Corporate Pension Plans Seeking New Risk Reduction Measures
In 2016, the number of defined benefit plans with a funded status less than 80% increased to 28%, from 21% in 2015, according to a new survey by investment consulting firm NEPC.
Following U.S. lawmakers’ move to increase the variable rate premiums charged by the Pension Benefit Guaranty Corporation (PBGC), nearly half of America’s pension plans are considering lump-sum payouts.
This is according to the 2016 Defined Benefit Plan Trends Survey by investment consulting firm NEPC.
For those plan sponsors considering other risk reduction measures, 27% said they plan to issue annuities. Twenty-five percent are considering higher contributions. Thirty-nine percent of respondents weren’t planning any changes at the time the survey was taken.
“The real game changer was what occurred at the end of last year with the PBGC rate premium decision, and plan sponsors have been scrambling on what to do ever since,” observes Brad Smith, partner in NEPC’s Corporate Practice. “Our expectation is that this anxiety about the rate premiums will continue, regardless of who is in the White House. We continue to advise clients on best approaches to improve or maintain their funded status in a low-yield environment, even with a slight rate increase expected before the end of the year.”
As projected, longevity increases are affecting pension funding. In 2016, the number of defined benefit plans with a funded status less than 80% increased to 28%, from 21% in 2015. Forty-three percent of plans have a funded status of at least 90%.
Thirty-four percent of respondents considered issuing debt to improve funded status; 47% of these plans have a funded status of less than 80%.
The firm also points out that while a majority of plan sponsors (69%) are hedging interest rate exposure using liability driven investing (LDI) strategies, many are also taking action to reduce the absolute size of the sponsor’s pension liability by offering lump sum distributions to participants. The 38% of plans not pursuing LDI say they are waiting for interest rates to rise (34%) or are maintaining a total return approach as the plan remains open (29%).
In the past six years, plan sponsors using LDI have materially increased their LDI allocations—36% have an allocation greater than 50% or more today, versus nine percent in 2011, the survey finds.
The firm also discovered that Treasury STRIPs and other zero-coupon bonds are standing out among LDI strategies gaining popularity. Forty-five percent of funds that allocate to LDI invest in these products, versus just 10% in 2012. Long-duration government/credit bonds are the most popular LDI investment, with 62% of LDI investors using them today versus 46% in 2012.
“The only lever plan sponsors have to pull is to try and shrink the size of their liability and many still stand pat,” Smith warns. “If you look at this issue through the lens of the interest rates story, you’ll see that those plan sponsors who rejected an LDI approach as they waited for rates to rise, saw their DB plans suffer. And they’re still waiting for that entry point as equity markets continue to perform well.”
The NEPC concluded that alternative investment strategies still remain in favor, with 79% of respondents expecting to maintain their current allocation to private equity and hedge fund managers, among other opportunities. The results also show that of those plans invested in alternatives, 37% allocated between 10-25%, and eight percent allocated between 25-50% of assets.
Other key findings include:
51% of plan sponsors have a bullish outlook on the stock market for the next 12 months, while 49% are bearish.
Legislative/actuarial changes to liability valuations are the greatest concern followed by low interest rate and return environment.
Double-digit equity returns were not enough to stem the negative impact that lower discount rates had on pension plans.
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T. Rowe Price Expands 401(k) Brokerage Services with Charles Schwab; Wilshire Launches New EVA Index Family; USAA Launches R6 Retirement Share Classes; and more.
T. Rowe Price Expands 401(k)
Brokerage Services with Charles Schwab
Beginning
in April 2017, Charles Schwab’s Personal Choice Retirement Account (PCRA) will
be available for T. Rowe Price’s recordkeeping clients and their participants
across all market segments. Charles Schwab’s platform is currently available to
T. Rowe Price’s small-market clients.
This
self-directed brokerage account allows plan participants to invest a portion of
their retirement plan savings in a wide range of investments beyond those that
are ‘core’ to the employer’s retirement plan.
“We
believe Schwab’s brokerage platform meets the unique needs of our recordkeeping
clients across all market segments,” says Diana Awed, head of Product &
Marketing at T. Rowe Price Retirement Plan Services. “We look forward to
providing our clients with key product enhancements that are important to them,
such as direct access for a participant’s financial adviser, paperless account
opening, online fixed income trading, and the ability to trade through multiple
channels.
This
service is for T. Rowe Price Retirement Plan Services recordkeeping clients
only, and does not pertain to brokerage services provided by T. Rowe Price to
individual investor clients.
T. Rowe
Price Retirement Plan Services has been a retirement solutions provider for
more than 30 years and currently serves nearly 1.9 million retirement plan
participants across more than 3,500 plans. Retirement-related assets
represent 69% of the firm’s total assets under management.
NEXT:
Wilshire Launches
New EVA Index Family
Wilshire Launches New EVA Index
Family
Wilshire
Associates and EVA Capital Management have launched two new indexes which aim
to gauge the performance of strategies based on an Estimated Value Added (EVA)
weighing of the Wilshire 5000 Total Market Index. The
firm now offers the EVA Wilshire 5000 Index (EVAW5000) and the EVA
Wilshire US Large-Cap Index (EVAWLC).
Wilshire
defines EVA as a “time-tested and well-respected process
designed to identify a company’s true economic profitability.” EVA weightings
are calculated by EVA Capital, using data from evaDimensions, a global leader
in the application of EVA-based solutions. EVA Capital has an exclusive license
to construct indexes based on data from evaDimensions and has collaborated with
Wilshire to create the new indexes based on the EVA of the constituents of both
Wilshire index counterparts.
“Wilshire Analytics is proud to align with EVA innovator,
EVA Capital, to bring these indexes to market,” says Robert J. Waid, Managing
Director at Wilshire Associates. “Wilshire’s well-respected broad market index
heritage combined with EVA Capital’s access to a robust methodology that helps
identify positive economic value for investors is in the true spirit of
Wilshire’s deep commitment to deliver actionable insight to the investor.”
Nick Lobaccaro, founder of EVA Capital added, “We are proud
to align with ... Wilshire, to create these unique
indexes that measure the performance of a strategy that aims to invest in
companies that create value and avoid companies that do not.”
Wilshire
Associates is a global financial services firm providing consulting services,
analytics solutions and customized investment solutions to plan sponsors,
investment managers and financial intermediaries. Based in Santa Monica,
California, Wilshire provides services to clients in more than 20 countries
representing more than 500 organizations with assets totaling approximately $7
trillion, according to the firm.
NEXT:
USAA Launches R6 Retirement Share Classes
USAA Launches R6
Retirement Share Classes
USAA, a financial services organization supporting military
members and their families, will be offering R6 retirement
share classes across six of its mutual funds for eligible investors. The share
classes comprise the USAA Income Fund, USAA High Income Fund, USAA Income Stock
Fund, USAA Short-Term Bond Fund, Intermediate-Term Bond Fund, and the Government
Securities Fund.
The move is a response to member feedback and research,
which indicated that saving for retirement was a financial goal for 70% of USAA
members. Today, more than 2.4 million businesses are majority-owned by veterans
currently representing 9% of the non-farm companies, USAA notes.
Many of these businesses offer a retirement plan such as a 401(k).
“USAA is offering the R6 share class as another financial
solution to provide plan sponsors a lower-cost option with greater fee
transparency for employer-sponsored retirement plans to prepare our members and
the military community for financial security,” the company says.
NEXT: T. Rowe Price Releases New Fixed Income
Fund
T.
Rowe Price Releases New Fixed Income Fund
The recently-launched T. Rowe Price
Total Return Fund will seek to maximize return by investing in a diversified
portfolio composed of U.S. securitized bonds, bank loans, and other debt
instruments. It will be co-managed by Andy McCormick, head of the U.S. taxable
bond team, and portfolio manager Chris Brown.
The Total Return Fund will mainly focus
on intermediate-term bonds and will employ a U.S.-focused, multi-sector
approach. Its risk-balanced framework is supported by T. Rowe Price's research
platform. The firm says the fund will serve as a complement to its existing
multi-sector lineup, and is designed to address the challenges of the current
market environment including low interest rates, volatility potential,
stretched valuations, and impaired market liquidity.
"The importance of high-grade U.S.
bonds to both U.S. and global clients is an enduring feature of fixed income
markets,” says McCormick. “With rates so low, bond investors are seeking more
from their fixed income allocation. They want managers to dig harder to find
higher returns. We've structured this fund to have the flexibility to take
advantage of the best ideas our global research platform produces while still
retaining the characteristics of a high-grade bond portfolio—diversification
of risk away from stocks and steady cash flow from the fund's holdings."
The fund's primary benchmark will be
the Bloomberg Barclays U.S. Aggregate Bond Index, but as a high tracking error
fund, it will seek to differentiate itself from the index and maximize returns.
The fund will be offered with Investor,
Advisor and I Class shares.
"This fund is built on
high-conviction ideas from a wide range of bond markets, so we anticipate being
able to spread risk broadly to protect investors from adverse outcomes while
maximizing risk-adjusted returns,” says Brown. “Andy and I will use the same
process that all of our multi-sector bond portfolios have employed in our
effort to help produce strong risk-adjusted performance for investors; it is
time-tested and built to support this new investment strategy."
To download a prospectus for the fund,
click here.
NEXT:
Nationwide Funds
Rolls Out Family of NextShares Funds
Nationwide Funds
Rolls Out Family of NextShares Funds
Nationwide Funds has entered into a preliminary agreement
with NextShares Solutions to launch a family of NextShares exchange-traded
managed funds.
NextShares aims for benchmark-beating returns by integrating
its manager’s proprietary investment research. As exchange-traded products,
NextShares may offer cost and tax efficiencies that can enhance shareholder
returns.
"We're proud to add Nationwide Funds as a NextShares
partner," says Stephen W. Clarke, president of NextShares Solutions.
"We're pleased to expand the distribution of NextShares to Nationwide
Funds investors."
Investors interested in learning more about Nationwide's
mutual funds should contact their financial professional or click here. Financial
professionals interested in learning more should call the Nationwide Funds
Group sales desk at 877-877-5083, option 3, or visit the website.
NEXT: CANNEX to Launch Annuity Comparison Tools in 2017
CANNEX to Launch
Annuity Comparison Tools in 2017
CANNEX is set to roll out its new deferred annuity benefit
comparison tools during the first quarter of 2017. Currently being tested by
clients, the new service is designed to help users gauge the economic suitability
of variable annuity and fixed-indexed annuity transactions. Moreover, it is
developed to help fiduciary advisors act in the best interest of their
clients.
"Variable and fixed indexed annuities are bundled
products with a variety of rules and benefit combinations that can make them
difficult to compare," says CANNEX President Gary Baker. "Our
approach allows advisers to evaluate the insured performance of these products
to assist them in making the appropriate selection to meet clients' financial
planning objectives. As we implement this service, we will provide advisers and
their firms the support they need to help them meet the transaction
requirements of FINRA, as well as their obligations as a fiduciary adviser
under the Department of Labor's Best Interest Standard of Care when selecting a
product."
The new tools evaluate the embedded guarantees of deferred
annuities to determine the economic benefit of each product specific to the
profile of the client. This methodology allows advisers and clients to
enhance their current qualitative analysis of products, and implement an
independent approach to reviewing, assessing and recommending an annuity based
on financial and actuarial models, the firm notes. To ensure consistency
from a quantitative and actuarial perspective, CANNEX is leveraging its
existing platforms which permit the comparison and evaluation of income annuity
products at a transactional level.
"I have been an advocate of using objective analytic
techniques to determine economic suitability for all annuity transactions and
have been writing about how to do this conceptually for almost 15 years—well
before the DOL raised the issue," says finance professor Moshe A.
Milevsky. CANNEX has finally put this theory into practice with the development
of a tool to evaluate these sophisticated products."
CANNEX has also received a formal Employee Retirement Income Security Act (ERISA) opinion of counsel
from the Wagner Law Group validating that the methodology is consistent with
the DOL Best Interest Contract Exemption (BICE) requirement for firms to adopt compliance measures that are
reasonably and prudently designed to prevent conflicts.
NEXT: Prudential
Fixed Income Becomes PGIM Fixed Income
Prudential Fixed
Income Becomes PGIM Fixed Income
Currently operating globally under two brand names,
Prudential Fixed Income will consolidate the two to become PGIM Fixed Income.
The change will officially go in effect January 1, 2017, pending customary
regulatory approvals in certain markets.
Prudential Fixed Income is a global asset manager offering
active solutions across all fixed income markets. The company manages assets
for institutional clients and retail investors worldwide with $681 billion in
assets under management as of September 30, 2016.
“As we continue to expand globally, a single name offers better clarity and
consistency across all regions in which we operate,” says Michael Lillard, head
of Prudential Fixed Income and chief investment officer.
NEXT: AllianzGI Acquires Sound Harbor Partners
AllianzGI Acquires
Sound Harbor Partners
Private credit manager Sound Harbor Partners has agreed to
join the Private Debt Platform of active investment manager Allianz Global
Investors (AllianzGI). Under the terms of the transaction, AllianzGI will
acquire Sound Harbor’s assets for an undisclosed sum, and the Sound Harbor team
will join AllianzGI. Following the acquisition, AllianzGI’s clients will have
access to U.S. private credit investment funds managed by a Sound Harbor
team.
“Over the last five years, AllianzGI has invested steadily
in the quality and breadth of its active investment offering,” says AllianzGI
Global CEO Andreas Utermann. “Within our fast-growing Alternatives segment,
private debt stands out as a particularly exciting area, where we’ve clearly signaled
our intent to expand our capabilities to address our clients’ evolving
investment needs. The addition of the team from Sound Harbor is a significant
step in that process, strengthening and complementing our existing capabilities
in this important space.”
Sound Harbor is led by led by Michael Zupon and Dean
Criares.
“Dean and I, along with the entire team, are looking forward
to joining a leading and respected investment manager that shares Sound
Harbor’s commitment to outstanding investment performance and dedication to its
clients’ needs,” Zupon says. “Joining AllianzGI will enhance our ability to
capitalize on trends favoring growth in alternative investment managers with
scale, brand recognition and long-term capital.”
Sound Harbor focuses on alternative investments in corporate
loans, direct lending, distressed debt and opportunistic credit. The firm
manages these investments on behalf of its clients in private limited partnerships,
collateralized loan obligations and separately managed accounts.