Administration September 7, 2017

DB Plan Sponsors Preparing for PRTs

The most common preparatory steps taken include an evaluation of the financial impact of a pension risk transfer; discussions with stakeholders; data review/cleanup; and, exploration of the PRT solutions.

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Nearly nine in ten defined benefit (DB) plan sponsors (87%) believe the level of 2017 pension risk transfer (PRT) activity will be at least as, or even more, robust than in 2016, according to MetLife’s 2017 Pension Risk Transfer Poll.

Nearly all plan sponsors (92%) are aware that, although the length of time it takes to complete a PRT transaction will vary by plan, the entire process typically takes six to 18 months. To ensure that they are ready to act, more than six in 10 plan sponsors (61%) have taken preparatory steps for an eventual PRT transaction, up from 45% in 2015. The percentage of plan sponsors that have taken preparatory steps rises to 79% among plan sponsors that are likely to engage in PRT to an insurer in the next two years.

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The most common preparatory steps taken include an evaluation of the financial impact of a pension risk transfer (71%); discussions with key stakeholders (67%); data review/cleanup (64%); and, exploration of the PRT solutions available in the marketplace (59%). Among those planning for a buyout or buyout in combination with a lump sum, one in five (20%) has already secured an illustrative bid from an insurer. According to MetLife, securing an illustrative bid is a strong indicator of intent to transact in the near future.

The top catalysts driving sponsors to consider transferring pension obligations to an insurer are Pension Benefit Guaranty Corporation (PBGC) actions (64%)—this includes PBGC premium increases (58%) and a change in the PBGC premium methodology to the risk-based formula (29%); interest rates (50%); and, the impact of changes to mortality tables proposed by the U.S. Internal Revenue Service (IRS) in 2016 for use starting in plan years beginning on or after January 1, 2018 (34%). Other notable factors for initiating PRT include the regulatory environment (29%) and funded status reaching a pre-determined level (26%).

Implementing PRT Transactions

When asked about the type of PRT activity plan sponsors will most likely use to achieve their de-risking goals, nearly 57% say they will use an annuity buyout, including 43% who plan to use a combination of a lump sum and annuity buyout. Interest in annuity buyouts rose from 46% in MetLife’s 2015 Pension Risk Transfer Poll, which included 37% who planned to secure a buyout in combination with a lump sum offer.

Nearly half of plan sponsors (47%) say financial strength is the most important consideration when selecting an insurer for an annuity buyout transaction, followed by the cost of the annuity transaction (33%) and recommendations from their consultant or independent fiduciary (15%).

More than two-thirds of plan sponsors (69%) are aware that it is possible to split an annuity buyout transaction among two or more insurers. The highest level of awareness is among sponsors with $1 billion or more in  DB plan assets (75%). While there is a high level of awareness about split deals, only one in five plan sponsors (21%) say that if and when they are ready to complete an annuity buyout, they would be likely to split the transaction among two or more insurers.

Four in 10 plan sponsors (44%) say they would be unlikely to split the transaction, primarily for reasons of perceived complexity, believing it would cause administrative burdens and that it would be easier to manage a single transfer.

The majority of plan sponsors intend to tranche their annuity buyouts by participant population. Retirees are identified as the most common population for which sponsors are considering purchasing annuities (53%), followed by terminated-vested participants (47%). Only one in five (22%) say they would secure a buyout for all participants.

When their company is ready to complete an annuity buyout, more than half of plan sponsors (51%) say they would be more likely to select an insurer that allows the premium for the annuity to be paid with assets-in-kind (AIK)—an emerging trend. MetLife explains that with an AIK transfer, a relatively new approach used in the U.S. since 2012, the premium for the annuity is paid by transferring ownership of some or all of the plan’s eligible assets to the insurance company, as opposed to liquidating plan assets for cash. An AIK transfer is possible when assets held by a DB plan are generally consistent with those the insurer would deem suitable for its portfolio, pursuant to regulatory requirements and internal risk management practices.

The full survey report may be downloaded from here.

Products September 7, 2017

Investment Products and Services Launches

Goldman Sachs Launches High Yield Corporate Bond ETF; Sage Advisory Introduces Custom Laddered Strategy; and Franklin Templeton Rolls Out Active Municipal Bond ETFs.

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Goldman Sachs Launches High Yield Corporate Bond ETF

Goldman Sachs Asset Management (GSAM) has updated its Access suite of exchange-traded funds (ETFs) with the addition of the Goldman Sachs Access High Yield Corporate Bond ETF (GHYB).

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The fund seeks to track the Citi Goldman Sachs High Yield Corporate Bond Index, which measures the performance of high yield corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria. It uses a rules-based methodology that aims to exclude bonds with the greatest potential to default or deteriorate in price. It is priced to investors at 34 basis points and will begin trading on the NYSE Arca on September 7 with $50 million in assets.

The Index is owned and calculated by FTSE Fixed Income LLC using concepts developed with GSAM.

“High yield corporate bonds are a natural choice for investors seeking ways to generate yield in their portfolios,” says Jason Singer, portfolio manager for GHYB. “GHYB aims to address concerns surrounding high yield bonds, particularly that they can be less liquid and more prone to default, when compared to other sectors. GHYB seeks to offer a more thoughtful way to access the high yield market in a low-cost, transparent ETF wrapper.”

The GHYB will be passively managed by GSAM’s Global Fixed Income team. The fund is the second ETF in GSAM’s Access ETF line-up, following Goldman’s Access Investment Grade Corporate Bond ETF.

Sage Advisory Introduces Custom Laddered Strategy

Sage Advisory Services, a fixed income investment management firm, has launched a new Customized Laddered Strategy (C.L.I.M.B.) designed to offer high liquidity, optimal risk/reward characteristics and favorable tax status.

Sage’s C.L.I.M.B strategy enables clients to set a maximum maturity range and realize consistent cash flows from maturity and coupon payments. In an effort to enhance return potential relative to traditional laddered strategies, Sage actively manages state, sector, and credit weightings within each maturity bucket. Additionally, Sage can provide a higher degree of liquidity to clients that encounter unexpected cash flow needs or would like to reallocate to a different asset class, the firm says.

Sage’s portfolio management team can adjust portfolio characteristics to maximize return opportunities for both institutional and retail clients, while reducing risk exposure when necessary.

C.L.I.M.B. offers an actively managed municipal ladder approach with a competitive fee structure, the ability to customize based on client’s unique investment objectives, and access to municipal bond inventory across all broker/dealers.

“Investment goals of both institutions and individuals have evolved as a result of changing market structure and regulatory oversight,” says Robert Smith, president and Chief Investment Officer at Sage. “Our goal with our new Customized Laddered Municipal Strategy was to offer a flexible investment solution that not only reflects changing investor needs, but also a simpler approach to traditional fixed income investing.”

Franklin Templeton Rolls Out Active Municipal Bond ETFs

Franklin Templeton Investments has added two actively managed municipal bond exchange-traded funds (ETFs) to its Franklin LibertyShares lineup: the Franklin Liberty Intermediate Municipal Opportunities ETF (FLMI) and Franklin Liberty Municipal Bond ETF (FLMB).

Both seek to provide investors with a high level of current income by investing at least 80% of their net assets in municipal securities for which interest is free from federal income taxes, including the federal alternative minimum tax. The two ETFs are generally differentiated by the dollar-weighted average portfolio maturity levels they target and the credit ratings of municipal securities they may purchase, the firm says.

The Franklin Liberty Intermediate Municipal Opportunities ETF may invest in municipal securities rated in any category including below investment grade and defaulted securities. It seeks to maintain a dollar-weighted average portfolio maturity of three to 10 years.

The Franklin Liberty Municipal Bond ETF invests only in municipal securities rated, at the time of purchase, in one of the top four ratings categories by one or more U.S. nationally recognized rating services (or comparable unrated or short-term rated securities). It seeks to maintain a dollar-weighted average portfolio maturity of five to 15 years.

“Creating a world class ETF business is our central objective, and we are delighted to unveil our new muni ETFs amid a surge in client interest in fixed income ETFs,” says Patrick O’Connor, head of global ETFs at Franklin Templeton Investments. “Leveraging Franklin Templeton’s world class municipal bond platform with more than $71 billion in assets under management, these actively managed ETFs seek to generate yield exempt from federal taxes, allowing investors to keep more of what they earn.”

The firm currently offers a suite of actively managed ETFs through the LibertyShares ETF platform, which includes two equity funds and four fixed income funds. LibertyQ, the strategic beta ETF suite, includes seven equity ETFs covering U.S., emerging markets, international and global equity strategies, as well as an income-focused global equity strategy.

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