Products August 7, 2019

Club Vita Issues Report About How ZIP Codes Affect Longevity

Club Vita teamed up with Mercer to develop a proprietary model, VitaCurves, that uses the nine-digit ZIP code to help defined benefit (DB) plan sponsors more accurately make longevity assumptions.

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Club Vita, a provider of longevity risk data, has produced a new white paper, “Zooming in on ZIP Codes,” which explains how integrating CIP codes and identifying other socioeconomic factors can help pension plan sponsors have a better handle on the life expectancy estimates for their participants.

Club Vita teamed up with Mercer to develop a proprietary model, VitaCurves, that uses the nine-digit ZIP code, or ZIP+4 code. Employing the nine-digit ZIP code offers significantly more detail on geographical differences in life expectancy than other methods.

By honing in on each participant’s ZIP+4 code to capture a wealth of lifestyle information, and analyzing them alongside factors such as gender, annuity amount and retirement health, Club Vita can help plan sponsors make more informed decisions on funding and risk management, often reducing costs.

Statistics from the VitaCurves model identified specific characteristics of individuals within pension plans that resulted in increases and decreases of liabilities of up to 6% relative to the standard Society of Actuaries tables. With a reduction of liabilities on average, the paper says most plans could be over-valuing their liabilities.

Mercer has previously contended that industry-specific mortality tables also are more accurate for use in defined benefit (DB) plan assumptions.

“ZIP code modeling has several practical benefits for the risk management of pension promises for groups of individuals,” says Dan Reddy, CEO of Club Vita US. “Not only are ZIP codes insightful for assessing how healthy the lifestyles are of people living in different neighborhoods, but they are also readily available, so there is no need to collect sensitive individualized health information.”

Club Vita’s ZIP+4 code model will also facilitate the development of new products, allowing pension plans to prepare themselves for extreme longevity events, such as medical breakthroughs, while keeping control of plan assets. In addition, Douglas Anderson, founder of Club Vita, points out the reduction in uncertainty enables insurers of blocks of pensions to offer lower prices to take on this risk, which makes insurance more affordable and long-term pension promises more secure.

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Anderson adds, “The barrier to many pension plan sponsors using life insurers to secure participants’ benefits is the confidence in getting value for money, and that’s where ZIP code modeling helps. The amount of each retiree’s pension is unaffected and the security of the promise is strengthened.”

Club Vita’s ZIP code model will be available for use on September 1, 2019 by Mercer clients and any pension plan that signs up directly with Club Vita.

The Markets August 7, 2019

Global Assets Will Keep Growing, But So Will Fee Compression

To combat the squeeze, asset managers will seek out new markets, product offerings and investment capabilities, says Cerulli.

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Global assets under management (AUM) will continue to grow for the foreseeable future, but so will pressure on profit margins, according to Cerulli Associates’ latest report, “Global Markets 2019: Bringing Clarity to an Uncertain World.” In light of the ongoing pressure to lower fees, asset management firms will seek out new markets, product offerings and investment capabilities. In addition, asset management firms that operate around the world are paying more attention to China, India, Latin America and the Netherlands, where they see the greatest opportunities for retail growth.

“Decisionmakers in the asset management industry are having to weigh a wide variety of factors, including regulation, fee compression, persistently low yields, and political and economic uncertainty,” says André Schnurrenberger, managing director, Europe, at Cerulli. “In addition, we are increasingly seeing regulators seeking to promote investment, particularly saving for retirement, and several countries have introduced legislation that seeks to make the industry more transparent and user-friendly.” Further, asset managers are grappling with mounting market volatility.

To improve client service, many asset managers now use artificial intelligence (AI), machine learning and big data. In addition, advances in robo-advice and passive investing continue to reshape the fund management landscape, widening access to investment services, the report says.

In many of the regions, environmental, social and governance (ESG) investing is gaining traction. “We are bullish on the long-term prospects of success when it comes to ESG integration and see shifting demographics and the impending intergenerational wealth transfer as causes for optimism,” says Justina Deveikyte, associate director, European international research at Cerulli. “Investors under age 40 prefer strategies that incorporate ESG, and many investment platforms are recording an increasing number of searches for ESG solutions.”

Cerulli says that investors need to be better educated about ESG investing but that asset managers will be well-served if they actively market this investment choice.

ESG is particularly trending in France, where 56% of asset managers expect fast growth in the category’s assets. Another 39% expect moderate growth. The outlook for ESG investing is also bullish in the UK, where 32% of asset managers expect fast growth and 42%, moderate growth.

Several governments in the Pacific Rim are taking the lead on ESG investing, Cerulli says. Hong Kong’s Securities and Futures Commission plans to launch a website by the end of the year that identifies green or ESG funds, for investors. Japan’s Government Pension Investment Fund invests according to ESG principles and requires outside managers to apply those principles to their equity investments. Taiwan’s Bureau of Labor funds launched its maiden domestic ESG equity mandate last year, worth U.S.$1.3 billion.

In addition, Cerulli expects that equity and bond funds will gradually lose market share to alternative and balanced funds over the next five years. In the U.S. retail sector, aging demographics are creating an interest in products that protect assets—e.g., annuities—and asset managers are looking into how to leverage solutions developed for the institutional channel, such as pension liability matching, for retail clients.

In the U.S., only four of the 20 largest fund managers were able to increase their assets last year. Cerulli attributes this to poor market conditions, net outflows and the commoditization of products. Cerulli says, to reverse this trend, asset managers will need to find new ways to differentiate themselves. Giants such as BlackRock and Vanguard are experimenting with free models, designed to attract assets and strengthen relationships with key distribution partners.

In conclusion, Cerulli says, “asset managers need to keep adapting in order to limit the impact of rising costs and fee compression. Many are considering disruptive revenue and compression models, cutting costs and focusing on broad value-add services that tap different revenue streams. Product innovation is another important area, and firms should investigate ways to improve operational efficiencies through better use of technology.”

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