The Finance Of Longevity

A.M. Best: SECURE Act Enables Growth Opportunities For Annuity Powers

Including reframing  safe-harbor fiduciary standards

AM Best believes the SECURE Act contains a number of specific provisions that will expand market opportunities for the retirement and employee benefits segments in the U.S. life/annuity industry. The four most important provisions for the U.S. life/annuity industry are:

– Reframing of the safe harbor fiduciary standards;

– Required disclosures on lifetime income;

– Promotion of lifetime income options in the plan; and

– Portability of those options.

The relaxation of fiduciary standards is an important provision and offers a big opportunity to the group market: Because of the provision of lifetime income options on in-plan annuities (assuming they are derived in accordance with disclosure requirements), fiduciary liability under ERISA once benefits are distributed is limited. Additionally, plan sponsors have an optional safe harbor provision to allow them to select insurers to provide guaranteed income solutions, which protects the sponsors from liability for any losses that may result to participants or their beneficiaries due to the insurer’s inability to satisfy its financial obligations under the terms of the contract. For many years, ERISA’s fiduciary standards have been a roadblock to the adoption of retirement income solutions. Additionally, the portability feature is an important step toward retirement security, which remains a pressing public policy issue in the United States

Enhanced Retirement Security

Defined contribution plans represent roughly 28% of the U.S. retirement market, while 401(k) plans constitute roughly 69% of the defined contribution market. The 401(k) market comprises an important part of overall U.S. retirement assets, as defined benefit pension plans continue to fall out of favor with employers.

In the U.S. marketplace, less than 50% of plan sponsors offer an in-plan retirement income option; only 20% offer a guaranteed income product. This translates into only 9-10% of U.S. employers currently offering in-plan annuities. AM Best believes that greater participant awareness of lifetime income is an important step in enhancing retirement security and will provide plan participants a clearer picture of retirement assets from accumulation to draw down over their lifetime. Insurers with large employee benefit segments and insurers that manage retirement assets stand to benefit the most from these changes.

In the U.S. marketplace, less than 50% of plan sponsors offer an in-plan retirement income option; only 20% offer a guaranteed income product. This translates into only 9-10% of U.S. employers currently offering in-plan annuities...

Other provisions (e.g., tax benefits, raising of compensation caps) are likely to have only a modest but favorable impact on U.S. insurers. Most notable are the tax credits and the revisions to caps, which have the potential to spur growth in small employer plans and increase assets under management. The ability to offset some of the costs associated with the start-up of smaller plans is important. Some 40% of Americans do not have access to one, and small employers cite cost and limited administrative resources as major barriers to offering a retirement plan.

This legislation, coupled with a recent action by the U.S. Treasury allowing employers to buy out employees from their pension plans, underscores the need for greater retirement security in the United States. Additionally, the U.S. Treasury action will likely drive further growth in the rapidly expanding pension risk transfer market.

Increased Longevity Risk

AM Best believes the ability to offer in-plan annuities as part of 401(k) plans will provide opportunities for the industry. However, the industry’s risk profile will have increasing exposure to longevity risk, which has already grown due to the rapid growth of the pension risk transfer market. Despite uncertainty as to how many small employers will adopt a plan, the growth potential is significant, as roughly 36% of the U.S. workforce is employed in small business.

A growing small employer market would likely benefit insurers that have scale in the full-service retirement services market and increase their fee for service revenue. However, the impact of small employer plans with respect to in-plan income annuities could take some time to evolve, as these plans will likely be attractive to new participants who have not built retirement savings and are not in the de-accumulation phase. Finally, access to the small employer market will provide insurers with opportunities to market voluntary products as well as employer-sponsored life and supplemental health.”

– George Hansen, senior industry research analyst, AM Best
– Rosemarie Mirabella, director, life/health ratings, AM Best