Matt Condos, Senior Vice President, FSA, MAAA Registered Representative of Voya Financial Partners, LLC (member SIPC)

Transcription

1 Stable Value November 4, 2015 Matt Condos, Senior Vice President, FSA, MAAA Registered Representative of Voya Financial Partners, LLC (member SIPC) Kyle Puffer, Senior Actuary and Head of Retirement Valuation, FSA, MAAA

2 Agenda Stable Value Introduction Current Market Overview Update on Statutory Reserve Proposals 2

3 STABLE VALUE INTRODUCTION 3

4 Retirement Products Overview Pension Plans 401(k) Plans Cash Balance Plans 403(b) Plans 412(e)(3) Plans Annuities. Individual Products Bonds 457 Plans Profit- Sharing Plans IRAs Money Market Funds 4

5 Stable Value Overview Stable Value offers principal preservation and stability for participants seeking a conservative component in their portfolio. Steady growth over time without daily fluctuations through a fixed crediting rate General liquidity for participant transactions (certain conditions may apply) Conservative Option for 404(c) in DC plans Strives to be an income producing, low-risk, liquid fund Less Risk Spectrum 1 More Money Market Funds Stable Value Funds Bond Funds Balanced Funds Growth & Income Funds Growth Funds International /Global Equity Funds Specialty Funds 1 SVIA presentation Stable Value: What s on the Horizon? 5

6 Stable Value in All Phases Easy way to get started Protect against loss of accumulated assets Plan for retirement by assuring that the amount needed for withdrawal is secure Older participants are more likely to invest in fixed-income securities such as bond funds, GICs and other stable-value funds, or money funds. 2 Beginning Career Mid-Career Late Career Retirement One of the great things about stable value is that it s a great entry point for millennials because it has a loose relationship to equities. They can use it to get comfortable investing in equities in their 401(k) plan. 1 Part of a diversified portfolio Can use stable value to create a self-managed stream of payments similar to an annuity without the additional cost or complexity that comes with some annuity products 1 Gina Mitchell, President, Stable Value Investment Association. 2 Employee Benefit Research Institute, Issue Brief No. 408, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in

7 Stable Value Overview Stable Value Funds are a Core Investment in Defined Contribution (DC) Employee Benefit Plans Utilization $706 billion invested in stable value assets 1 Offered in approximately half of all 401(k) plans 1 Key Points Providers Providers Benefit responsive contracts that guarantee participants can transact at book value (i.e.; principal value plus accrued interest) High quality, liquid fixed income securities backing contracts Current accounting regulations - FASB ASC Section (formerly SOP & FSP AAG INV-1) - allow valuation of benefit responsive contracts at contract value or book value in Defined Contribution plans Insurance Companies Banks Investment Firms / Trust Companies 1 SVIA Stable Value at a Glance Presentation and SVIA s 19 th Annual Investment Policy Survey Covering Stable Value Assets as of Year End

8 Benefits of Stable Value Stable value provides capital preservation and consistent, steady returns. Source: SVIA Stable Value at a Glance Presentation 8

9 Stable Value Risk & Return Stable Value offers unique risk and return characteristics rarely found in other asset classes. Stable Value is one of few assets classes that consistently generates positive returns in all market cycles Returns that are generally higher over the long-run than money market funds and cash Less risk (volatility) to principal than most bond funds Since their inception in 1973, Stable Value funds have undergone several severe tests and have weathered the storms through countless challenging circumstances Source: How Stable Value Stacks Up Presentation, by Professor David F. Babbel of The Wharton School, University of Pennsylvania and Charles River Associates, Director of Insurance Economics Practice 9

10 Participant Asset Allocation A participant s Stable Value asset allocation is correlated to the equity market returns. Source: Aon Hewitt 401(k) Index TM - Historical Asset Allocation Pattern May 1995 May

11 Types of Stable Value Investments SV PRODUCT: Guaranteed Insurance Accounts: General Accounts Guaranteed Insurance Accounts: Separate Accounts Synthetic GICs DESCRIPTION: Contracts and agreements with an insurance company that provide principal preservation, benefit responsiveness, and a guaranteed fixed or indexed rate of return backed by the assets of the insurer s general account. Contracts and agreements with an insurance company that provide principal preservation, benefit responsiveness, and a guaranteed rate of return backed first by assets held in a segregated account separate from the insurer s general account and then, to the extent there are any shortfalls, by assets in the general account. Contracts and agreements with a bank or insurance company that provide principal preservation, benefit responsiveness, and a guaranteed rate of return relative to a portfolio of assets held in an external trust and backed by assets held in the trust. RATE OF RETURN: Guaranteed regardless of the performance of the underlying class May be fixed, indexed, reset periodically, or based on the actual performance of the segregated assets. Provides a periodic rate of return based on the actual performance of the underlying assets. ASSETS: Owned by the insurance company and held within the insurer s general account. Owned by the insurance company but set aside in a separate account for the exclusive benefit of the plan(s) in the separate account. Directly owned by the participating plan(s). % MARKET 1 : 40% 16% 39% 1 SVIA 19 th Annual Stable Value Investment & Policy Survey as of year-end 2014 ( Cash & Other make up remaining 5%) Source: Bloomberg BNA A Guide to Stable Value Funds for Pension Plan Sponsors and Advisors and SVIA Stable Value Guaranteed Insurance Accounts FAQs

12 FUND STRUCUTRE 2 BU PRODUCTS Initiatives 1 Stable Value Structures General Account Separate Account Synthetic GIC Individually Managed Single Plan Accounts 27% Life Insurance Company Full Service Funds 53%! Bloomberg BNA A Guide to Stable Value Funds for Pension Plan Sponsors and Advisors and SVIA Stable Value Guaranteed Insurance Accounts FAQs SVIA 19 th Annual Stable Value Investment & Policy Survey as of year-end 2014 ( Cash & Other make up remaining 5%) Pooled Funds 20% 12

13 Separate Account and Synthetics Managed portfolio of high-quality, fixed income securities The investment contract provides preservation of principal and a stable crediting rate The investment contract smoothes market volatility by amortizing gains and losses over the duration of the portfolio This smoothing is triggered through the rate reset mechanism and insulates against day-to-day volatility Stable Value Portfolio Asset Value Market Value of underlying portfolio Falling interest rates Investment Contracts Stable Value Fund Time Rising interest rates Wrap Value Book Value Market Value Source: SVIA presentation Stable Value: What s on the Horizon? 13

14 CURRENT MARKET OVERVIEW 14

15 Evaluating Stable Value PROVIDER Underwriting Contract Features Investment Guidelines Plan Features Participant Demographics PLAN Structure Provider Strength & Commitment Crediting Rate Level & Volatility Contract Features Investment Portfolio 15

16 Stable Value Market Size Stable Value Market is contracting due to several factors. $450 Approx. Notional Outstanding (in billions) $400 $402 $403 $400 $395 $391 $350 $ H2015 Source: Valerian Capital Group, 2Q Survey 16

17 Stable Value Market Sales Per LIMRA, Stable Value sales have been declining in recent years. ($Mn) New sales Refers to deposits to new contracts and deposits to new funding agreements. Ongoing deposits Includes deposits to existing contracts and existing funding agreements. Renewal sales Includes contracts that have fixed maturities and roll over to new contracts each 3, 6, or 12 months. Initial sales of these contracts are reported as new sales. Source: SVIA/LIMRA presentation : Stable Value and Funding Agreement Products, First and Second Quarters 2015, pgs. 12 & 17 17

18 New Product Development International 529 Plans BOLI/ COLI Health Savings Accounts 403(b) Target Date Funds Retirement Income IRA Market 18

19 Regulatory Items DOL Fiduciary Proposal Dodd Frank GAO Study of QDIA s FASB Money Market Reform NAIC Statutory Reserve Proposal 19

20 UPDATE ON STATUTORY RESERVE PROPOSALS 20

21 Upcoming Statutory Regulatory Changes Proposals in progress will modify existing statutory regulations for in-force stable value business. Proposals Changes to Model 695 (Synthetic GICs) Changes to Model 200 (Separate Accounts Funding Guaranteed Minimum Benefits Under Group Contracts) Applies to separate account GICs Impacts Will generally reduce stat reserves in low rate/credit stress scenarios Strengthens reserving, Cash Flow Testing and Plan of Operations requirements for Pooled Fund Contracts to reflect incremental risk associated with plan sponsor put provisions Status NY Reg 128 modified in 2014 (does not follow NAIC model) NAIC model 695 modifications likely to be adopted by NAIC in 2015 NAIC Model 200 modifications under peer and policy review at AAA Not yet presented to NAIC 21

22 Existing Statutory Regulation NAIC Synthetic Guaranteed Investment Contract Model Regulation (Model Regulation 695) Reserve equals excess, if any, of (1) PV of guaranteed benefits using spot rate supportable by the expected return from segregated portfolio but not greater than 105% of the treasury spot rate over (2) market value of assets less deductions Present Value of 105% Treasury Reserve (Vx) Market Value of Assets Deductions Adjusted Market Value Source: American Academy of Actuaries: 22

23 Existing Statutory Regulation State Specific Regulations MN Bulletin % of treasuries for discounting No market value haircuts NY Regulation 128 (requirements updated in 2014) Maximum discount rate is greater of 105% of treasuries Minimum of 2% and treasuries +1% Different market value haircuts CT Regulation 38a-459 Follows NAIC model CA and NE Title 210, Chapter 80 Reserves must be > 30% of accumulated fees collected, but not more than 150% of fees collected in the current year NJ Regulation 11: No market value haircuts 23

24 Timeline of Events 2008 Financial Crisis 2012 Synthetic GIC Proposed Changes to Statutory Valuation Methodology 2014 Synthetic GIC Additional Proposed Changes to Statutory Valuation Methodology Future Expectations A Plan is Born to Update Existing Statutory Regulations LATF Feedback on Proposed Changes Current Status 24

25 Financial Crisis Existing Regulation Scrutinized Reserves increased significantly at year-end 2008 due to low Treasury rates and high spreads on investment grade corporate bonds Temporary relief granted by some states Need for a permanent solution within the statutory framework Does not distinguish between single client and pooled fund contract Source: American Academy of Actuaries: 25

26 Statutory Regulations Update Plan A plan is born to update Existing Statutory Regulations NAIC s LATF requested that the Deposit Fund Subgroup of the AAA Annuity Reserve Work Group investigate and recommend modifications to the existing statutory regulations applicable to in-force business, August, Source: American Academy of Actuaries: 26

27 Synthetic GIC Proposed Changes to Statutory Valuation Methodology 1 Determination of the Discount Rate Substitute 50% Treasury-based spot rate plus 50% corporate bond index spot rate for 105% of the Treasury spot rate Results in lower reserves when Treasury rates are low and credit spreads are wide Source: American Academy of Actuaries: 27

28 Synthetic GIC Proposed Changes to Statutory Valuation Methodology 2 Deduction to the market value of assets Eliminate the deduction provided Asset default risk borne by the plan participants Transfer of risk reflected in contractual provisions No change to the deduction if: Asset default risk borne by the insurance company Results in lower statutory reserves for impacted contracts Aligns asset deductions with AVR requirements for separate accounts Source: American Academy of Actuaries: 28

29 LATF Feedback on Proposed Changes LATF requested that the Subgroup expand the proposal to clarify and strengthen the valuation requirements for Synthetic GICs issued to pooled funds within the existing deterministic valuation framework and to provide more transparency in the Plan of Operations Subgroup provided guiding principles to expand the proposal and discussed them with LATF on a December 2013 conference call LATF requested that the Subgroup proceed with expanding the proposal based on the guiding principles Source: American Academy of Actuaries:

30 Synthetic GIC Additional Proposed Changes to Statutory Valuation Methodology 3 Clarify and strengthen the valuation requirements for pooled fund contracts Reflect known cash flows associated with the plan sponsor book value put option Reflect a prudent estimate of projected future cash flows associated with the plan sponsor book value put option based on experience and other relevant criteria Use a single valuation rate equal to the lesser of the expected return from segregated portfolio of assets and the blended spot rate based on the duration of the segregated portfolio of assets 4 Expand the actuarial memorandum requirements related to withdrawal risks Consider the impact of any dynamic lapse assumptions Consider sensitivity testing the prudent estimate of projected future cash flows associated with plan sponsor book value put withdrawals 5 Expand the requirements in the Plan of Operations for pooled fund contracts Describe criteria used by insurer in approving pooled fund and investment manager Describe risk mitigation techniques used by insurer for pooled fund contracts Source: American Academy of Actuaries:

31 Current Status Approved by NAIC LATF March 2015 Approved by NAIC Life and Annuity A Committee August 2015 Expected to go to NAIC Executive & Plenary Committee for vote on November 22,

32 Future Expectations Will require legislative action to be effective in states with specific regulations Proposed modification to Model 695 does not apply to Separate Account GICs Covered under Model Regulation 200 Separate Accounts Funding Guaranteed Minimum Benefits Under Group Contracts Proposed modifications to Model 200 are currently under peer and policy review at the AAA Very similar to Synthetic GIC Proposal

33 Concluding Remarks Stable Value Introduction Current Market Overview Update on Statutory Reserve Proposals 33