Prudential Sheds Positive Light on Stable-Value

A whitepaper by Prudential Retirement outlines the benefits of stable-value investment strategies.

(December 5, 2011) — In contrast to a recent report by Towers Watson that warned about the risks of stable-value investment strategies, Prudential has outlined the benefits in a recent report, citing safer investment options and principal protection, along with predictable and sufficient returns. 

The paper — titled Stable Value Products: An Increasingly Important Component of the US Retirement Market — provides an overview, description, and comparison of the wide range of stable value products and outcomes. “Following the volatility of the 2008 financial crisis, plan sponsors and participants have become more conservative investors seeking stable value products that preserve capital and deliver steady returns,” a statement on the results said.

“Prudential’s white paper…provides advisors a tool to assist them in the evaluation of stable value options for their clients,” said Debra Roey, vice president and director of Retirement Plan Services for Philadelphia, PA.-based advisor Janney Montgomery Scott LLC. “The information in the paper is timely, as a greater percentage of plan assets are being allocated to this asset class. The format of the whitepaper is suitable for both educating our financial advisors as well as presenting to our clients as part of the plan review process.”

According to the report, stable value products — which combine an investment in fixed-income securities with a guarantee of principal and accumulated earnings — are increasingly growing in importance as retirement plan sponsors make crucial retirement plan design decisions and participants seek ‘safe’ retirement investment options. 

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In November, consulting giant Towers Watson noted that plan sponsors are subject to new risks within stable-value strategies. “While stable value investment strategies have performed relatively well during the past few years compared to money market strategies, we believe the changed environment means investors should revisit these with a view to understanding all the risks now associated with this investment strategy,” said Peter Schmit, research manager in Towers Watson’s investment business and co-author of the paper. “Regardless of upcoming regulatory decisions, we believe there has been a structural shift in competitive advantage away from plan sponsors and stable-value managers over to insurance providers and the investment strategy now faces distinct market risks and regulatory headwinds.”

Towers Watson’s whitepaper — titled “Assessing Stable-Value Strategies: What Plan Sponsors Should Consider” — noted that Dodd-Frank is a wide-ranging law that could impact stable-value because it will define whether or not stable-value wrap contracts should be included within the definition of a swap security. “This is a concern throughout the stable-value market since Dodd-Frank could be very harmful to the future of the stable-value industry. Reform could include capital and margin requirements for banks’ swap transactions as well as new clearing and reporting requirements,” the report explained. “If stable- value contracts were to fall under this definition, the additional requirements may deter certain wrap providers from issuing new wrap capacity, which would put even greater pressure on a market that is trying to cope with an already-limited supply of insurance wrap capacity.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Report: Insured Pension Risk Transfer Solutions Stand to Rescue Struggling DB Plans

Dietrich & Associates, a US pension risk transfer advisory firm, has released a new whitepaper with the goal of evolving the conversation surrounding pension risk and liability driven investing. 

(December 5, 2011) — A new report by Dietrich & Associates claims that because many sponsors in the next few years will be focused on de-risking their pension program to predictably fund the plan over a series of years, struggling defined benefit pensions are poised to be rescued by insured pension risk transfer solutions. 

“Pension cost and volatility issues have led to the ‘freezing’ of benefits in almost half of corporate defined benefit pension plans,” commented Jay Dinunzio, Senior Consultant at Dietrich & Associates and the author of the new paper. “For this growing group of organizations, plan termination (and the associated required annuitization) is a clear objective that is challenged by recent low interest rates and unfunded liabilities. For many sponsors the next few years will be focused on de-risking their pension program in order to predictably fund the plan over a series of years. Inevitably, this shift will lead sponsors to shorten investment horizons and associated asset return targets, which may result in higher costs as a required trade-off to arrive at more certain outcomes. This paradigm shift towards liability driven investing in defined benefit plans is creating a compelling opportunity for insured pension risk transfer solutions to add significant value to the conversations that pension committees and consultants are having regarding fixed income investments.”

Dietrich & Associates’ findings highlight the increased popularity of liability-driven investing (LDI) among schemes seeking to de-risk in the face of market turbulence and added volatility. 

The report coincides with a study released last month by consulting firm Aon Hewitt, which found a continued trend of closure to DB accrual among UK schemes. “Just over 40% of the schemes surveyed have either already closed to DB accrual or are currently in the process of closing to future accrual,” James Patten, benefits design specialist at Aon Hewitt, said in a statement. “Nearly half of those that have closed to accrual, and indeed many of those that have not, are now taking pension risk management to the next phase. In some cases, this might simply be through implementing a liability management exercise such as an enhanced transfer value offer.”

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The closure to DB accrual represents a greater focus on risk managements strategies among schemes. Mark Hyde Harrison, the new Chairman of the National Association of Pension Funds (NAPF), noted in October that DC pensions in the UK are inefficient and wasteful. In the UK, DC pensions have largely replaced final salary, or DB, pensions in the private sector. According to the NAPF, their importance is set to balloon ahead of new government rules that will force all workers to automatically enroll into the system.

Read Dietrich & Associates’ whitepaper here.  



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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