Government bonds are a key asset class for pension fund investment, allowing matching of long-term fixed liabilities. Sovereign risk, understood as the risk of default on government bonds, has historically been seen as low or zero in many developed economies. Government bonds have been perceived as “risk-free” instruments in part due to an implied capacity for countries to print more money should the ability to meet interest or maturity payments be called into question.
With the global financial crisis of 2008, and subsequent debt crisis in Europe, several eurozone economies have seen government bond yields rise well above what might be considered risk-free rates within the market. The implied sovereign risk reflects high levels of public debt in these countries together with the lack of any real room for manoeuvre given membership of the eurozone.
With COVID-19, the devastating effect on major economies of the pandemic is likely to mean that these governments are going to find it even harder to balance budgets. They may need to increase borrowing significantly, and the probability of sovereign default and/or possible exit from the eurozone can increase further.
What should pension plans and insurers with exposure to domestic sovereign risk within the eurozone consider? How might they manage the risk? In this article, Milliman’s Dominic Clark provides some insight and suggestions.
In these trying times, many investors are relying on trained professionals to help them understand the markets and stay committed to their long-term goals. While gender should not determine the quality of financial advice, it is noteworthy that eight out of 10 people giving the advice are men.
Our new societal and economic pressures create a greater sense of urgency for many financial decisions: assessing investment risk tolerance, retirement timelines, college funding, and healthcare costs. Now more than ever, people need financial “helpers.” By increasing the number of female advisors, a greater number of clients can benefit from the unique perspectives and life experiences women bring to help people navigate critical financial decisions. The “Great Lockdown” could be an opportunity and rallying cry to challenge more women to step into an advisory career.
In this article, Milliman’s Sheila Jelinek, Suzanne Norman, and Michelle Richter explain what makes an ideal financial advisor, whether women are better investors, and the business opportunity for female financial advisors.
Ken Mungan, Milliman’s Financial Risk Management practice leader, is quoted extensively in an article about Milliman’s customized hedging strategies for individual accounts, in the March 16 edition of Retirement Income Journal (access to the entire article requires login).
“We’re seeing the emergence of a client account on a platform with a protection strategy that would contain hedge aspects,” according to Mungan. “So many people have withdrawn from the market. This would give them protection.”
Milliman’s new service is driven by three factors: the failure of diversification during the recent global financial crisis, low bond returns, and the need for Baby Boomers to invest in equities in order to make up for their failure to save enough for retirement.
Mungan explains that Milliman’s approach offers investors a middle path—between advisory services with unprotected portfolios and complete market exposure, on one hand, and variable annuities with living benefits, on the other. Individual investors can participate in uncomplicated hedges that protect against severe downturns without abandoning gains if markets rise. It’s an approach uniquely suited to investors with anxieties about entering a volatile equities markets still feeling the effects of the recent financial crisis.
Does this service compete with some of Milliman’s traditional clients, such as insurers offering VA products?
Not really. In fact, Mungan thinks Milliman’s approach will actually create new business for insurance companies—by increasing the demand for unbundled living benefit riders, aka stand-alone living benefits (SALBs).
More details on the approach can be found at “Overcoming challenges through portfolio protection” on the Milliman website, an article Mungan co-authored with his Chicago colleagues Ghalid Bagus and Matt Zimmerman (who is also quoted in the RIJ article).