The Markets March 21, 2016

Aging Population Will Create Opportunities for Institutional Investors

PGIM foresees investment opportunities across real estate, health care, and technology.
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While the retirement industry worries that increasing longevity will affect retirement plans for many individuals—in what could be negative ways—research from PGIM suggests aging populations worldwide will create investment opportunities across real estate, health care, and technology.

The report, “A Silver Lining: The Investment Implications of an Aging World,” urges institutional investors to consider how a graying world could impact their portfolios. Global aging will reshape consumer spending for decades to come, according to the report. These changes will not only impact developed markets but also have a far-reaching effect on emerging markets, home to two-thirds of the world’s elderly. In particular, the report calls attention to evolving opportunities set within real estate and new opportunities within health care and technology.

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Real estate represents more than 40% of the gross assets of households ages 65 and older in major developed markets like the U.S. and the U.K., and aging populations will reshape demand in the sector, along three key investment themes:

  • From homes to condos: In the U.S., as an example, Baby Boomers are discovering the appeal of active urban lifestyles and creating demand for centrally located condos in cities like Raleigh, North Carolina; Nashville, Tennessee; Austin, Texas; and Atlanta.
  • Senior housing: Demand for senior housing in the U.S. alone will surge by 850,000 new units by 2030, a 75% increase from 2010, according to Senior Housing Analytics. Other nations, like the U.K., Japan, and China, are also straining to meet demand.
  • Eds and Meds: A silver tsunami brings with it a host of age-related diseases—and a growing industry to treat and cure them. Opportunities exist to invest in the real estate required by biotech startups, established medical companies, and research centers that typically cluster around universities.
NEXT: Opportunities in health care and technology

According to PGIM, health care and technology will grow substantially, driven by people older than 85 who spend four times as much on health care as those ages 45 to 64, leading to two key investment themes:

  • Pharmaceutical and biotech firms: Investors can find focused opportunities among venture capital firms whose operating companies target diseases such as dementia, stroke, cancer, Alzheimer’s, and Parkinson’s. Mid- and late-stage pharma-focused private equity also plays a role.
  • Silvertech: A new wave of businesses are emerging that create, distribute, and use technology-enabled medical services and devices to help seniors live more independently, including providing solutions for chronic care, enhancing mobility, and improving delivery of medical care.

Taimur Hyat, PGIM’s chief strategy officer, says, “For the first time in recorded history, the old will outnumber the young. Our report demonstrates the profound impact global aging will have on individuals, businesses, governments, and investors around the world. Long-term institutional investors should holistically evaluate the longevity megatrend and consider capitalizing on the opportunities it will bring.”

More than 30 PGIM and Prudential Financial experts gathered to debate the most attractive investment themes arising from the longevity megatrend, and to identify the likely winners and losers across different sectors in the economy. For more details and to download a copy of the report, visit www.PGIM.com/silverlining.

Compliance March 21, 2016

QSERP Sponsors Could See Rule Change Under IRS Proposal

The IRS says if a benefit formula applies solely to a highly compensated employee who is identified by name, it does not apply to a reasonable business classification.
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The Internal Revenue Service’s (IRS) proposed rules from January that would offer nondiscrimination testing relief for closed defined benefit (DB) plans include a proposal that could limit plan sponsors’ ability to offer enhanced executive benefits under their qualified retirement plans.

A blog post from Morgan, Lewis & Bockius LLP explains that employers often provide highly compensated executives additional retirement benefits outside of qualified plans using nonqualified deferred compensation plans (NQDCs), often called supplemental executive retirement plans (SERPs). To offer tax-deferred benefits under SERPs and other NQDCs, amounts set aside to fund the benefits must remain at risk to an employer’s creditors in the event of the employer’s insolvency. Additionally, benefits payable under a SERP (or any NQDC) generally are subject to the stringent limitations of section 409A on when and in what form a benefit may be paid.

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According to the blog post, because of these disadvantages to using SERPs and other NQDCs, some employers have instead capitalized on flexibility built into the qualified plan nondiscrimination rules to provide enhanced benefits for executives. Under the nondiscrimination rules, qualified plan benefit accruals need not be uniform among participants. So long as there are a sufficient number of non–highly compensated employees (NHCEs) who accrue benefits at a rate equal to or greater than the accrual rate for each HCE designated for an enhanced benefit, the designated HCEs can accrue benefits under a different or additional formula. Plans that use this qualified supplemental executive retirement plan (QSERP) approach typically identify each QSERP participant and his or her benefit or accrual rate by name or employee identification number in the plan document.

NEXT: What the IRS proposal says

The IRS proposal explains that under the general test in the existing regulations, if a plan satisfies the minimum coverage requirements of section 410(b) using the average benefit percentage test, then the rate group for each highly compensated employee is treated as satisfying the minimum coverage requirements if the ratio percentage for the rate group is equal to the midpoint between the safe harbor and the unsafe harbor percentages (or the ratio percentage for the plan as a whole, if less). This rule recognizes that the composition of a rate group may be unpredictable and so the rate group should not be subject to a reasonable business classification standard.

However, that same consideration is not relevant if the group of employees to whom the allocation formula under a defined contribution plan (or benefit formula under a defined benefit plan) applies is not a reasonable business classification. The proposed regulations limit the existing rule under which a rate group with respect to a highly compensated employee is treated as satisfying the average benefit percentage test to those situations in which the allocation formula (or benefit formula) that applies to the highly compensated employee also applies to a reasonable business classification. For example, if a benefit formula applies solely to a highly compensated employee who is identified by name, it does not apply to a reasonable business classification. In such a case, the proposed regulations would require that the rate group with respect to that individual satisfy the ratio percentage test.

Sponsors of QSERPs may want to consult with counsel about what the proposed rule would mean for their plans.

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