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 January 15, 2006
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OUR COUNTRY'S PENSION CRISIS IN A NUTSHELL
- Pension plans that promise a specific benefit in the future are
essentially a contract between current and future generations, and
those future generations aren't represented at the bargaining table. As
a result, they get stuck guaranteeing the retirement income of their
elders while receiving nothing in return. This is the case for Social
Security, corporate pensions, state pensions, county pensions,
municipal pensions...virtually all defined benefit pensions! Read more
at International Centre
for Pension Management.
TWO PENSION CRISES
PLUS HEALTH CARE - The U.S. pension system is heading toward a
double crisis. For employees, the crisis is a lack of funding.
S&P says the companies in their S&P 500 with traditional
pension plans will need another $40 billion to get their plans back up
to speed. The second impending crisis is an accounting change that may
make pension issues more painful for corporations. Regulations for both
pensions and retiree health care cost changes will be implemented over
the next five years. Health coverage for retirees is even scarier for
employees. The same S&P 500 companies would need to come up with
$292 billion to meet current obligations and those "obligations" are
only promises...not legal obligations like pension plans.
PENSION PLAN PRESS
– With IBM freezing its pension plan, a plethora of articles on
the dim future of the defined benefit pension plan concept have hit the
press. Here is a summation of what you need to know.
Brief
history - The corporate pension has been around since the 19th
century, but really came into its own in the U.S. in the years just
after World War II. The defined benefit plans assumed lifetime jobs
with a company, which seemed reasonable at the time, but has long since
ceased being the American norm.
Why
is it happening? - Companies are trying to become more
competitive and adapt to changing times. They must compete with younger
companies that never made pension promises or foreign companies where
the government provides retirement benefits or there are no benefits at
all. IBM is paying about $270 million to make the change but will save
$2.5 billion over the next 5 years.
Why
now? – Pension crises at steelmakers and airlines have
brought the issue to a head, but arcane accounting rules and low,
long-term interest rates mean the accounting benefit for freezing a
pension is higher than it would be if long-term rates rise.
Who's
most vulnerable? - Salaried employees since companies have to
negotiate to cut benefits for workers covered by collective bargaining.
What
about earned benefits? - Companies can't cut pension benefits
already earned, but the earned benefits in a defined plan may be a lot
less than expected.
Who
gets hurt the most? - Workers in their 40s and 50s who have been
at the company many years. Benefits build up fastest in an employee's
final years at a company...50% of a person's pension may be earned in
the last five years on the job. Even with bigger 401(k) contributions,
these workers may never catch up.
Who
isn't hurt? - Current retirees, younger workers and those who
switch jobs frequently.
Freezing
versus terminating – Freezing locks the pension in place
where it currently stands actuarially and the company is obligated to
pay in the future. When employers terminate a pension, they must
pay out all of the benefits immediately, either in lump sums or by
buying each worker an annuity. Most terminations are due to bankruptcy.
Companies
at risk – Those with a large percentage of older, longtime
employees; those with employees not covered by a collective-bargaining
agreement; those have already cut some retiree benefits in the past.
GOOD RIDDANCE TO
DEFINED BENEFITS – Fortune
sees the IBM pension plan freeze as the beginning of the end of
traditional pensions in the U. S. and editorializes that "corporate
pensions are an unstable, unfair and economically perverse means of
paying for retirement."
MERGER MANIA?
- CNNMoney is predicting that the insurance industry could see a record
number of mergers and acquisitions in 2006. The two big deals in
2005 were MetLife's purchase of Travelers from Citigroup and Lincoln
National's acquisition of Jeff-Pilot. In 2006, we may see more
financial institutions, such as JPMorgan Chase, selling off their life
and annuity businesses. Don't be surprised if Allstate either
spins off or sells its Allstate Financial unit. AmerUs Group and
Protective Life are cited as top candidates for acquisition, with
Prudential and Principal predicted to be in solid positions to make
acquisitions in the near term.
SEC TACKLES
COMPENSATION ISSUES – The SEC is set to overhaul
disclosure rules for compensation to executives and directors. The
changes will not be designed to reduce soaring compensation packages,
but to make them more transparent by forcing boards to provide more
explanation to investors. Part of the reason for the new rules is an
apparent lack of correlation between executive pay and company
performance. One recent study found that 60 companies in the bottom
10th of the Russell lost $769 billion in market value in the five years
through 2004...and paid their top five executives more than $12 billion
over the same period.
CONSUMER BANKRUPTCY
RECORD - U.S. consumer bankruptcy filings rose 31.6% to a record
2.04 million in 2005 from 1.55 million in 2004, as people rushed to
seek protection from creditors ahead of tough new laws.
100 MOST POWERFUL
- InsuranceBroadcasting.com has released its 5th annual life of the
"100 Most Powerful People in the Insurance Industry (North
America)." Click here
to see if you made the list!
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LIFE INDUSTRY PREDICTIONS
- The LOMA Board of Directors is predicting flat to modest growth for
the life insurance industry in 2006. Other predictions: continued
consolidations in response to competitive pressures, regulatory and tax
issues including income tax reform, estate tax changes and the optional
federal charter, use of technology to better serve customers, finding
and hiring talented people. More information is available here.
HEALTH CARE FACTS – In 2004
Americans paid an average of $6,280 per person (16% of the U.S. gross
domestic product) for health care. The "good news" is that total
U.S. health care spending increased "only" 7.9% in 2004, to $2
trillion, versus 8.2% for 2003. Despite media reports of consumers take
the full force of the increases due to "cost sharing," consumer
out-of-pocket health care spending increased only 5.5%.
TOP BUSINESS HEALTH ISSUES -
PricewaterhouseCoopers reports that the rising costs of health care
coverage, the implications of the Medicare Drug Plan, the rise of
consumer directed health care as well as HSAs, pressure on
pharmaceutical companies, the urgent need to reduce medical errors and
investments in information technology are among the Top 10 Business
Issues for the Health Industries in 2006. See complete report at http://www.pwchealth.com.
"FAIR SHARE" LEGISLATION - The
Maryland legislature voted to overturn the governor's veto of "fair
share" legislation requiring large employers (companies with more than
10,000 employees in the state) to spend a minimum of 8% of payroll on
their employees' health care costs, either through the private market
or by paying into a state fund to offset taxpayer expense. Of
Maryland's four large employers, as defined by the legislation, only
Wal-Mart doesn't currently spend above the required minimum. Look
for "fair share" legislation to be introduced in other states this year.
ANNUITY REGULATION
SUMMIT - NASD Chairman Robert Glauber believes that sellers of
fixed and equity-indexed annuities should meet the same standards
required of variable annuity sellers. Mr. Glauber also wants all
parties with an interest in any type of annuity, including regulators
and representatives from the securities and insurance industries to
meet at a summit conference to discuss how to harmonize the rules
governing the sale of three versions of the same product. A copy
of Mr. Glauber's comments is available here.
BIG BUCKS - The Wall Street Journal is reporting
that AIG is close to settling civil investigations by state and federal
authorities into its accounting scandal. Reported price tag: as
much as $1.5 billion, an amount nearly equal to the $1.57 billion that
AIG paid as a result of Hurricanes Katrina and Rita.
SPEAKING OF KATRINA
AND RITA - The Insurance Information Institute reports that
homeowner insurance companies in Louisiana are expected to pay $12.4
billion in claims from the two hurricanes, an amount equal to all
homeowners insurance premiums paid in the state in the past 25
years. In Mississippi, the $5.5 billion in homeowners insurance
claims paid as a result of Katrina represents 17 years of homeowners
premiums paid.
DOW HITS
11,000...4-1/2 YEAR HIGH - The Dow Jones closed above 11,000 for
the first time since June 13, 2001. GM's movement had a pronounced
effect on the entire market after brokerage upgrades. 11,000 may not
signify a new bull but it is at least a psychological milestone. Moving
over the 11,000 mark puts the Dow about 6% below its all-time high of
11,750.28 set on January 14, 2000.
SETTLEMENTS GROW – Conning
estimates that the life settlements market grew to $5.5 billion in face
amount in 2005 thanks to available capital and continued aggressive
marketing of producers. This is more than twice the $2 billion estimate
of 2002. "Life Settlements: The Concept Catches On" is available for
purchase at http://www.conningresearch.com.
JOBLESS AT RECORD
LOW, LAYOFFS UP – How can we reconcile these conflicting
reports? Beats us but the Labor Department reports that the number of
workers seeking jobless benefits fell to its lowest in over five
years. In a separate report, employment-consulting firm
Challenger, Gray & Christmas said planned U.S. layoffs rose 8.6% in
December and the annual total of job cuts was 3.1% higher than in 2004.
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MAKE IT EASIER! - According to the
ING Financial Planning and Investment Study, consumers are frustrated
by the complexity of financial planning and 75% of them say they would
switch to a financial services company that makes managing their money
easier. Get this...43% vs. 38% of consumers say retirement
planning is harder than raising a child! What makes a financial
services experience "easy"? Knowledge of the representative,
information provided in straightforward language, responsiveness to
their needs, quality of customer service, products that clearly address
their needs, explanation by the representative of costs, penalties and
restrictions and the advisor's understanding of their needs and
financial goals.
DISABILITY IN
BANKRUPTCIES AND FORECLOSURES - Nearly 50% of bankruptcies and
mortgage foreclosures are caused by disability. At least, that is what
studies by Harvard, based on 2001 filings, and a Housing and Home
Finance Agency study, based on 1998 filings, found. Things may have
changed some with the record bankruptcies in 2005, but it is still a
problem that is ignored by many planners.
PRESERVE THOSE
DISTRIBUTIONS! - A new study by the Employee Benefit Research
Institute shows the value of preserving versus spending lump-sum
distributions received when switching jobs. A copy of the press
release can be found here.
DON'T COUNT ON IT
- According to the Wall Street
Journal, many baby boomers counting on an inheritance from their
parents to fund their retirements may end up with little or
nothing. The likelihood is that "a small number of wealthy
families are likely to receive the bulk of the windfall and that many
other would-be heirs will end up disappointed." Reasons: estate
taxes, bequeaths to charities, increased longevity with the
accompanying health and long-term care costs, the annuitization of a
greater share of retirees' financial resources to provide guaranteed
income, reverse mortgages and spending it all on themselves. The
lesson: don't count on an inheritance funding your retirement.
BANK ANNUITY SALES
DOWN –Kenneth Kehrer reports total bank annuity sales fell
to $2.8 billion in October 2005, down 25% from the total for October
2004. VA sales increased 23%, but fixed annuity sales fell 52%.
VARIABLE ANNUITY
CONCERNS - Will you be able to sell variable annuities to anyone
over 60 anymore? The SEC is currently reviewing a new rule proposal
(2821) from the NASD to tighten suitability for variable annuities.
This has some industry analysts worried about life insurers and their
agents becoming less effective in the fast-approaching baby boomer
retirement market. This may also become an issue for Index Annuities.
GA EVALUTATION GUIDE
- NAILBA has posted a manual that can help general agents in their
negotiations with insurers. "Contracts for the Independent Life
General Agent" can be found here.
FLEXIBILITY TREND IN
VARIABLE ANNUITIES – In order to make their product more
suitable, insurers are adding a variety of riders. Allianz has
introduced a variable annuity that will let holders combine and change
income options quickly and easily. Riders in the contract guarantee a
fixed stream of income for life or can provide a shorter, steadily
increasing stream of income. Annuitants can "mix and match" the riders
in a variety of ways as their circumstances change.
LAST TO DIE VARIABLE
ANNUITY - AXA Equitable is marketing an "annuity built for two."
Basically, it is a joint survivor annuity with underlying funds that
provide retirement income for a husband and a wife.
ANNUITY UNDERWRITING
- Protective Life has introduced a single premium immediate annuity
that offers medical underwriting, a feature that could be attractive to
retirees with health problems. The annuity also offers the owner
the ability to surrender the annuity in exchange for a portion of the
purchase payment, as well as an inflation option that provides for
increasing benefit payments.
STOCK OWNERSHIP
– A survey by the Investment Company Institute and the Securities
Industry Association about America's investors reveals that most
investors believe that the stock market is great place for long-term
investment. Half of American households now own stocks or mutual funds.
Major factor has been the growth of company sponsored 401(k) plans.
Also, nearly 75% of all equity investors hold equities outside
retirement plans and professional financial advisers are the main
conduit to equity ownership outside employer plans.
ID PROTECTION BIG
BUSINESS – Here is a perfect example of "turning worry
into wampum." ID theft is obviously a problem, but many experts are now
questioning the value of coverages being offered insurers, credit card
companies, credit services, etc.
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