stable value - achs · 11/4/2015 · source: aon hewitt 401(k) indextm - historical asset...

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November 4, 2015

Stable Value

Matt Condos, Senior Vice President, FSA, MAAA Registered Representative of Voya Financial Partners, LLC (member SIPC)

Kyle Puffer, Senior Actuary and Head of Retirement Valuation, FSA, MAAA

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Agenda

Stable Value Introduction

Current Market Overview

Update on Statutory Reserve Proposals


STABLE VALUE INTRODUCTION

3


.

401(k) Plans

403(b) Plans

457 Plans

Profit-Sharing Plans

Pension Plans

Cash Balance Plans

412(e)(3) Plans

Retirement Products Overview

Individual

Products

Annuities

IRAs Money Market

Funds

Bonds

4


1 SVIA presentation “Stable Value: What’s on the Horizon?”

5

Money Market Funds

Stable Value Funds

Bond Funds

Balanced Funds

Growth & Income Funds

Growth Funds

Specialty Funds

International/Global Equity Funds

Less More Risk Spectrum1

Steady growth over time without daily fluctuations through a fixed crediting

rate

General liquidity for participant transactions (certain conditions may apply)

Conservative Option for 404(c) in DC plans

Strives to be an income producing, low-risk, liquid fund

Stable Value Overview

Stable Value offers principal preservation and stability for participants seeking a

conservative component in their portfolio.


Can use stable value to create a

self-managed stream of payments

similar to an annuity without the

additional cost or complexity that

comes with some annuity products

Protect against loss of accumulated

assets

Plan for retirement by assuring that

the amount needed for withdrawal is

secure

Part of a diversified

portfolio

Easy way to get

started

Beginning Career Mid-Career Late Career Retirement

1 Gina Mitchell, President, Stable Value Investment Association. 2 Employee Benefit Research Institute, Issue Brief No. 408, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013.”

“One of the great things about stable value is that it’s a great entry point for millennials because it has

a loose relationship to equities. They can use it

to get comfortable investing in equities in

their 401(k) plan.” 1

Older participants are more likely to invest in fixed-income securities

such as bond funds, GICs and other stable-value

funds, or money funds.2

Stable Value in All Phases


Insurance Companies

Banks

Investment Firms / Trust Companies

7

Providers

Key Points

Providers

$706 billion invested in stable value assets1

Offered in approximately half of all 401(k) plans1

Benefit responsive contracts that guarantee participants can

transact at book value (i.e.; principal value plus accrued interest)

High quality, liquid fixed income securities backing contracts

Current accounting regulations - FASB ASC Section 946-210

(formerly SOP 94-4-1 & FSP AAG INV-1) - allow valuation of benefit

responsive contracts at “contract value” or “book value” in Defined

Contribution plans

1 SVIA “Stable Value at a Glance” Presentation and SVIA’s 19th Annual Investment Policy Survey Covering Stable Value

Assets as of Year End 2014

Stable Value Overview

Stable Value Funds are a Core Investment in Defined Contribution (DC)

Employee Benefit Plans

Utilization


Source: SVIA “Stable Value at a Glance” Presentation

Benefits of Stable Value

Stable value provides capital preservation and consistent, steady returns.


Stable Value Risk & Return

Stable Value offers unique risk and return characteristics rarely found in

other asset classes.

Stable Value is one of few assets classes that consistently generates positive returns in all market cycles

Returns that are generally higher over the long-run than money market funds and cash

Less risk (volatility) to principal than most bond funds

Since their inception in 1973, Stable Value funds have undergone several severe tests and have weathered the storms through countless challenging circumstances

Source: How Stable Value Stacks Up Presentation, by Professor David F. Babbel of The Wharton School, University of Pennsylvania and

Charles River Associates, Director of Insurance Economics Practice


Source: Aon Hewitt 401(k) IndexTM - Historical Asset Allocation Pattern May 1995 – May 2015.

10

A participant’s Stable Value asset allocation is correlated to the equity market returns.

Participant Asset Allocation


1SVIA 19th Annual Stable Value Investment & Policy Survey as of year-end 2014 (“Cash & Other” make up remaining 5%) Source: Bloomberg BNA “A Guide to Stable Value Funds for Pension Plan Sponsors and Advisors” and SVIA Stable Value Guaranteed Insurance Accounts FAQs 2013

SV

PRODUCT:

Guaranteed Insurance Accounts:

General Accounts

Guaranteed Insurance Accounts:

Separate Accounts

Synthetic GICs

DESCRIPTION: Contracts and agreements with an

insurance company that provide

principal preservation, benefit

responsiveness, and a guaranteed

fixed or indexed rate of return backed

by the assets of the insurer’s general

account.

Contracts and agreements with an insurance company

that provide principal preservation, benefit

responsiveness, and a guaranteed rate of return

backed first by assets held in a segregated account

separate from the insurer’s general account and then,

to the extent there are any shortfalls, by assets in the

general account.

Contracts and agreements with a bank or

insurance company that provide principal

preservation, benefit responsiveness, and a

guaranteed rate of return relative to a portfolio of

assets held in an external trust and backed by

assets held in the trust.

RATE OF

RETURN:

Guaranteed regardless of the

performance of the underlying class

May be fixed, indexed, reset periodically, or based on

the actual performance of the segregated assets.

Provides a periodic rate of return based on the

actual performance of the underlying assets.

ASSETS: Owned by the insurance company and

held within the insurer’s general

account.

Owned by the insurance company but set aside in a

separate account for the exclusive benefit of the plan(s)

in the separate account.

Directly owned by the participating plan(s).

% MARKET1: 40% 16% 39%

Types of Stable Value Investments


Individually Managed Single Plan Accounts

27%

Life Insurance Company Full Service Funds

53%

BU

Init

iati

ves

FUN

D S

TRU

CU

TRE2

P

RO

DU

CTS

1

General Account Separate Account Synthetic GIC

Pooled Funds 20%

Stable Value Structures

! Bloomberg BNA “A Guide to Stable Value Funds for Pension Plan Sponsors and Advisors” and SVIA Stable Value Guaranteed Insurance Accounts FAQs 2013 2 SVIA 19th Annual Stable Value Investment & Policy Survey as of year-end 2014 (“Cash & Other” make up remaining 5%)


Managed portfolio of high-quality, fixed income securities

Stable Value Fund

The investment contract provides preservation of principal and a stable crediting rate

The investment contract smoothes market volatility by amortizing gains and losses over the duration of the portfolio

This smoothing is triggered through the rate reset mechanism and insulates against day-to-day volatility

Stable Value Portfolio

Investment Contracts

Asset Value

Time

Market Value of underlying

portfolio

Rising interest

rates

Falling interest

rates

Wrap Value Book Value Market Value

Source: SVIA presentation “Stable Value: What’s on the Horizon?”

Separate Account and Synthetics


CURRENT MARKET OVERVIEW

14


Underwriting

Contract Features

Investment Guidelines

Plan Features

Participant Demographics

15

Structure

Provider Strength & Commitment

Crediting Rate Level & Volatility

Contract Features

Investment Portfolio

PROVIDER PLAN

Evaluating Stable Value


Approx. Notional Outstanding (in billions)

Source: Valerian Capital Group, 2Q Survey

$402 $403 $400 $395

$391

$300

$350

$400

$450

2011 2012 2013 2014 1H2015

Stable Value Market is contracting due to several factors.

Stable Value Market Size


New sales — Refers to deposits to new contracts and deposits to new funding agreements.

Ongoing deposits — Includes deposits to existing contracts and existing funding agreements.

Renewal sales — Includes contracts that have fixed maturities and roll over to new contracts each 3, 6, or 12 months. Initial sales of these contracts are reported as “new sales.”

Source: SVIA/LIMRA presentation : Stable Value and Funding Agreement Products, First and Second Quarters 2015, pgs. 12 & 17

($Mn)

Stable Value Market Sales

Per LIMRA, Stable Value sales have been declining in recent years.


International 529

Plans

Health

Savings

Accounts

Retirement

Income

Target Date

Funds

BOLI/

COLI

403(b)

IRA Market

New Product Development


GAO Study

of QDIA’s

NAIC Statutory

Reserve

Proposal

Money

Market

Reform

FASB

DOL

Fiduciary

Proposal

Dodd

Frank

Regulatory Items


UPDATE ON STATUTORY RESERVE PROPOSALS

20


Proposals – Changes to Model 695 (Synthetic GICs)

– Changes to Model 200 (Separate Accounts Funding Guaranteed Minimum Benefits Under Group Contracts)

Applies to “separate account GICs”

Impacts – Will generally reduce stat reserves in low rate/credit stress scenarios

– Strengthens reserving, Cash Flow Testing and Plan of Operations requirements for “Pooled Fund Contracts” to reflect incremental risk associated with plan sponsor “put” provisions

Status – NY Reg 128 modified in 2014 (does not follow NAIC model)

– NAIC model 695 modifications likely to be adopted by NAIC in 2015

– NAIC Model 200 modifications under peer and policy review at AAA

Not yet presented to NAIC

21

Proposals in progress will modify existing statutory regulations for

in-force stable value business.

Upcoming Statutory Regulatory Changes


Present Value of Benefits @ 105% Treasury

Reserve (Vx)

Adjusted Market Value

Deductions

Source: American Academy of Actuaries: http://www.actuary.org/files/Synthetic_GIC_Proposal_ppt_11-28-12.pdf

Market Value of

Assets

NAIC Synthetic Guaranteed Investment Contract Model Regulation

(Model Regulation 695)

Reserve equals excess, if any, of

(1) PV of guaranteed benefits using spot rate supportable by the expected return from segregated

portfolio but not greater than 105% of the treasury spot rate over

(2) market value of assets less deductions

Existing Statutory Regulation


NY Regulation 128 (requirements updated in 2014) • Maximum discount rate is greater of

105% of treasuries Minimum of 2% and treasuries +1%

• Different market value haircuts

CT Regulation 38a-459 • Follows NAIC model

MN Bulletin 97-3 • 100% of treasuries for

discounting • No market value haircuts

NJ Regulation 11:4-46.7 • No market value haircuts

CA 95-10 and NE Title 210, Chapter 80

• Reserves must be > 30% of accumulated fees collected, but not more than 150% of fees collected in the current year

State Specific Regulations

Existing Statutory Regulation


Financial Crisis

A Plan is Born

to Update

Existing

Statutory

Regulations

Synthetic GIC

Proposed

Changes to

Statutory

Valuation

Methodology

LATF Feedback

on Proposed

Changes

Synthetic GIC

Additional

Proposed

Changes to

Statutory

Valuation

Methodology

Current Status

Future

Expectations

2016 + 2008

2010

2012

2013

2014

2015

Timeline of Events


Reserves increased significantly at year-end 2008 due to low

Treasury rates and high spreads on investment grade corporate

bonds

Temporary relief granted by some states

Need for a permanent solution within the statutory framework

Does not distinguish between single client and pooled fund contract

25


2016 + 2008

2010

2012

2013

2014

2015

Existing Regulation Scrutinized

“Financial Crisis”


NAIC’s LATF requested that the Deposit Fund

Subgroup of the AAA Annuity Reserve Work Group

investigate and recommend modifications to the

existing statutory regulations applicable to in-force

business, August, 2010

26

2016 + 2008

2010

2012

2013

2014

2015


A plan is born to update Existing Statutory Regulations

Statutory Regulations Update Plan


Determination of the Discount Rate

27

Source: American Academy of Actuaries: http://www.actuary.org/files/Synthetic_GIC_Proposal_11-28-12.pdf

2016 + 2008

2010

2012

2013

2014

2015

Substitute 50%

Treasury-based spot

rate plus 50%

corporate bond

index spot rate for

105% of the

Treasury spot rate

Results in lower

reserves when

Treasury rates are

low and credit

spreads are wide

1

2008

Synthetic GIC Proposed Changes to Statutory

Valuation Methodology


Eliminate the deduction provided

– Asset default risk borne by the plan participants

– Transfer of risk reflected in contractual provisions

No change to the deduction if:

– Asset default risk borne by the insurance company

Results in lower statutory reserves for impacted contracts

Aligns asset deductions with AVR requirements for separate accounts

28

2016 + 2008

2010

2012

2013

2014

2015

Deduction to the market value of assets 2


Synthetic GIC Proposed Changes to Statutory

Valuation Methodology


Subgroup provided guiding principles to expand the proposal and

discussed them with LATF on a December 2013 conference call

LATF requested that the Subgroup proceed with expanding the

proposal based on the guiding principles

29

Source: American Academy of Actuaries: http://www.actuary.org/files/Deposit_Fund_Subgroup_SyntheticGIC_Presentation_LATF_111414.pdf

http://www.actuary.org/files/Synthetic_GIC_Supplemental_Proposal_for_LATF_111414.pdf

2016 + 2008

2010

2012

2013

2014

2015

LATF requested that the Subgroup expand the proposal to clarify and strengthen the

valuation requirements for Synthetic GICs issued to pooled funds within the existing

deterministic valuation framework and to provide more transparency in the Plan of

Operations

LATF Feedback on Proposed Changes


Consider the impact of any dynamic lapse assumptions

Consider sensitivity testing the prudent estimate of projected future cash flows

associated with plan sponsor book value put withdrawals

30

2016 + 2008

2010

2012

2013

2014

2015

Clarify and strengthen the

valuation requirements for

pooled fund contracts

Expand the actuarial

memorandum requirements

related to withdrawal risks

Expand the requirements in

the Plan of Operations for

pooled fund contracts

Reflect known cash flows associated with the plan sponsor book value put option

Reflect a prudent estimate of projected future cash flows associated with the plan

sponsor book value put option based on experience and other relevant criteria

Use a single valuation rate equal to the lesser of the expected return from

segregated portfolio of assets and the blended spot rate based on the duration of

the segregated portfolio of assets

Describe criteria used by insurer in approving pooled fund and investment

manager

Describe risk mitigation techniques used by insurer for pooled fund contracts

Source: American Academy of Actuaries:

http://www.actuary.org/files/Deposit_Fund_Subgroup_SyntheticGIC_Presentation_LATF_111414.pdf

3

4

5

Synthetic GIC Additional Proposed Changes to

Statutory Valuation Methodology


Approved by NAIC LATF March 2015

Approved by NAIC Life and Annuity A Committee August 2015

Expected to go to NAIC Executive & Plenary Committee for vote on

November 22, 2015

31

2016 + 2008

2010

2012

2013

2014

2015

Current Status


Will require legislative action to be effective in states with specific

regulations

Proposed modification to Model 695 does not apply to “Separate

Account” GICs

– Covered under Model Regulation 200 Separate Accounts Funding

Guaranteed Minimum Benefits Under Group Contracts

Proposed modifications to Model 200 are currently under peer and

policy review at the AAA

– Very similar to Synthetic GIC Proposal

32

2016 + 2008

2010

2012

2013

2014

2015

Future Expectations


Concluding Remarks

Stable Value Introduction

Current Market Overview

Update on Statutory Reserve Proposals

stable value - achs · 11/4/2015 · source: aon hewitt 401(k) indextm - historical asset...

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