Recently, the Massachusetts Mutual Life Insurance Co. (MassMutual) announced it had finalized the consolidation of Barings’ mutual funds with MassMutual funds onto the MassMutual investments platform. To mark the occasion, PLANADVISER sat down with Keith McDonagh, the head of MassMutual’s institutional solutions business, to talk about this and other developments, including the state of competition in the institutional services space and the challenges he is hearing about from brokers, consultants and their institutional investor clients.
At a high level, McDonagh says, the past two years have been challenging for institutional investors, but they have also brought about opportunities to address some long-term financial challenges, especially among employers with active and/or frozen pension plans. Though they have had to contend with substantial volatility, the current funded status of many pensions is higher than it has been for some time, McDonagh says, with many plans in the ballpark of 95% funded. As the end of the fiscal year approaches, for many plan sponsors, this increase in funded status has spurred more discussions on de-risking and end-state objectives.
Echoing comments made by other experts, McDonagh says the early part of 2022 may be defined by inflation statistics and the at-times counterintuitive impact higher inflation can have on corporate pensions.
In simple terms, inflation can be good for pension funded status in the same way inflation can benefit individual debt holders: If wages (or corporate income) increase with inflation, and if the borrower (or pension) already owed money before the inflation occurred, the inflation benefits the borrower. Of course, if interest rates go up too much in response to rampant inflation, that can in turn impact the value of equity portfolios, which can itself damage pensions’ funded statuses and the holdings of individual investors.
McDonagh says his outlook remains cautiously optimistic, as equities still have room to grow and there are reasons to believe that inflation will moderate as the new year unfolds. Among other implications, this outlook means the pension risk transfer (PRT) market should likely remain robust in 2022, with 2021 clearing close to $40 billion in total PRT transaction volume.
McDonagh’s perspective matches that of Legal & General Retirement America (LGRA)’s third quarter Pension Risk Transfer Monitor, which estimated that more than $16 billion in sales occurred in the third quarter. Fueled by strong equity returns and rising interest rates, third quarter transaction volume was nearly twice the combined $8.8 billion recorded during the first two quarters of 2021.
LGRA also reported that the third quarter was the second highest single quarter to date, behind only the fourth quarter of 2012, when General Motors completed a transaction of $26 billion. With Q4 2021 transactions projected to be between $10 billion to $15 billion, total annual market volume could be between $35 billion to $40 billion, potentially surpassing its previous high set in 2012 at $36 billion.
“Keep in mind, there is still over $7 trillion invested in U.S. pension plans,” McDonagh observes. “Even with all the payouts and the PRT activity that has taken place to date, overall pension liabilities are continuing to increase, and there is a lot of room there for companies to explore de-risking and PRT opportunities.”
Beyond the topic of pension risk transfers, McDonagh expects to spend significant time in 2022 working on the question of how to ensure defined contribution (DC) plan investors can get access to in-plan retirement income solutions. In fact, he says creating effective, scalable and portable DC plan income solutions is the “next holy grail for our industry.”
“I do think we are still in the early days in terms of solution development,” he says. “We at MassMutual, along with our peers in the institutional investor marketplace, are asking ourselves, ‘What is the right design and approach?’ We are wondering, for example, if DC plan investors will favor approaches that allow them to annuitize over time, or if they want a solution that moves a portion of their assets into annuities right at their retirement date.”
McDonagh says he expects DC plan annuities to become a more important part of the broader and ongoing discussion about diversification.
He also says institutional investors should take time in 2022 to revisit their stable value assets, knowing the important but often-understated role capital preservation options continue to play in retirement plan portfolios.
“You may recall that 2020 was a banner year for stable value inflows, and the market increased roughly 15% in asset volumes relative to 2019,” McDonagh says. “Stable value remains a great stabilizer that still comes with a return. Money market funds are paying nil right now, basically, while stable value might have a 1% return floor and might be paying substantially more than that.”
When selecting a stable value option, he says, it is important for sponsors to assess a fund’s performance, risk mitigation, team and process. They should also assess such things as the underlying credit quality of the bonds, noting that some stable value products may generate higher returns but take on higher risk. McDonagh recommends institutional investors look for an experienced team that has been doing this for quite some time and uses a robust process—because not every stable value fund is the same.
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