The Markets January 30, 2017

Institutional Investors Must Dial Back Return Expectations

Medium- and long-term return assumptions that had already been fairly muted heading into 2017 should be adjusted downward even further, a new analysis from Cerulli Associates contends. 
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A new report from Cerulli Associates discusses the major challenges U.S. institutional investors face in accomplishing their investment goals—observing cause for both optimism and concern.

According to the first quarter 2017 issue of “The Cerulli Edge – U.S. Institutional Edition,” unfavorable forward-looking return projections across several asset classes, tied to recent shifts in the interest rate environment, are causing significant uncertainty for large and small asset owners.

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“Institutional investors have faced a variety of pressures during the past year that have made achieving their investment goals very challenging,” observes Chris Mason, senior analyst at Cerulli. “The difficult market environment, including historically low interest rate levels, has wreaked havoc on corporate defined benefit plan sponsors, in particular.”

As other research and data providers have noted, interest rate declines pretty much characterized the whole first half of 2016 and then some, with the end of August marking the lowest pension contribution discount rates in more than 15 years. Since that point and coincident with the conclusion of the U.S. presidential election, interest rates have steadily increased. Going into 2017, rumors of potential multiple interest rate hikes by the Federal Reserve have plan sponsors and pension practitioners closely watching market activity.

Cerulli suggests the recent increase in interest rates following the election has “sparked renewed interest in pension de-risking and liability-driven investing among these institutional investors,” Mason adds. “Cerulli believes that in order for managers to serve their clients most effectively, it is imperative they understand how these specific challenges affect institutions as a whole.”

Cerulli expects that, as rates continue to rise, investment managers will focus on highlighting and continuing to expand their liability-driven investing (LDI) solutions.

“Proactive managers that educate plan sponsors about the benefits of de-risking will be the best positioned in the marketplace,” the research suggests.

More information about obtaining Cerulli Associates research is available here. 

Data & Research January 30, 2017

Employers Can Help Employees With Beneficial Retirement Timing

Employees who retire with strong retiree benefits are happy retirees, but those who leave because they feel disengaged regret when they retired and worry about not having enough money.
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For most people, the decision to retire was prompted by both personal and professional circumstances, according to a survey of 4,049 retirees age 65 and older by Willis Towers Watson.

More than one-quarter of surveyed retirees cited employer incentives—such as eligibility for retirement and retiree health benefits—as their main motivation to retire. Among more recent retirees, however, the relative importance of employer programs has declined, while workplace environment and eligibility for Social Security and Medicare play larger roles.

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Retirees who based their retirement decision on eligibility for employer benefits or other employer incentives seemed to be enjoying retirement more than retirees with other motivations, and they were less likely to regret their decision to retire.

As more people delay retirement, the work environment is assuming a larger role in retirement decisions, with workers’ feelings about their jobs becoming increasingly instrumental. More than one in five retirees (23%) cited disengagement with their job as a key reason for deciding to retire. This is signaling that changing the work environment could open up alternative ways for employers to influence employees’ retirement timing, counterbalancing the receding impact of direct employer incentives.

This is important for employers. Those who retired because of dissatisfaction with their workplace had more negative experiences: 31% felt they had retired too soon, 24% had difficulty adjusting and 23% worried about whether they could afford retirement. Towers Watson says this is likely to become more problematic in the future, as more employees continue working because they can’t afford to retire, despite feeling disappointed and less engaged with their jobs.

More findings from “Why Workers Retire When They Do: A Survey of U.S. Retirees” may be found here.

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