Data & Research March 1, 2017

Single-Premium Pension Buyout Sales Ticked Up During 2016

Employers are clearly still committed to moving risk off of their balance sheets by pursuing single-premium pension buyouts. 
Reported by

Data shared by LIMRA Secure Retirement Institute (LIMRA SRI) shows U.S. single premium pension buy-out sales totaled $13.7 billion during 2016, “almost one percent higher than prior year and the second highest annual total recorded,” according to LIMRA SRI’s quarterly U.S. Group Annuity Risk Transfer Survey.

During the fourth quarter of 2016, single premium pension buy-out sales were $5.8 billion, “which is level with 2015 sales.”

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“This marks the seventh consecutive quarter to exceed $1 billion in sales, a trend never seen since the Institute began tracking sales in the 1980s,” observes Matthew Drinkwater, assistant vice president. “Buy-out sales have strong seasonality, usually resulting in higher sales in the fourth quarter. However 2016 proved to be an exception to this trend with fourth quarter results slightly lower than the third quarter sale.”

According to Drinkwater, jumbo plan sales (transactions involving more than $1 billion) “tend to swing quarterly results.”

“While there was only one jumbo sale in 2016, the Institute continues to see broad growth across the industry and many of the sales came from smaller plans,” he says. ”Participating companies reported having sold more than 383 contracts in 2016.”

Total assets of buy-out products were nearly $99 billion at the end of the fourth quarter 2016, an increase of 9%. Other findings show “single-premium buy-in product sales” reached $15.7 million in 2016, up a whopping 118% from 2015. Of course, this is still very much a developing market, as there were only three single-premium buy-in contracts sold in 2016, according to LIMRA SRI.

“Continued market volatility and low interest rates coupled with PBGC premium increases have drawn more employers to explore transferring their pension risk to an insurer,” Drinkwater concludes. “New Institute research finds about one in three employer-sponsored pensions have a funding status of 80% or more. As plans approach full funding, they become attractive candidates for PRT.”

Additional research and information is available at www.limra.com/secureretirementinstitute/. 

The Markets March 1, 2017

Investors Increasingly Embrace ETFs for Liquidity

ETFs have taken on a central role in critical investment functions like risk and liquidity management. 
Reported by

Institutional assets are flowing into exchange-traded funds (ETFs) as U.S. institutions integrate ETFs into essential investment functions ranging from risk management and liquidity enhancement to the generation of income and yield in a challenging interest-rate environment.

In a new report, “ETFs: ‘Active’ Tools for Institutional Portfolios,” Greenwich Associates says it interviewed 187 institutional investors and found respondents invest an average 21.2% of total assets in ETFs—up from the 18.9% of total assets reported in 2015. Those allocations are likely to grow in 2017. Forty-seven percent of equity ETF investors and 38% of bond ETF investors expect to increase their allocations to the funds in the year ahead.

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“Although institutions are using ETFs as a means of obtaining strategic investment exposures, for many institutions, ETFs also have taken on a central role in critical functions like risk and liquidity management,” says Greenwich Associates consultant Andrew McCollum. Approximately half the institutions in the study use ETFs for liquidity management and nearly the same number employs ETFs in risk management/overlay strategies.

The survey found institutional demand for ETFs is fueled by several powerful trends:

  • Institutions are using ETFs alongside other investment vehicles. Thirty-eight percent of institutional ETF users are replacing other vehicles in their portfolios, including active mutual funds and derivatives positions.
  • Institutions are using innovative ETF structures to address challenges in their portfolios. Growing numbers of institutions are turning to non-market-cap weighted/Smart Beta funds like Minimum-Volatility ETFs and Dividend/Equity Income ETFs to help navigate the challenges posed by low interest rates and increasing market volatility. The share of institutional ETF users investing in non-market-cap weighted/Smart Beta ETFs increased to 37% in 2016 from 31% in 2015, and 44% of these investors plan to increase their allocations to the funds in the next year.
  • Demand for ETFs is being fueled by the roll-out of new multi-asset funds. Fifty-two percent of asset managers use ETFs as part of multi-asset funds operated for clients. That share is up sharply from the 35% of asset managers employing ETFs in these funds in 2015. Within these funds, asset managers allocate a full 55% of total assets to ETFs.
  • Past impediments to institutional use are giving way. Fewer institutions are expressing concerns about ETF liquidity and expenses. In fact, many institutions are introducing the funds into their portfolios specifically to enhance liquidity and reduce costs. Meanwhile, explicit prohibitions or limitations against ETF investments are becoming less common in both equities and fixed income. In 2015, nearly one-quarter of non-users said they were prevented from investing in fixed-income ETFs by internal investment guideline restrictions. That share fell to 19% in 2016.

When conducting due diligence on a potential ETF investment, institutions consider four primary factors: the degree to which the ETF matches their exposure needs, liquidity/trading volume, the expense ratio of the fund and performance/tracking error. Insurance companies, of course, pay close attention to an ETF’s National Association of Insurance Commissioners (NAIC) rating, and institutions across the board also take into account the fund company and management behind the ETF.

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