Global Institutional Annuity Market Update

Transcription

1 Global Institutional Annuity Market Update Liability De-Risking/Plan Terminations Fourth Quarter 2013 Hewitt EnnisKnupp, An Aon Company 2014 Aon plc Brief Description: This report reviews the international annuity market in the fourth quarter of 2013, sample annuity rates in the market and annuity purchases in Puerto Rico. Consulting Investment Consulting

2 Fourth Quarter International Market Update United States In the fourth quarter of 2013, 83 settlements worth a total of almost $2.4 billion were reported by the insurance companies surveyed below. This was four times the amount of premium placed in any of the preceding three quarters of There were 235 settlements for the year with a total premium of $3.8 billion, lagging 2012 (which saw jumbo deals from GM and Verizon), but outpacing total premium in all years from 2005 to The data comes from a survey of true pension annuity closeout deals (in addition to buy-ins and carveouts in advance of full closeouts) from 10 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 Total Number of Cases Settled Total Premium (billions) $40 $7 $6 $5 $4 $3 $2 $1 $0 114 $ $ Year 180 Total Premium $2.7 $ $0.8 $0.7 $ $35.3 $3.8 Insurance companies currently surveyed include: American General Life ING Life Insurance & Annuity Massachusetts Mutual Life ( MassMutual ) Metropolitan Life ( MetLife ) New York Life Pacific Life Principal Life 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 2013 MetLife 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 Annuity purchase rates fell slightly in October, then rose in November and ended December at levels not seen since mid January and February 2014 rates declined. The chart below illustrates annuity pricing and market interest rates since January 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 held open for only 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 2/28/ % 3.41% 3.79% 4.17% 1/31/ % 3.42% 3.86% 4.24% 12/31/ % 3.66% 4.11% 4.49% 11/30/ % 3.52% 4.02% 4.40% 10/31/ % 3.39% 3.82% 4.20% 9/30/ % 3.47% 3.88% 4.26% 8/31/ % 3.59% 3.97% 4.35% 7/31/ % 3.45% 3.89% 4.27% 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% 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 possibly should be added to reduce 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 started the fourth quarter at about 88% and ended at 91%. The increase was driven by a 3.8% increase in pension assets due mainly to equity performance (the Russell 3000 Index returned 10.1%). Pension liabilities had a modest increase of 0.3%. Ten-year Treasury rates were up by 4 basis points over the quarter but credit spreads narrowed by 4 basis points, resulting in no change in the discount rate over the quarter for an average pension plan. Over the last 12 months, the aggregate S&P 500 funded ratio improved to 91%. The S&P 500 pension deficit decreased from well over $400 billion to $155 billion during this period, due to a substantial reduction in valuation of liabilities by $162 billion and an increase in pension assets of $114 billion. Consulting Investment Consulting 4

6 Canada Based on information provided by LIMRA, the fourth quarter of 2013 closed with total annuity placements of $1,280 million (compared to $428 million for fourth quarter 2012). In 2013, annuity placements totaled $2,218 million, which is twice the 2012 volume of $1,054 million. The market showed an increased interest in de-risking among defined benefit pension plans. During this quarter, two insurance companies dominated the market with about three-quarters of the purchases divided equally between them. In January 2014, the Canadian Institute of Actuaries (CIA) published its revised discount rate guidance for estimating the cost of purchasing non-indexed group annuities for hypothetical wind-ups and solvency valuations. The cost of purchasing non-indexed annuities is now estimated using the duration of the liabilities plus the Government of Canada (GoC) long-term bond yields (CANSIM series V39062). Effective December 31, 2013, the discount rate guidance above unadjusted CANSIM series V39062 is: Low duration (<7.6) +50 basis points Medium duration +70 basis points High duration (>12.1) +80 basis points During the fourth quarter of 2013, interest rates rose. The GoC bond yield rose from 2.97% on October 1 to 3.13% on December 31 with an average at 3.02%. Rates reached a high of 3.15% during the quarter on December 27, which is below the 2013 high of 3.20% attained in September. For more information, please contact Eric Tardif at or Mathieu Bouvrette at Consulting Investment Consulting 5

7 United Kingdom The total volume of business placed in the fourth quarter of 2013 was 1,933 million (77 cases), for a total of 7,782 million (228 cases) in This was the second highest year since the low of under 2 billion in 2006 (2008 was over 8 billion). The largest new deal in the fourth quarter was a 670 million transaction securing all of a scheme s liabilities for NCR, advised by Aon Hewitt Limited and placed with PIC. This deal was second only to the largest UK buyout deal to date the 1.5 billion settlement of the EMI scheme, following the 1.1 billion settlement of the once-related Thorn scheme, in This placed with PIC and was advised by Aon Hewitt Limited, as well. PIC, Rothesay Life and Legal & General remain the leading insurers in terms of overall volume. Medically underwritten deals are gaining further ground, though still only a small number of deals have been written to date. A key challenge for further expansion of this area is the development of a costeffective process for obtaining quotations from multiple insurers to increase competitive tension. Longevity swap transactions had a record quarter ( 5.3 billion in the fourth) and year ( 8.8 billion). In February 2014, Rothesay announced its proposed acquisition of MetLife s UK bulk annuity business, subject to regulatory approval. 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 has been making efforts to promote it since the social security law change took effect 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 10 insurance companies that provide social security life annuities. Only a couple of companies offer private retirement life annuities. Cumulative Premiums From 2010 Period Ending March $276,450 $288,034 $336,527 $348,713 June $591,354 $555,705 $650,583 $830,410 September $884,334 $877,212 $1,010,902 $1,211,807 December $1,219,116 $1,211,473 $1,356,385 $1,546,080 Exchange rate: $1 USD = 13 Mexican pesos. Figures in USD (thousands). Every year more pension plans are implemented. While the transition generation of social security is shrinking and the new generation is growing, the annuity market and retirement savings culture will acquire greater importance in Mexico. Due to the aging population, the market grows 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 Puerto Rican Pension Plan Terminations: Look Before You Leap! In 2011, the Puerto Rico Internal Revenue Code of 1994 ( 1994 PRIRC ) was amended and restated by the Puerto Rico Revenue Code of 2011 ( 2011 PRIRC ). The 2011 PRIRC significantly modified many of the rules that had applied to Puerto Rico-qualified retirement plans for a number of years. Generally, the changes reflected in the 2011 PRIRC resulted in the Puerto Rico-qualified retirement plan rules more closely resembling the rules that currently apply to U.S. tax-qualified plans, with certain exceptions. Some of the substantial changes made by the 2011 PRIRC are: Expansion of the definition of a lump-sum distribution; Increased flexibility and opportunities for tax-free rollovers; and Additional withholding requirements for certain types of retirement benefit distributions. These broad changes to the 2011 PRIRC, together with other financial considerations, have played a role in driving some plan sponsors to consider termination of their Puerto Rico-qualified defined benefit pension plans. Below, we offer a high-level overview of some of the important factors a plan sponsor should consider when it evaluates whether to terminate its Puerto Rico-based pension plan. Why Are Plan Sponsors Thinking About Terminating Their Puerto Rico Pension Plans? Many Puerto Rico pension plans were established by large U.S.-based organizations with significant U.S.-based employee populations and large retirement plan interests, where the U.S.-based pension plan asset base was significantly larger than that of the Puerto Rico-based pension plan. Today, against a backdrop of increasing global competitive pressures, some companies have decided upon or are actively considering a move away from their current Puerto Rico pension program. Factors influencing this decision include: Focus on core U.S. retirement plans; Emphasis on defined contribution benefits over traditional defined benefit programs; Limited resources; Financial uncertainty associated with funding and accounting rules required for defined benefit plans; and Increased administrative risk in complying with the changing Puerto Rico regulatory environment. Consulting Investment Consulting 8

10 Tax Complexity Drives Administrative Burden As in the U.S., the tax authorities in Puerto Rico place specific income tax withholding and reporting requirements on retirement plans. The failure to comply with these local tax withholding and reporting requirements can lead to significant penalties. These issues are of particular importance in a plan termination, since all participant benefits are being settled (often through a combination of lump-sum payments and the purchase of a group annuity contract). Puerto Rico-Qualified versus Dual-Qualified: In order to determine the specific impact of the 2011 PRIRC, it is important to first understand if a specific Puerto Rico pension plan is dual-qualified (taxqualified under both the U.S. IRC and the PRIRC) or qualified only in Puerto Rico. Importantly, Puerto Rico pension plans are not covered under Title IV of ERISA, which provides insurance coverage under the Pension Benefit Guaranty Corporation and outlines a prescribed regulatory process for terminating covered pension plans. Source Income: Determining where benefits (i.e., both accruals and trust investment earnings) were earned (U.S. or Puerto Rico) also plays a role in determining the proper tax and reporting requirements to apply. A dual-qualified plan with a U.S.-based trust will generate both U.S. and Puerto Rico source income for Puerto Rico-based employees. Additionally, a dual-qualified plan may have participants whose benefits were earned while performing services in both the U.S. and Puerto Rico. Puerto Rico Residency: Residency is another determining factor in assessing the tax liability, withholding and reporting requirements associated with a Puerto Rico pension plan. The items above provide an overview of some of the key factors that must be evaluated when considering Puerto Rico taxation of retirement benefits. While there are any number of potential additional issues to consider based on a retirement plan s particular history and facts, the administrative complexity of managing a Puerto Rico pension program is likely a key contributing factor leading sponsors to investigate if and when to terminate these programs. Insurer Availability and Its Impact on Plan Termination Strategy and Execution While the idea of terminating a Puerto Rico pension plan may be attractive to some sponsors, the practical reality of executing that decision presents challenges including, most notably, a lack of available insurers. In the U.S., the number of Safest Available annuity providers comprises about 10 insurers that participate in placement opportunities to varying degrees, depending on a variety of factors (detailed in the following chart). Consulting Investment Consulting 9

11 Insurer Underwriting Consideration Case Size Liability Mix (Retired %/Non-Retired %) Licensing Available Resources Plan Features Comments Larger size = more insurer participation Higher retired life concentration = more insurer participation Insurer must be licensed to write business in the required jurisdiction; some insurers are not licensed in Puerto Rico Opportunity set is growing faster than insurer resources Unrestricted (large amount) lump-sum payment forms and cash balance or similar designs are unattractive to some insurers Currently the insurance market has limited capabilities to support Puerto Rico annuity transactions. The combination of minimal past Puerto Rico transaction volume and changes brought about by the 2011 PRIRC has led some insurers to decide not to participate. While we expect insurers to reevaluate and readily adapt their capabilities as more Puerto Rico annuity opportunities emerge, at this time there are only two or three available insurer options. Also important is that these two or three options could be further reduced, based upon the underwriting criteria referenced above. Recommendations for Puerto Rico Plan Sponsors: Four Questions to Consider In light of the issues discussed above, there are some questions we recommend that plan sponsors consider when evaluating the feasibility of terminating a Puerto Rico pension plan. Ideally, these questions are fully addressed before any formal decision to terminate a Puerto Rico pension plan is made. 1. Am I working with advisors who have recent and substantial experience working through Puerto Rico plan terminations? 2. Does it make sense to offer large-amount lump sums on a window basis to participants immediately prior to the plan termination? 3. When is the optimal time to solicit potential annuity providers? 4. What are my options if I cannot find an annuity provider? While several factors are leading more sponsors to evaluate and execute Puerto Rico plan terminations, Aon Hewitt thinks there are some important issues every plan sponsor must carefully consider and evaluate to ensure a smooth and efficient execution of the plan termination process. Consulting Investment Consulting 10

12 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 Retirement Practice Leader Mexico Aon Hewitt +52 (55) x2821 Consulting Investment Consulting 11

13 About Hewitt EnnisKnupp Hewitt EnnisKnupp, Inc., an Aon plc company (NYSE: AON), is an SEC-registered investment adviser, and provides investment consulting services to over 470 clients in North America with total client assets of approximately $2 trillion as of 12/31/2013. More than 270 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 12