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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