Data & Research December 18, 2012

Interest Rates Put Squeeze on Guaranteed Income

Sustained low interest rates and market volatility are putting Americans’ retirement security at risk, according to Prudential Financial.

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Add longevity risk to that, and it increasingly makes sense for people to include guaranteed retirement income products, such as annuities or guaranteed products within defined contribution plans, in their portfolio, according to a research report from Prudential titled, “Should Americans Be Insuring Their Retirement Income?”

The continued volatility of the equity markets is prompting many investors to turn to conservative investments, but should interest rates remain low for an extended period, Americans’ savings will not be able to grow to a level that will sustain them throughout their retirement, Prudential said. Retirees also tend to favor conservative investments, which in today’s unprecedentedly low interest rate environment, just aren’t delivering adequate returns, Prudential said.

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“While the majority of Americans insure their most valuable assets in order to safeguard against significant financial loss, many don’t think to insure their ability to generate lifetime income,” said Bob O’Donnell, president of Prudential Annuities. “Today’s guaranteed income products were designed to help protect retirees from running out of income in retirement, regardless of market conditions or increased longevity.”

“Life insurance helps families manage the risks of not living as long as expected, while guaranteed retirement income products help Americans manage the risk of outliving savings in retirement,” O’Donnell added. “This paper clearly demonstrates the real risks of a sustained period of low interest rates and market volatility to Americans’ retirement security, and the potential benefits of strategies that provide guaranteed income through retirement.”

The paper reminds investors and their financial advisers that “market uncertainty is a much greater risk in the years just before and just after retirement because investors have less time to recover from any losses.”

The full report is here. 

 

 

Data & Research December 17, 2012

DB Sponsors Planning Fewer Changes

A Vanguard study finds defined benefit (DB) plan sponsors are planning fewer design and investment changes than two years ago.
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That is, in part, because most respondents’ (57%) plans were already closed or frozen, and the majority of sponsors with open plans are committed to keeping them that way. In addition, the majority of respondents have already implemented some type of liability-driven investment (LDI) strategy.  

Pension risk remains the top concern for plan sponsors, cited by 99% of respondents. As also reflected in the 2010 survey results, most plan sponsors still consider interest rates and the volatility of the equity markets as the most important types of risk.   

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Domestic bonds and equities are the top asset classes used. On average, allocation to domestic bonds (35%) has increased compared with the 2010 level (30%), with equity allocations staying roughly the same (47% in 2010 and 49% in 2012). Forty-seven percent of plan sponsors said they would likely increase fixed-income allocations in the next few years, funding this from equities. Many sponsors also stated that they expect to increase their alternative asset allocation (22%), although fewer planned to do so than in 2010.  

Impact on company financials is an even larger concern for plan sponsors in 2012, with significantly more sponsors citing it as the top reason for changing their plan’s design/status than in 2010. Twenty-three percent of respondents in 2012 listed this as the primary reason for changing their defined benefit plan design or status, versus 11% in 2010. High cost volatility tied impact on company financials as the top reason for changes. At the same time, those respondents citing high cost as the primary reason declined from 39% in 2010 to 28% in 2012.  

A report of the survey results is here.

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