Global Institutional Annuity Market Update

Transcription

1 Global Institutional Annuity Market Update Liability De-Risking / Plan Terminations Second Quarter 2013 Hewitt EnnisKnupp, An Aon Company 2013 Aon plc Brief Description: This report reviews the international annuity market in the 1 st and 2 nd quarters, sample annuity rates in the market, and settlor vs. fiduciary considerations. Consulting Investment Consulting

2 Total Premium (billions) Total Number of Cases Settled First and Second Quarter International Market Update United States In the second quarter of 2013, there were 42 placements worth a total of almost $523 million, as reported to us by the insurance companies surveyed below. This lagged the second quarter of 2012 and the preceding quarter in terms of number of cases but beat both by over $100 million in total premium. The data comes from a survey of true pension annuity close-out deals (in addition to buy-ins and carve outs in advance of full close-outs) from ten insurance companies (11 companies from 2005 to 2009) active in the annuity marketplace. Other industry sources report similar data but may include other types of placements, such as early retirement incentive programs, annuitization of defined contribution plan balances and internal conversions of unpurchased defined benefit annuities. Total Settlements Insurance companies currently surveyed include: American General Life John Hancock Life Massachusetts Mutual Life ( MassMutual ) Metropolitan Life ( MetLife ) Year New York Life Pacific Life Total Premium Principal Life $40 $7 $6 $5 $4 $3 $2 $1 $0 $0.6 $1.8 $2.7 $2.3 $35.3 $0.8 $0.7 $0.9 $0.8 Prudential Insurance Company of America Transamerica Life United of Omaha Life Year Consulting Investment Consulting 1

3 No single insurance carrier has monopolized the industry in the last several years. Industry sales leaders in terms of total premium have been: Year Market Leader 2005 Principal 2006 John Hancock 2007 Transamerica 2008 MetLife 2009 MassMutual 2010 MetLife 2011 Prudential 2012 Prudential Annuity placement inquiries have been consistent, even with the continued low interest rate environment. As sponsors decide to de-risk their pension plans, they are contemplating various options such as partial plan settlements, dollar cost averaging strategies and other liability risk management solutions. Consulting Investment Consulting 2

4 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Interest Rate Annuity purchase rates dipped in April then rose throughout the second quarter to end the quarter 63 (immediate) and 66 (deferred) basis points above March 31, 2013 rates. The chart below illustrates annuity pricing and market interest rates since January % Historical Sample Annuity Pricing Rates Deferred Rate (Duration=15) Immediate Rate (Duration=7) 6.0% 30-Year Treasury Rate 10-Year Treasury Rate 5.0% 4.0% 3.0% 2.0% 1.0% Note: Rates are derived from a Hewitt EnnisKnupp survey completed monthly by eight insurance companies active in the marketplace. (Data since 3/31/2013 now excludes two companies, which are currently on bidding hiatus). The rates since 2011 are derived from the highest (most aggressive) interest rates available in the marketplace on plain vanilla cases as of the last working day of the calendar month. Since rates vary so much intraday, quotes are generally only held open for a couple of hours on the day they are published. Consulting Investment Consulting 3

5 Immediate Annuity Rates Deferred Annuity Rates Rates as of Low High Low High 6/30/ % 3.41% 3.78% 4.16% 5/31/ % 2.96% 3.34% 3.72% 4/30/ % 2.62% 2.95% 3.33% 3/31/ % 2.78% 3.12% 3.50% 2/28/ % 2.75% 3.23% 3.61% 1/31/ % 2.75% 3.26% 3.64% 12/31/ % 2.74% 3.04% 3.42% 11/30/ % 2.66% 2.98% 3.36% 10/31/ % 2.73% 3.02% 3.40% 9/30/ % 2.81% 3.05% 3.43% 8/31/ % 2.85% 3.15% 3.53% 7/31/ % 2.87% 3.14% 3.52% 6/30/ % 3.05% 3.35% 3.73% Note: Pricing interest rates can vary for many reasons. For estimate purposes, the low end of the range should be the starting point for cases that have complex plan provisions, contain data that has not been scrubbed, have cash balance and/or employee contributions, etc. Extra conservatism for such circumstances should possibly be added to lower the estimated rate even further. According to the Aon Hewitt Pension Risk Tracker, the aggregate funded ratio of pension plans in the S&P 500 Index showed a healthy improvement from 81.4% at the beginning of the quarter to 84.8% at the close of the quarter. The increase was driven by a 5.9% decrease in pension liabilities, primarily due to an increase in corporate bond yields used to discount them. Also, 10-year treasury rates were up by 0.62% over the quarter, while credit spreads narrowed marginally by 0.06%, resulting in an uptick in the 10-year corporate bond yield from 4.00% to 4.56% during the quarter. Overall, pension assets had a strong performance and increased by 1.9% during the quarter. Over the last twelve months, the aggregate S&P 500 funded ratio improved by about 9.6% from 75.2% to 84.8%. 10-year treasury yields increased by 82 basis points, from 1.67% to 2.49%. Aa credit spreads shrunk by 16 basis points from 223 to 207. Combined with the decrease in 10-year treasury yields, corporate Aa yields increased by 66 basis points from 3.90% to 4.56% over the last year. is resulted in the S&P 500 pension deficit decreasing from $464 billion to $226 billion over the last 12 months. This was due to a reduction in the valuation of liabilities and good performance from pension assets. Consulting Investment Consulting 4

6 Canada The first quarter of 2013 closed with total annuity placements of $180 million (compared to $308 million for the first quarter of 2012) based on information provided by LIMRA. Annuity placements for 2012 totaled $1.054 billion, so based on annuity activity through the first quarter of 2013, expected annuity placements for 2013 are expected to miss the 2012 level. During this period, no single insurer dominated the market. In June 2013, Sun Life Assurance Company of Canada announced a $150 million annuity "buy-in" policy with Canadian Wheat Board with a full indexation to the rate of change in the Canadian Consumer Price Index (CPI). This type of "buy-in" annuity, which consists mainly of an investment that transfers investment and longevity risk to an insurance company, is starting to hit the market as a new innovative solution for pension committees in the Canadian market. In June 2013, the Canadian Institute of Actuaries (CIA) re-affirmed their discount rate guidance for estimating the cost of purchasing non-indexed group annuities for hypothetical wind-ups and solvency valuations, which uses Government of Canada (GoC) long-term bond yields (CANSIM series V39062) plus a 70 basis point (bp) margin to valuations with effective dates between December 31, 2012 and December 30, As of March 31, 2013, the average of the most competitive quotes came out at a discount of 3.03% (for large purchase). For the second Quarter of 2013, interest rates have been on the rise. The GoC bond yield rose from 2.33% on April 1 st to 2.84% on June 28 th with an average at 2.41%. For more information, please contact Eric Tardif at or Mathieu Bouvrette at Consulting Investment Consulting 5

7 United Kingdom There were 54 cases written in the UK in the first quarter of 2013 for a total of 876 million, which is above the first quarters in the last few years. Legal & General (L&G) was again the leader by far in terms of the number of placements in the first quarter, with 27 cases written for 359. Three insurance companies took over 90% of the business placed by overall volume: Legal & General, PIC and Rothesay Life. Legal & General furthered its presence by announcing on June 26th that it would acquire Lucida PLC, subject to regulatory approval. Lucida took on liabilities from 2008 to 2012, when it closed to new business. The first quarter of 2013 had the following two longevity swap transactions, whose overall size made the quarter the best ever for this part of the market. Aon Hewitt was the lead advisor on both. A 3.2bn longevity swap for BAE Systems, with Legal & General. This was the biggest UK pension settlement transaction to date. A further 400M longevity swap deal for Bentley Motors, with Abbey Life. Other topics of note include the release of a discussion paper on the treatment of insurance policies and other longevity risk transfer in pension schemes by the Pensions Research Accountants Group. It provides expected final guidance on best practices for the treatment of buy-in and longevity swaps, including various asset valuation options. In addition, Interest is continuing to grow for medically underwritten annuities annuities using information gathered on key members health and lifestyle to price longevity risk more accurately. Trustees are starting to become more familiar with this approach to pricing, and there is considerable appetite to know more. The effective date of Solvency II, the new solvency regime for European Insurance Companies, had been pushed back to In the meantime, there was substantial relief for pension schemes, as a key part of the proposed Solvency II equivalent standard for pensions the use of a holistic balance sheet as a new test of funding adequacy was put on ice. For more information, please contact Paul Belok at +44 (0) Consulting Investment Consulting 6

8 Mexico In Mexico, pension plans are relatively new. As mentioned in previous issues, the retirement savings culture is not widespread. However, the Mexican government is making efforts to promote it since the Social Security Law change in In 1997, Social Security Law passed from a Defined Benefit scheme (Law 73) to a Defined Contribution scheme (Law 97). Employees in Law 73 are the transition generation. They will be entitled to select the benefit they want to receive (either Law 73 or Law 97). The annuity market is linked to Social Security pension payments and there are ten insurance companies that provide Social Security life annuities. Only a couple of companies offer private retirement life annuities. Cumulative premiums from 2010 are as follow: Premiums Period Ending March $276,450 $288,034 $336,527 $348,713 June $591,354 $555,705 $650,583 $ September $884,334 $877,212 $1,010,902 December $1,219,116 $1,211,473 $1,356,385 Exchange Rate: $1 USD = 13 Mexican pesos. Figures in US (000s) Every year more pension plans are implemented. While the transition generation of Social Security is decreasing and the new generation is increasing, the annuity market and retirement savings culture will acquire greater importance in Mexico. Due to the aging population, the market increases every year and there are more campaigns in terms of retirement savings. For more information, please contact Patricia Barra at +52 (55) x2821. Consulting Investment Consulting 7

9 The Settlor and Fiduciary Elements of Annuity Settlements Plan sponsors have witnessed gains in pension plan funding levels driven by strong equity markets and a rise in interest rates. These market dynamics have made the economics of settling pension liabilities more attainable, especially for financially flexible firms willing to trade short term costs for a reduction in risk. The settlor and fiduciary implications of annuity settlements are key considerations for pension plan sponsors. Settlor versus Fiduciary Overview Settlor decisions are focused on company interests, and do not fall under the fiduciary standards covered under ERISA. Examples of common settlor decisions are: amending a pension plan, freezing plan participation, terminating a pension plan, redesigning a plan (e.g., by adding a lump sum feature), or changing a benefit formula. Fiduciary decisions focus on the interests of plan participants. ERISA governs these decisions which require fiduciaries to act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to plan participants and their beneficiaries. Plan fiduciaries must act with the duties of loyalty, care, skill and prudence under the circumstances existing at the time when taking actions on behalf of plan participants. Examples of common fiduciary decisions are: hiring and monitoring of service providers for the plan, decisions with respect to the use and investment of plan assets and communicating with plan participants with respect to administration of the plan. In most instances, U.S. plan fiduciaries are also employees of the plan sponsor, so they may serve both settlor and fiduciary roles depending on what decisions are being made. While it is acceptable and quite normal for retirement plan decision makers to serve in both functions, it is important to remember to distinguish each role when making settlor or fiduciary decisions involving the plan. For example, most plan sponsors have a plan committee to establish a bright line between decisions made on behalf of the plan sponsor and decisions focused on the implementation of settlor decisions and the administrative and related fiduciary components of managing the retirement plan program. Well-documented compliance is essential for plan fiduciaries, as they may have unlimited personal liability in the event of fiduciary breaches. Annuity Specific Considerations Annuity settlements give rise to some significant decisions which are required by both the settlor and the fiduciary. The settlement decision making process starts with the plan sponsor s taking on the settlor role as the organization analyzes and manages the costs associated with its pension program. Below are some specific settlor-focused actions which correlate with considering an annuity settlement: Conducting settlement feasibility analysis Educating company management on the annuity marketplace Resolving to terminate the pension plan Amending the plan to annuitize existing retirees (with or without terminating the plan) Using corporate assets to pay for settlor related services Consulting Investment Consulting 8

10 A settlor decision to explore a pension settlement triggers a need for the plan fiduciaries to execute that decision with the interests of plan participants as their guiding light. Below are some specific fiduciaryfocused actions which correlate with implementing an annuity settlement: Determining the right advisors, including outside counsel and independent fiduciaries, as needed Ensuring that service provider fees are reasonable Understanding the process used to analyze insurers financial strength Reviewing and selecting an insurance company that is determined to be the safest available annuity provider Using plan assets to pay for plan-related services Conclusion Plan sponsors are increasingly focusing on managing pension risk, and settling pension liabilities is a core risk management strategy. Settlement via annuitization involves a combination of settlor and fiduciary decisions. It is critically important for plan sponsors to understand the distinction between settlor and fiduciary decisions and to have processes in place to identify which decisions should be made by the plan sponsor in its settlor capacity, and which decisions should be made by the plan fiduciaries in their role of focusing on plan participants. Consulting Investment Consulting 9

11 Contact Information U.S. Team Steve Shepherd Partner Hewitt EnnisKnupp Jay Dinunzio Senior Consultant Hewitt EnnisKnupp Jennifer Lawrence Consultant Hewitt EnnisKnupp Canada Eric Tardif Senior Consultant Aon Hewitt Mathieu Bouvrette, CIM Consultant Aon Hewitt United Kingdom Paul Belok Partner Aon Hewitt +44 (0) Mexico Patricia Barra Aon Hewitt +52 (55) x2821 Consulting Investment Consulting 10

12 About Hewitt EnnisKnupp Hewitt EnnisKnupp, Inc., an Aon plc company (NYSE: AON), provides investment consulting services to over 450 clients in North America with total client assets of approximately $2 trillion. More than 240 investment consulting professionals in the U.S. advise institutional investors such as corporations, public organizations, union associations, health systems, endowments, and foundations with investments ranging from $3 million to $700 billion. For more information, please visit About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Consulting Investment Consulting 11