Compliance June 2, 2022

Latest Social Security Solvency Update Sees 2035 Depletion Date

The combined asset reserves of the Old-Age and Survivors Insurance and Disability Trust Funds are projected to become depleted in 2035, which is one year later than projected last year.

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The Social Security Board of Trustees has released its annual report on the financial status of the Social Security Trust Funds.

According to the update, the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds are projected to become depleted in 2035, one year later than projected last year. At that time, presuming no legislative changes are made, 80% of benefits would still be payable.

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Specifically, the OASI Trust Fund is projected to become depleted in 2034, one year later than last year’s estimate, with 77% of benefits payable at that time. On the other hand, the DI Trust Fund asset reserves are not currently projected to become depleted during the 75-year projection period.

In dollar figures, the asset reserves of the combined OASI and DI Trust Funds declined by $56 billion in 2021 to a total of $2.852 trillion. Moving forward, the total annual cost of the program is projected to exceed total annual income in 2022 and remain higher throughout the 75-year projection period.

As noted in the update report, total costs began to be higher than total income in 2021. Social Security’s costs have exceeded non-interest income since 2010.

“It is important to strengthen Social Security for future generations. The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually,” says Kilolo Kijakazi, acting commissioner of Social Security. “Social Security will continue to be a vital part of the lives of 66 million beneficiaries and 182 million workers and their families during 2022.”

Other highlights of the Trustees Report show total income, including interest, to the combined OASI and DI Trust Funds amounted to $1.088 trillion in 2021. This includes $980.6 billion from net payroll tax contributions, $37.6 billion from taxation of benefits and $70.1 billion in interest. Total expenditures from the combined OASI and DI Trust Funds amounted to nearly $1.145 trillion in 2021.

Social Security paid benefits of $1.133 trillion in calendar year 2021. There were about 65 million beneficiaries at the end of the calendar year.

The projected actuarial deficit over the 75-year long-range period is 3.42% of taxable payroll. This is lower than the 3.54% projected in last year’s report.

During 2021, an estimated 179 million people had earnings covered by Social Security and paid payroll taxes, and the cost of $6.5 billion to administer the Social Security program in 2021 was 0.6% percent of total expenditures.

Deals & People June 2, 2022

An M&A Update for the Second Quarter

Nearly 190 retirement plan advisory firms have been acquired in the decade since 2012, and aggregators expect a substantial number of deals during the remainder of this year.

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A new report by Wise Rhino Group provides a mergers and acquisitions recap of 2021—the busiest year on record for the retirement advisory industry—and reviews industry M&A progress so far in 2022.

The report, “Retirement & Wealth Advisory Q2 2022 Spotlight,” says that retirement advisory firm M&A activity hit a new record high for the fifth consecutive year in 2021, more than doubling the total from any previous year.

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The 76 reported transactions in 2021 represented a leap over the 28 and 32 transactions reported in 2019 and 2020, respectively, the report says. In the decade since 2012, 187 retirement advisory firms have been acquired. The report suggests several reasons for this unprecedented pace, including that the retirement advisory industry is going through a natural evolution of consolidation.

Advisory firm leaders looking to leverage the benefits of scale by integrating with a larger organization are one force behind this consolidation. Firm leaders are also seeking an improved platform, broader service capabilities and accelerated growth, as well as a reduction in administrative burdens. Finally, valuations have reached unprecedented levels, helping to drive the rapid pace of deals.

A More Modest 2022?

Though 2021 was a record year, 2022 has started off more modestly, the report says. Based on announced M&A transactions through the end of April 2022, deal levels are down compared to early 2021.

The report states that it is too early to project downward trends, noting that retirement aggregators have cited several factors that may account for the sluggish start.

A few firms noted that, after a very active M&A year in 2021, they are now focused on the task of integrating their newly acquired advisory firms, the report says. Many also noted the continued commitment of resources toward the development of centralized platforms and processes, as well as the search for talent to support their business.

Despite the challenges, interest in retirement and wealth advisory M&A remains high and competition is strong for acquisition targets, the report says. M&A will continue to be a core growth strategy for many retirement aggregator firms and most have full pipelines and expect 2022 to be another very active year.

The report says that over the past five years, retirement and wealth advisory firm buyers have emerged from several segments within financial services, with the most active acquirers coming from the insurance brokerage and branded registered investment adviser aggregator segments.

A new significant player was added to each of these verticals in the last year, the report says. First, Creative Planning, a wealth advisory RIA, acquired Lockton’s scaled retirement operation. Second, World Insurance Associates acquired Pensionmark Financial Group and made an investment in 36 of the platform’s affiliate firms.

Many of the retirement and wealth advisory firm acquisitions over the past five years have been executed by seven firms—CAPTRUST, HUB, OneDigital, NFP, Marsh McLennan Agency, Sageview and World Insurance, the report says. Each firm has focused on first establishing multidisciplinary office hubs within each of the major regions, and then filling their advisory talent within each of the major U.S. markets.

Significant Optimism Continues

Many of the scaled retirement advisory firm leaders have an overwhelmingly positive mid- and long-term view of the retirement and wealth M&A outlook, according to the report. As such, it will remain a critical component of their overall growth strategies.

Buyers will likely continue to evolve in terms of how they analyze sell-side firm opportunities, the report says. Revenue composition and growth trend lines will become more important, with a bias toward new client acquisition growth versus same-client market growth.

The report also says that sellers will have to focus on developing a compelling story and demonstrating a strong record. A straightforward story of organic growth, engaged talent and unique capabilities will be needed to achieve premium valuations. Demand will still outweigh supply, but it will take more to stand out.

Finally, in addition to the acquisition of larger “regional hub” retirement advisory firms, the report says, retirement aggregators will have a renewed focus on “sub-acquisitions” and improving market penetration going forward.

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