sales, up 7% from 2009, according to LIMRA. But low interest rates made the business less profitable for carriers.

The low-rate environment forced the largest indexed-annuity sellers — Allianz, American Equity Investment Life Holding Co. and Aviva USA — to begin trimming features last fall.

“Now, yields have come back to where they were at the start of 2010, and we’re having conversations again with carriers about enhanced features,” said Tim Hill, a consulting actuary and principal at Milliman Inc.

Carriers had loaded their investment portfolios with cash following the financial crisis and then gradually shifted funds to highly rated corporate bonds in search of yield. At the beginning of 2010, a seasoned corporate bond rated Aaa by Moody’s Investors Service was yielding 5.34%. But yields on top corporates dropped over the summer, falling to as low as 4.31%. (They rose to 5.26% by mid-month.)

That decline sparked a number of product cutbacks, as low yields constrict what carriers can afford to offer in the way of benefits, Mr. Hill said.

America saves?

Today marks the end of “America Saves Week,” which puts us in mind of all things saving-related. A few basic concepts:

Of course it may take more than a week for behavioral changes to take hold. Is it too late to suggest that we make 2011 America Saves Year?

The bucket list

Robert Powell of MarketWatch turns his attention to the question of a “bucket list” and how retirees can accomplish all they hope for in retirement.

Spending time with family and friends is among the most common items on the bucket list. Timothy Harris, a principal with principal at the consulting firm Milliman and the author of “Living to 100 and Beyond,” says, “social connections including family and friends are important and have been shown to add to longevity. This isn’t restricted to FaceBook connections, although that can be a start. Spend, instead, face time with family and friends.”…

Identifying your interests — be it travel or gardening or playing a musical instrument — and what makes you happy are, of course, important. But unless you have a plan and the money to pursue your interests, this bucket list might as well be a sieve.

For instance, Harris said, you might need to consider a phased retirement or delayed retirement. In addition, you’ll need a realistic projection of post-retirement income and expenses. “Financial planning is the key to being able to accomplish the bucket list,” Harris said.

The full article is available here.

EB/employment-based items in the president’s budget proposal

The president released his budget proposal for fiscal year 2012 (which begins October 1, 2011). Congress ultimately will decide whether to translate the proposal (or parts of the proposal) into legislative language.

Provisions in the administration’s proposal for employee benefits, compensation, or employment implications include:

  • A requirement that employers in business for at least two years and that have more than 10 employees offer an automatic-enrollment IRA option with contributions made on a payroll deduction basis, along with a temporary tax credit for employers to do so
  • A doubling of the small employer tax credit (from $500 per year to $1,000 per year) for three years for employers that adopt a new qualified retirement, SEP, or SIMPLE plan
  • Authority for the PBGC Board to increase premium payments, along with a study conducted over two years (with public comment) before implementation and gradual implementation of any increases

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What’s in a name?

David Benbow

I just wanted to take this moment to say goodbye to FAS87.

FAS87 is the accounting standard that actuaries have lived by since 1985 to value pension expense. With the abundance of pension legislation over the last few decades, FAS87 was always a loyal friend, making sure that our plans were correctly accounted for.

Now, alas, the Financial Accounting Standards Board has rechristened FAS87 with the much-less-catchy moniker of FASB ASC 715-30-25. It just doesn’t roll off the tongue quite the same way.

In this era of clever names for new pieces of legislation, couldn’t they come up with something better than FASB ASC 715-30-25? For example, the Heroes Earning Assistance and Relief Tax (HEART) Act required legislators to use a little creativity. And let’s not forget the recent attempt by Congress to pass the Repealing the Job-Killing Health Care Law Act.

It just makes me sad (in a geeky pension-administrator kind of way) that old friends like FAS87 don’t merit the flashy repackaging that new legislation does. It makes me worry that ERISA might be next on the list, to be renamed something cumbersome like Omnibus Legislation Describing Pensioners’, Employees’, and Other Participants’ Lifetime Earnings. Think about it.

Goodbye, FAS87. We’ll miss you.

What if you go broke in retirement?

The Street poses a question that may haunt more retirees than you think:

So what happens if, into your retirement, you run out of money? What options are you left with?

“You hope you have good family and good services in your community and that sort of thing,” says Noel Abkemeier — a retirement actuary for Milliman and an active member of the Society of Actuaries. “Of course when your account runs dry, hopefully you still have Social Security coming in your direction.”

One in six older Americans lives below the federal poverty line, according to a recent government analysis.

Corporate pensions begin 2011 with improvement in funded status

Milliman’s latest Pension Funding Index was released today. These results indicate that corporate pensions are off to a good start in 2011. If you look at the funded ratio, this is the first time we’ve been above 80% since last April. At the same time, the pension deficit has been yo-yoing between $200 billion and $450 billion for the last two years, and we are still susceptible to that kind of volatility.

Here is an exhibit showing how the deficit changed this month:

The “To” versus “Through” distinction in target date funds

Jeff_MarzinskyA follow-up to my last note on the proposed rule released recently by the Department of Labor (DOL) that would amend both the qualified default investment alternative (QDIA) regulation and the participant-level disclosure regulation: The DOL commented in its proposal that many target date funds, with dates of 2010 and 2015, still had up to half of their portfolios invested in equities. This allocation, coupled with the significant market volatility and decline in 2008, led investors who were nearing retirement to significant losses. The DOL goes further to note that many of the funds did not significantly reduce their equity allocations until five or more years after their target dates.

“To” versus “Through” target date funds

This concept is very important and is an area that must be understood by both the plan sponsor that introduces target date funds as an investment in a retirement plan as well as by the investor or plan participant. As a target date fund winds down to its terminal point, the allocation to equity should gradually reduce by design. A confusing area is that if the fund states its target is 2010, one would assume that 2010 is the date that the fund hits its most conservative allocation. Well, for some target date funds that is not exactly true.

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WSJ: Building a cheaper annuity

The Wall Street Journal reports on an emerging approach to annuities that may include lower fees for participants. Here is the quick explanation:

A longstanding beef against variable annuities is their steep cost. A big plus of exchange-traded funds is their ultralow cost.

Finally, momentum is growing to pair the two financial products in innovative ways, a trend consultants say is good for many people who are trying to save for retirement.

The products now emerging have lower fees, though it’s important to understand that the participant still needs to fund the guarantee:

The ValMark-Milliman approach still awaiting SEC approval is innovative in that it moves part of the financial-hedging program from the insurer’s balance sheet into ETF portfolios. By taking that off the insurer’s books, costs can be lowered for consumers, [Milliman principal Ken] Mungan says. That’s because the insurer doesn’t have to raise prices to compensate for the punitive effect on reported earnings per share that sometimes results from holding financial hedges, under generally accepted accounting principles.

“The consumer is paying for the hedge asset no matter what,” Mr. Mungan says. “But here, the consumer buys and owns the hedge asset at a cheaper price” through the ETF portfolio itself.

For more on exchange-traded funds, go here. For more on the potential for retirement security from variable-annuity-like products, go here.

Day of reckoning for pensions drawing closer?

Reuters picks up on a familiar line of discussion: The plight of corporate pensions. Here is an excerpt:

Companies in a wide swath of sectors are shoring up pensions, warning about hits to earnings and even taking drastic measures such as an overhaul of their pension accounting.

Behind all the activity is a ballooning corporate pension deficit, worsened by retiring baby boomers and poor returns on pension assets over the past decade.

Liabilities for the 100 largest U.S. corporate pension plans have jumped by 78 percent since 2000 to $1.44 trillion, while assets have grown by just 15 percent to $1.15 trillion, according to consulting firm Milliman.

Congress gave companies breathing room to close the gap in a 2006 pension law, but the day of reckoning is getting closer.

You’ll find the full article here.