Client Service July 23, 2019

Watching Interest Rates Can Save Clients Money on PRTs

The higher the annuity credited rate (interest rate) for a pension risk transfer (PRT), the more interest an insurer would earn and the less money it needs today in order to guarantee the monthly benefit, but the lower the interest rate, the less interest it would earn and the more money it needs today, explains Mark Unhoch, with October Three.

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The first quarter of 2019 shows a noticeable drop in annuity purchase interest rates for pension risk transfers (PRTs), according to October Three’s latest Annuity Purchase Update, and the second quarter has continued the trend as rates fell again in July.

The average interest rate for an annuity purchase that contains retirees only and has a liability duration of 7 years (Annuity Plan 1) is 2.46%, and the average interest rate for an annuity purchase that contains 70% retirees and 30% deferreds and has a liability duration of 15 years (Annuity Plan 2) is 2.77%.

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However, Mark Unhoch, partner and practice leader responsible for the October Three Annuity Services Practice in Chicago, says, “Our experiences during 2019 have been that insurers are pricing annuity purchases aggressively. Annuity purchase prices have not risen as much as expected based on this year’s drop in interest rates.”

Unhoch explains why annuity costs are greater when interest rates are lower:

“A defined pension plan promises to pay a participant a defined amount or monthly benefit when they retire. For the example, let’s assume the participant has earned a $100/month income when they retire at age 65. The following assumption will factor into the annuity cost calculation:

  • Current age of the participant = 65 years old, and
  • Life expectancy of the participant = 20 years.

“The question the insurance company is trying to solve is ‘how much money do I need to collect today to guarantee the 65 year old participant an income stream of $100/month for their life expectancy?’

“If we use an assumption that the insurance company will not earn any interest on the money, then the calculation would be easy. The money it would need today is the monthly benefit multiplied by the participant’s life expectancy or $100  X 12 months X 20 years = $24,000.

“Now if we assume the insurance company will earn interest on the monies it collects today to provide the guarantee of $100/month for the life of the participant, the following is true:

“The higher the annuity credited rate (interest rate), the more interest it would earn and the less money it needs today in order to guarantee the monthly benefit.

“The lower the annuity credited rate (interest rate), the less interest it would earn and the more money it needs today in order to guarantee the monthly benefit

“Based on the above example and to keep it simple, let’s assume the $24,000 is going to be paid at the end of the participant’s life expectancy. The amount of money needed to be collected today using simple interest would be as follows:

“Money needed today = Amount needed in the future  /  (1 + (interest rate X participant’s life expectancy in years)).

“Interest rate = 10%, money needed today

  • = $24,000  /  (1 + (.1 X 20 ))
  • = $24,000 /   (1 + 2)
  • = $24,000 / 3  or $8,000.

“Interest rate = 5%, money needed today

  • = $24,000 /  (1 + (.05 X 20))
  • = $24,000 /  (1 + 1)
  • = $24,000 / 2 or  $12,000.”

According to the Annuity Purchase Update, annuity purchase interest rates can be volatile. Although 2018 experienced an upward trend in annuity purchase interest rates, history demonstrates these rates fluctuate over time with varying degrees of peaks and valleys.

During 2018, the spread of annuity purchase prices above the Generally Accepted Accounting Principles (GAAP) projected benefit obligation (PBO) remained fairly stable, at around 4% for Annuity Plan 1 and 12% for Annuity Plan 2. From December 2018 to July 2019, as annuity purchase interest rates and yield curve interest rates changed rapidly, the spread fluctuated slightly up and down for both plans.

“Narrowing of the spread may represent an opportunity to complete an annuity purchase at a relatively cheaper price than when the spread is larger,” Unhoch says in the Update. “The consistent short-term volatility of annuity pricing makes timing an early entrance to the insurance market a crucial part of the planning stage. By connecting with an annuity search firm early, sponsors can take advantage of favorable fluctuations in a volatile market.”
Client Service July 23, 2019

Women Investors Less Financially Prepared than Men

They are also less optimistic about the U.S. stock market and economy, according to a Nationwide survey.

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Women are less financially prepared than men, according to the fifth annual Advisor Authority study commissioned by Nationwide Advisory Solutions and conducted online by The Harris Poll. While women more commonly have an optimistic financial outlook for 2019 (56% versus 53%), they are less likely to be optimistic than men about the U.S. stock market this year (36% versus 50%) and the U.S. economy (35% versus 48%).

“There is a disconnect between a woman’s degree of concern and her level of preparation—regardless of her access to an adviser—and the tension is clearly highlighted in Nationwide Advisory Solutions’ Advisor Authority study,” says Kristi Rodriguez, leader of the Nationwide Retirement Institute. “It’s clear that women are highly attuned to the uncertainty in the market and the economy, and that they need more help to protect against these potential risks.”

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Women are also more concerned than men about a bear market (57% versus 51%) and a recession in the next 12 months (60% versus 57%). Sixty-six percent of women think that market volatility will increase in the next 12 months. However, women and men agree that protecting assets is among their top financial concerns. At the same time, women are far less likely than men to have a strategy to protect their assets against market risk (56% versus 71%).

According to the survey, women are more likely to say that outliving assets is a top financial concern but are less likely to have a plan to help protect against this happening (62% versus 76%). Women are more likely than men to say they will rely on Social Security (78% versus 66%) to protect themselves against outliving their savings. They are also less likely to say they would turn to deferred income annuities (6% versus 18%), qualified longevity annuity contracts (5% versus 14%) or single premium immediate annuities (10% versus 14%).

Whereas 44% of women were working with a financial adviser in 2016, this has risen to 58% this year. However, in 2019, 64% of men are working with a financial adviser.

The findings are based on a survey of 1,021 financial advisers and 824 investors conducted this past February and March.

Nationwide’s findings echo those of a recent survey on women’s and men’s views on financial matters that LIMRA-SRI issued this past spring. Thirty-one percent of women in that survey fear they will outlive their assets, 35% expect to face significant health care costs in retirement, and 31% think they will incur long-term care costs. By comparison, the figures for men, respectively, are 25%, 27% and 28%.

Similarly, Lincoln Financial’s Love and Responsibility Survey found that 90% of women are planning for their retirement, and 84% are planning for their family’s future, but more than seven out of 10 say they are not doing a very good job with either. Seventy percent are worried they will run out of money in retirement, and among them, only 20% have a plan to mitigate this fear. Asked what is keeping them from saving for the future, 58% say current expenses, 44% say lack of time for financial planning, 52% say feeling less educated about retirement planning than men, and 44% say feeling less educated about personal financial planning.

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