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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
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STABLE VALUE INTRODUCTION
3
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.
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
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1 SVIA presentation “Stable Value: What’s on the Horizon?”
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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.
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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
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Insurance Companies
Banks
Investment Firms / Trust Companies
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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
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Source: SVIA “Stable Value at a Glance” Presentation
Benefits of Stable Value
Stable value provides capital preservation and consistent, steady returns.
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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
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Source: Aon Hewitt 401(k) IndexTM - Historical Asset Allocation Pattern May 1995 – May 2015.
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A participant’s Stable Value asset allocation is correlated to the equity market returns.
Participant Asset Allocation
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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
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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%)
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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
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CURRENT MARKET OVERVIEW
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Underwriting
Contract Features
Investment Guidelines
Plan Features
Participant Demographics
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Structure
Provider Strength & Commitment
Crediting Rate Level & Volatility
Contract Features
Investment Portfolio
PROVIDER PLAN
Evaluating Stable Value
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Approx. Notional Outstanding (in billions)
Source: Valerian Capital Group, 2Q Survey
$402 $403 $400 $395
$391
$300
$350
$400
$450
2011 2012 2013 2014 1H2015
Stable Value Market is contracting due to several factors.
Stable Value Market Size
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New sales — Refers to deposits to new contracts and deposits to new funding agreements.
Ongoing deposits — Includes deposits to existing contracts and existing funding agreements.
Renewal sales — Includes contracts that have fixed maturities and roll over to new contracts each 3, 6, or 12 months. Initial sales of these contracts are reported as “new sales.”
Source: SVIA/LIMRA presentation : Stable Value and Funding Agreement Products, First and Second Quarters 2015, pgs. 12 & 17
($Mn)
Stable Value Market Sales
Per LIMRA, Stable Value sales have been declining in recent years.
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International 529
Plans
Health
Savings
Accounts
Retirement
Income
Target Date
Funds
BOLI/
COLI
403(b)
IRA Market
New Product Development
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GAO Study
of QDIA’s
NAIC Statutory
Reserve
Proposal
Money
Market
Reform
FASB
DOL
Fiduciary
Proposal
Dodd
Frank
Regulatory Items
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UPDATE ON STATUTORY RESERVE PROPOSALS
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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
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Proposals in progress will modify existing statutory regulations for
in-force stable value business.
Upcoming Statutory Regulatory Changes
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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
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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
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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
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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
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Source: American Academy of Actuaries: http://www.actuary.org/files/Synthetic_GIC_Proposal_ppt_11-28-12.pdf
2016 + 2008
2010
2012
2013
2014
2015
Existing Regulation Scrutinized
“Financial Crisis”
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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
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2016 + 2008
2010
2012
2013
2014
2015
Source: American Academy of Actuaries: http://www.actuary.org/files/Synthetic_GIC_Proposal_ppt_11-28-12.pdf
A plan is born to update Existing Statutory Regulations
Statutory Regulations Update Plan
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Determination of the Discount Rate
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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
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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
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2016 + 2008
2010
2012
2013
2014
2015
Deduction to the market value of assets 2
Source: American Academy of Actuaries: http://www.actuary.org/files/Synthetic_GIC_Proposal_ppt_11-28-12.pdf
Synthetic GIC Proposed Changes to Statutory
Valuation Methodology
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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
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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
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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
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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
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4
5
Synthetic GIC Additional Proposed Changes to
Statutory Valuation Methodology
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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
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2016 + 2008
2010
2012
2013
2014
2015
Current Status
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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
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Concluding Remarks
Stable Value Introduction
Current Market Overview
Update on Statutory Reserve Proposals