Sales of pension risk buyout products topped $3.8 billion in
2013, according to a LIMRA Secure Retirement Institute (SRI) survey. This
represents the best sales year for these products since 1999, with the
exception of 2012 when General Motors and Verizon transferred their group
pension obligations to Prudential, causing sales to spike to $35.9 billion for
the year.
According to the survey, sales in 2012 were seen as an
anomaly because those two large companies were responsible for nearly all the
sales that year. In a year-to-year comparison, 2013 sales represent a decrease
of 88%. However, if the GM and Verizon deals are excluded, say the survey
authors, sales in 2013 increased compared to 2012.
An improved interest rate environment in 2013 enabled more
companies to make gains on full funding of their pension plans, a prerequisite
to consider a pension risk transfer, according to survey findings. The survey
authors cite data from Mercer Investment Consulting, which found that by the
fourth quarter of 2013, companies in the S&P 1500 with defined benefit (DB)
pension plans had improved their funding levels to 91% of their obligations.
While a DB pension plan adds equity to a company, the
unpredictability of its assets, liabilities and funding ratio can add to the
volatility of the company’s balance sheet, say the survey authors. In addition,
internal administrative costs and Pension Benefit Guaranty Corporation
premiums, which are predicted to double or even triple in the coming years,
make purchasing an annuity and offloading the plan to an insurer a more
attractive option.
Survey findings also show that more sellers are entering the
market. LIMRA SRI currently tracks ten companies in its group annuity risk
transfer survey, with two companies joining the survey last year. If interest
rates remain favorable, LIMRA SRI analysts anticipate that 2014 sales will
eclipse 2013 and continue a positive growth trend for several years to come.
More
information about the survey can be obtained by emailing Catherine Theroux at CTheroux@limra.com.
The Commonfund Investor Outlook Survey gauged the sentiments
of more than 200 respondents, representing a broad range of nonprofit
institutional investors and pension funds with combined assets of $163 billion.
Overall, investor expectations for 2014 are reasonably
strong with an average forecast for the S&P 500 Index of 6.5% and a median
forecast of 7%. This represents a slight decrease from last year’s average
forecast of 7.9% and a median forecast of 8%.
The dispersion of expected annual performance narrowed with
60% of respondents expecting a return of between 5% and 8%. Over a three-year
period, performance expectations were slightly lower with an average annual
forecast for the S&P 500 Index over the next three years of 6.25%, compared
with last year’s 7.1%.
“The data indicates a level of realistic optimism that’s
both refreshing and important,” says Verne Sedlacek, president and CEO of
Commonfund in Wilton, Connecticut. “Additionally, despite recent discussions
surrounding emerging markets, we were pleased to see that investors have a
positive viewpoint towards it, in addition to other long-term strategies.”
Investors report overall expectations for annual performance
of institutional portfolios as follows:
Average 7.3% and a median 7% returns for one
year vs. an average 7.6% and a median 7% last year;
Average 7.5% and a median 7% returns over three
years vs. 7.3% and a median 7% last year; and
Average 7.7% and a median 8% returns over five
years vs. 7.4% and a median 7% last year.
Survey respondents were asked about tail risks over the next
three years. Tail risks are a form of portfolio risk that arises when the
possibility that an investment will move more than three standard deviations
from the mean is greater than what is shown by a normal distribution.
Forty-four percent of respondents say that tail risks are increasing vs. 38%
reporting the same last year. On the other hand, 11% on institutional investors
say tail risks are decreasing vs. 13% last year, and 45% say they are staying
the same vs. 49% last year.
The most significant tail risks reported relative to
portfolio performance over the next three years have shifted greatly from a
national concern to predominantly international concern. Fifty-eight percent of
respondents cited geopolitical crisis as the most significant tail risk. The
gridlock in Washington, the number one concern last year, decreased from 62% to
37% this year. Turmoil in the Mideast increased to 55% vs. 46% last year, and a
slowdown in China increased from 26% to 46%.
In terms of market and index performance, the survey finds
that emerging markets show a tempered level of confidence among investors with
58% of respondents expecting the MSCI Emerging Markets Index to outperform the
S&P 500 Index over the next three years, compared with 78% last year. In a
big increase from last year, 42% expect the MSCI – ex US (developed equity
markets) to outperform, vs. 23% last year.
Twenty-six percent of respondents expect commodities, as
measured by the Dow Jones-UBS Commodities Index, to outperform the S&P 500
Index over the next three years, compared with 27% last year. And 29% of
respondents expect hedge funds as measured by the HFRI Fund Weighted Composite
to outperform, compared with 26% last year.
Sentiment towards bonds had a slight upward shift with 5% of
respondents expecting the Barclay’s Aggregate Bond Index to outperform the
S&P 500 Index over the next three years, compared with 3% last year. Eight
percent of respondents expect high yield bonds as measured by the Merrill Lunch
High Yield Bond Index to outperform vs. 7% last year.
With
regard to U.S. Treasury yields, the survey finds that expectations for the
yield on the 10-year U.S. Treasury note by year-end 2014 reflect a modest
increase in interest rates from current levels. With the 10-year U.S. Treasury
at 2.8% as of early March 2014, the average and medium expectation from survey
respondents see the figure at 3% over the rest of the year.
Approximately 19% expect little change or a slight decline,
while more than one-third expect yields to rise to the range of 3.25% to 3.50%.
Last year respondents expected the average yield of the 10-year Treasury to be
2.1% by year-end 2013.
As for asset allocations, 13% of respondents indicated they
expect to decrease allocations over the next 12 to 18 months in their emerging
markets equities compared to only 3% last year. Forty-two percent of
respondents expect to increase allocations compared to 55% last year. European
equities realized the biggest jump in expected allocations with an increase
from 18% in 2013 to 29% this year.
The survey finds that the two greatest areas of concern for
institutional investors are market/investment volatility and shortfalls in
meeting return objectives. Although down slightly from 56% last year, market
volatility was acknowledged as a concern by 54% of respondents this year.
Shortfalls in meeting investment return objectives ranked second again this
year, but dipped slightly to 42% from 48% last year. Other areas of concern
include portfolio liquidity (66% vs. 62% last year) and deflation (64% vs. 76%
last year).
The survey also asked respondents whether or not clients are
planning to increase their use of fund-of-funds vehicles in their investment
strategies. One in four respondents expects to increase their use of private
capital fund-of-funds. For both hedge funds and private capital, more than half
do not expect a change.
Commonfund is an organization that works to enhance the
financial resources of long-term investors including nonprofit institutions,
corporate pension plans and family offices through fund management, investment
advice and treasury operations.
More
information about the survey results can be found here.