Pension buyouts by life insurance companies are driving a major expansion of the retail market for investor assets, which now tops $18 trillion, according to a new report.
Cerulli Associates, a research firm specializing in asset management and distribution analytics, discloses this finding in an October survey, “The State of U.S. Retail and Institutional Asset Management 2016: Business Planning for Growth Opportunities.” The report looks at the U.S. asset management landscape, and identifies distribution opportunities for insurance and financial service professionals including registered investment advisors — the fastest growing advisor segment today.
Low interest rates a key factor
The survey shows asset growth of the retail investor market has consistently surpassed that of the institutional space over the last decade. The report cites as a key reason macroeconomic factors, including historically low interest rates that are fueling a shift from institutionally managed defined benefit pension plans to pension risk transfer arrangements available in the retail market.
“A low-yield environment and a rise in average life expectancy is making it difficult for defined benefit (DB) plans to achieve returns to fund liabilities,” states Cerulli Associate Director Jennifer Muzerall in the report. “In recent years, [plan] sponsors have offered lump sums or buyouts to reduce the number of participants in DB plans via pension risk transfers.”
These transactions, which entail offloading pension liabilities to a third-party through the purchase of group annuity contracts, have been a growth market for major life insurers in recent years. Among the key players is Prudential Financial, which in September inked an agreement with WestRock Company, a provider of paper and packaging solutions in consumer and corrugated markets.
Under the deal, WestRock will transfer $2.5 billion in pension liabilities to Prudential, reducing its overall U.S. pension obligations by 40 percent. The transfer will cover approximately 35,000 retirees and their beneficiaries.
Also active in the market are:
Securian Financial Group, which today reported $275 million in pension risk transfer sales;
MetLife and MassMutual, which in June agreed to take on $1.6 billion in pension liabilities from PPG Industries, a maker of paints and coatings; and
Voya Financial, which last February sold a $350 million group annuity contract to Chemtura Corp., a Conn.-based specialty chemical company.
Group pension buy-out sales exceeded $1 billion in the second quarter of 2016, the fifth consecutive quarter they’ve surpassed the billion-dollar mark, according to LIMRA. (Photo: Thinkstock)
The deals inked by these and other life insurers active in the pension buyout space (among them American United, Principal Financial and Pacific Life) are showing up in eye-popping industry stats. According to LIMRA Secure Retirement Institute, group pension buy-out sales exceeded $1 billion in the second quarter of 2016, the fifth consecutive quarter they’ve surpassed the billion-dollar mark. Activity in the first half of 2016 is up 22 percent compared with the first half of 2015.
Through the second quarter of this year, LIMRA adds, 131 plan sponsors have converted their defined benefit (DB) pension plans to group annuity contracts, surpassing the previous high-water mark of 107 contracts sold in the first six months of 2015.
What’s more, a report by Prudential Financial, “Pension risk transfer: Annuities getting increased attention,” shows that corporate interest in such DB plan buyouts is on the rise. Nearly half of the companies surveyed by Prudential in 2016 say the purchase of a group annuity for DB plan participants is “very likely” (23 percent) or somewhat likely (24 percent).
While pension buyouts are major driver of the retail market’s surge, Cerulli Associates flags other factors, including a growing variety of products and strategies available in retail channels that increasingly mirror options in the institutional market.
“The growth of retail assets has…been driven by the convergence of institutional-like strategies in the retail marketplace, such as alternatives,” says Cerulli’s Muzerall. Alternatives include non-traditional investment vehicles, such as hedge funds, precious metals, venture capital and collectibles, not found a standard investment portfolio.
The Cerulli report also discloses these findings:
Non-depository trust companies and independent registered investment advisor (RIA) channels are the fastest-growing retail advisor channels. In 2016, they grew at 9.0 percent and 8.0 percent, respectively.
Third-party distribution “continues to dominate” the retail market, having garnered $13 trillion-plus in retail assets.
The number of financial advisors and the assets they manage have increased modestly in 2016, but forecasted 5- and 10-year compound annual growth rates (CAGRs) point to “an impending decline in advisor headcount.”
In contrast to a marginal 1 percent increase in advisor headcount, the number of RIAs grew at a robust 7.5 percent clip in 2015. This rapidly-growing distribution channel is “attracting the attention of asset managers that recognize the sales opportunity RIAs represent.”
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