The ripple effects of economic developments and interactions
touch many shores—including pension plans. Recent studies discuss factors now
affecting plans as well as what developments may portend.
Funded Status
Insight Investment, in its quarterly U.S. Pension Market
paper, reports that the funded status of all three of the pension indices they
track improved in the third quarter. The three indices they maintain are a
liability-drive investment (LDI) pension index, which reflects plans that have
adopted LDI in the fixed income portion of their portfolio; a traditional
pension index, which reflects plans that have not yet adopted LDI; and a Large
Company Aggregate Pension (LCAP) Index, which aims to represent an asset
weighted average of allocations held by S&P 500 companies’ plans.
The funded status of its traditional index, which has no
investments in long-duration fixed income, improved to 93.8% in the third
quarter; the improvement in the funded status of the LDI and LCAP indices was
even greater, says Insight Investment, taking them to 102.3% and 100.2%
respectively. Further, says Insight Investment, the funded status of all three
indices has improved for the year so far as well, by roughly 10%.
October Three, which tracks two hypothetical defined benefit
plans—one that is invested in a more traditional way and another invested in a
conservative manner—reports that pension plan funding improved in September; in
addition, it reports that funding remains up for 2021. “Generally, plan funding
statuses in 2021 have improved,” says the report.
Annuity Sales
U.S. annuity sales totaled $62.2 billion in the third
quarter, the Secure Retirement Institute (SRI) says in preliminary results from
its U.S. Individual Annuity Sales Survey. SRI says that represents sales 12%
higher that those of the third quarter of 2020. So far for the year, they say,
annuity sales increased 19% to $191.4 billion. SRI says that those sales are
the highest in the first nine months of a year since 2008.
SRI also examined sales of different kinds of annuities:
Variable annuity (VA) sales accounted for just under
half—49%—of the toral annuity market in the third quarter, says SRI. They
report that total variable annuity sales amounted to $30.7 billion in the third
quarter, up 28% higher than during the third quarter of 2020. VA sales
represented 49% of the total annuity market in the third quarter, the highest
level since first quarter 2018. In the first three quarters of 2021, total VA
sales were $93.4 billion, 32% higher than prior year.
Traditional VA sales came to $21.5 billion in the third
quarter, SRI notes, which it says is a 22% increase from their sales in the
third quarter of 2020. So far for 2021, traditional VA sales have totaled $65
billion, 17% higher than during the first nine months of 2020, according to
SRI.
Registered index-linked annuity sales in the third quarter
were lower than those in the second quarter, but still were 47% higher than
during the third quarter of 2020 and amounted to $9.2 billion. Year to date,
they came to $28.4 billion, a whopping 81% higher than during the first nine
months of 2020.
Total fixed annuity sales in the third quarter were $31.5
billion, down 1% from third quarter 2020 results. Still, SRI says, for 2021 so
far total fixed annuities have grown 10% to $98 billion.
Fixed indexed annuity sales in the second quarter grew 30%
to $17.1 billion, which it says were the highest quarterly sales in two years.
For the year so far, these sales came to $47.1 billion, up 14% from the first
three quarters of 2020.
Immediate income annuity sales in the third quarter were
$1.5 billion; that, SRI says, is 7% higher than in the third quarter of 2020.
Still, they say, for the year over all so far immediate income annuity sales
have fallen 6% to $4.4 billion.
Deferred income annuity (DIA) sales in the third quarter
increased 29% from the same period in 2020 to $540 million. In the first three
quarters of 2021, says SRI, those sales came to $1.47 billion, 19% higher than
in the first nine months of 2020.
October Three reports that annuity purchase costs for
retirees have “consistently been between 98% – 104% of the pension accounting
value” and that purchase costs have fallen slightly.
In looking at annuity sales and trends, October Three
measures the performance of two annuity plans: Annuity Plan 1 serves all
retirees and has a duration of seven years and Annuity Plan 2 serves both
retirees and those who are still making deferrals, although a strong majority
are retirees (70% and 30%, respectively). They report that in September 2021, the
spread between pension risk transfer price and GAAP and projected benefit
obligation (PBO) for Annuity Plan 1 is 3.56% and the spread for Annuity Plan 2
is 9.38%. In September, the annuity purchase price for Annuity Plan 1 decreased
0.50% and Annuity Plan 2 decreased 0.82%. Overall for 2021, October Three says,
“significant month-to-month cost volatility has persisted.”
Looking Ahead
Insight Investment also looks at what lies ahead. Key risks,
the paper says, include “stickier than expected inflation, forcing a more
disruptive response from the Fed, and pressure on corporates to increase
leverage in the low-yield environment, leading to credit downgrades and greater
financial risk.”
The paper says that inflation “has so far been dominated by
‘volatile’ rather than ‘sticky’ categories,” and adds that factors such as the
delta variant have exacerbated inflation. They expect that in the fourth
quarter of 2021, inflation will be among the key market risks for pensions and
that it will become “more sustained than transitory.”
The paper cites what it calls the “unprecedented pace” of
the growth in the Federal Reserve’s balance sheet as a catalyst for concern
that this “could create significant inflation or that tapering could spark
significant, sustained market volatility.”
Insight Investment suggests that higher inflation will “give
the more hawkish members of the Federal Open Markets Committee (FOMC)—the
branch of the Federal Reserve System that determines the direction of monetary
policy specifically by directing open market operations—a greater voice for
now.” Those members, it says, want to “reduce the excess liquidity that has
flooded the system.” They do not anticipate that this will last, however; nor
do they consider it likely that significant inflation or greater market
volatility will result from the Federal Reserve’s activity, in light of the
mechanisms in its asset purchase programs.
The paper expresses the expectation that pension liabilities
will shorten due to corporate pension plans becoming increasingly closed to new
members. As this happens, it argues, pension investments likely will “shift
towards slightly lower-duration assets.” This, they say, would support the
intermediate section of the corporate bond curve and also could support lower
duration fixed income sectors, among them high-yield credit and structured
credit.
October Three says that as some insurers begin to hit
capacity restraints, it expects a high level of pension risk transfer activity
and insurance company competition to be more prevalent as the year goes on.
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