Data & Research November 12, 2015

Gen Xers Skeptical About Social Security Stability

An RBC Wealth Management poll finds a majority of Americans don’t believe promised Social Security benefits will be there for them. 
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It’s a recipe for trouble, says RBC Wealth Management; while a majority of Americans say they will need to rely on Social Security benefits in retirement, most are not hopeful those benefits will be there.

The findings are from a survey commissioned by RBC and conducted by Ipsos in early October. The research shows more than seven in 10 (72%) Americans “think they will need to rely on Social Security in their retirement.” However, regardless of their need, more than half (55%) are not confident that promised benefits will be available when they need them.

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This opinion is especially prevalent among Americans falling into Generation X, or those ages 35 to 54. As explained by John Taft, CEO of RBC Wealth Management U.S., the news a few weeks back that two popular Social Security claiming tactics will be eliminated only increased peoples’ anxiety.  

Within Gen X, fully two-thirds of survey respondents said they “do not believe Social Security benefits will be there, regardless of whether they need them or not.” This compares to 55% of Millennials and 41% of Baby Boomers.

“It’s alarming that such a high percentage of the next generation of retirees has essentially given up hope that they will receive Social Security benefits,” adds Griffin Geisler, manager of the Internal Wealth Center at RBC Wealth Management—even more so because few are taking action today to cover the potential gap. Despite the significant changes made to the program under the federal budget deal, RBC is still stressing to clients that Social Security “should continue to be an important piece of their retirement income pie.”

RBC finds the recent changes to the Social Security program are expected to have the biggest impact on Baby Boomers—the group most likely (83%) to think they will need to rely on the benefits when they retire. Baby Boomers were also the group with greatest confidence that Social Security benefits will be available to them, highlighting their vulnerability.

“With no cost-of-living increase, and the elimination of popular tactics like ‘file and suspend’ and ‘restricted application,’ it’s more important than ever that retirees work with their advisers to plan the best course of action,” Geisler said. “While this survey echoes the concerns we hear from our clients, with the right strategy in place, Social Security will continue to play a significant role in assuring a comfortable retirement.”

The Markets November 12, 2015

Insurers Are Prepping for Interest Rate Changes, Are You?

A Cerulli Associates survey finds anticipated change in the interest rate environment remains the top concern of U.S. insurance providers. 
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Insurance companies are actively planning for interest rate changes that will significantly impact the management of investment portfolios, Cerulli Associates finds in a new survey.

The Cerulli research discusses management of insurance investment portfolios in the United States, as well as insurance companies’ “increasing interest in outsourcing investment functions supporting their general accounts.”

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According to Alexi Maravel, associate director at Cerulli, the way a particular insurance company is reacting to a likely interest rate hike depends on its business line: “Life insurance companies, which control the largest amount of insurance general account assets and have to match long-duration liabilities with long-duration assets, are making investment adjustments to their surplus assets, while, on the other end of the spectrum, we find health insurers are raising liquidity.”

Asset managers and retirement plan advisers alike say it’s still hard to pin down exactly when the Federal Reserve will raise the Federal Funds Rate from its current target of 0 to 25 basis points. Resurgent market volatility in the last week of August led some observers to question whether the Federal Reserve should raise rates after nearly seven years of easy credit policy. Now many in the market are planning for a hike in December, but as the last few years have proved, this is far from certain. 

Maravel says it should benefit long-term investors, including both defined benefit and defined contribution plan participants, when interest rates start ticking up, but some distressing short-term circumstances could coincide with a rate hike for those unprepared.

“While falling interest rates benefit fixed-income investments from a total return standpoint, as bonds mature or are called by the issuer, insurers have to reinvest in even lower-yielding securities,” Maravel explains. Depending on the type and duration of the insurer’s liabilities, this reinvestment risk can be detrimental to the short-term financial performance of the company. A similar lesson can be applied to retirement investment portfolios.

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Cerulli explains that the interest rate situation since the financial crisis “has pushed institutional fixed-income investors of all stripes to reach for yield to meet investment goals.”

For insurers in particular this is a challenging position, Cerulli says. “Insurers are caught between a rock and a hard place: they are under pressure to meet investment goals, yet they operate within strict regulatory capital constraints. Hence, even if they have an incentive to target higher-yielding, more risky securities, the capital charges may be too onerous and the investments might raise concerns with the rating agencies.”

Therefore, Cerulli says, within the context of high-quality fixed-income portfolios, insurers will “generally try to add credit risk on the margin, taking advantage of an individual credit falling a notch or two either within the investment-grade universe, or into the upper reaches of high-yield/non-investment-grade spectrum.”

Cerulli’s survey found nearly seven in 10 insurance asset managers and consultants “expect their insurance clients to increase their allocations to private fixed income,” while a little more than half said they expect insurers to add to allocations in either floating-rate debt (bank loans) or emerging markets debt.

Information about obtaining Cerulli research, including “Insurance Asset Pools 2015: Emerging Addressable Opportunities for Asset Management,” is here.

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