Library

NISA writes and distributes articles from time to time on topics of interest to us and our clients. Following are a selection of papers that are relevant to NISA’s business.

A Strategy That Pays Dividends – Dividend Tilts in Taxable Insurance Portfolios

Taxable insurance portfolios can enhance returns by employing the tax code’s preference for dividends. By orienting their holdings toward equities that pay higher dividends, taxable investors can shift their total return to the more favorably-taxed dividend return component and away from the price return. The end result: after-tax alpha relative to a passively managed index portfolio.
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NISA’s Target Date Glidepath – Designed for Retirement Security

The retirement landscape is shifting, as the workforce grows older and increasingly relies on its defined contribution plans for retirement security. NISA’s target date glidepath design seeks to manage risks that undermine the ultimate goal of retirement: sustainable and stable income. Our multi-asset and risk-controlled solutions can be employed in the design of your plan’s default option to help participants engage and plan for greater retirement confidence.
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The Full Picture on Partial Buyouts

Plan sponsors may be disappointed if they expect to eliminate most of their pension risk with a partial buyout. Unless a buyout is paired with a hibernation strategy, the sponsor may spend time and money arriving at an outcome that leaves a lot of pension risk unmanaged. A hard look at these different de-risking strategies suggests that the lion’s share of pension risk can be eliminated by simply changing asset allocation. For plan sponsors determined to go down the partial buyout path, in order to get their money’s worth they must be deliberate about both the participants they give up and the allocation of the remaining assets.
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Regulators Pave the Road to Retirement Income

We’ve witnessed a flurry of new guidance and regulations from both the Department of Treasury and Department of Labor related to retirement income. The growing retirement crisis has employees, employers and the government recognizing that this shared concern needs shared solutions. Washington has shown its focus on removing barriers and fostering adoption of retirement income solutions. As employers increasingly seek to solve this retirement income puzzle, the changing regulatory environment is a win for everyone – and for the participants in particular.
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Credit Where It’s Due

When de-risking with liability driven investing, pension plans must decide on the right blend of corporate bonds and Treasuries to hedge their liabilities. We look at the forces that can drive this decision and find that the mix of hedging bonds depends on changing market conditions. Plans should periodically examine their liability hedging portfolios and be aware of the opportunities and pitfalls presented by changes in the marketplace.
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Pension Buyout Reality Check

Recent annuity purchases highlight the need to examine what drives their pricing. Plan sponsor announcements that allude to “par” settlements relative to accounting values warrant a closer look at the plan’s actuarial assumptions before reaching any conclusions about the attractiveness of a buyout’s economics.
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The Beauty of the Bundle

DC participants want the most for their money when choosing a retirement income strategy. While annuities can offer higher income, that value is partially reduced by expenses and the loss of control and liquidity. We quantify these drawbacks and find that the most efficient way to fund retirement spending may be to combine a longevity annuity (e.g., QLAC) with a bond portfolio.
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Long Live Longevity Annuities

DC plans can now offer deferred “longevity” annuities that provide income in the later years of retirement. This is good news for those participants who want the peace of mind that they won’t outlive their assets while retaining control over most of their portfolio.
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The Long View on Short Rates

Since the 2008 financial crisis, the market has suggested a rapid rise in short-term rates to a higher equilibrium level. And while that future equilibrium yield has fluctuated between 4-5%, it is currently at the low end of the range. Will the market’s expectations about future interest rates continue to bounce around or is this a signal about lower interest rates and perhaps economic growth in the long run?
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Refocusing on Retirement Income Risk

Fixed income allocations in defined contribution plans, while perceived as low risk, may actually expose participants to substantial volatility in retirement income. To reduce this risk, sponsors can apply duration-matching techniques when designing target date funds or managed accounts. This offers participants stability in their retirement income expectations and customization to better reflect plan demographics.  Download

Spreading Confusion

We have observed (with some bemusement) how the financial media often compares the yields on different countries’ debt without adjustment for the different currencies in which the debt is denominated. By overlooking a currency adjustment, investors may get a distorted risk-return picture when comparing sovereign bond yields.
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Cash on the Barrelhead

LDI hibernation strategies may present an opportunity to de-risk at a lower expected cost and on a more flexible contribution schedule than annuity buyouts. Additionally, plans that have not yet de-risked may be surprised by how little their equity allocations reduce expected contributions, and how much contribution volatility they may generate.
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At the Crossroads

Many pension plan sponsors and fiduciaries are confronting perhaps the most important decision in the plan’s life – whether to pursue an internal de-risking strategy or pay an insurer to offload the liability. We highlight some key considerations for those faced with this choice, and explore the components of the amount a sponsor may pay in a buyout transaction.
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Putting Longevity Risk in its Place

Pension plans run the risk that actual beneficiary lifespans can exceed those assumed in their liability projections. We estimate the risk to be about 0.4% annually in funded status terms. While longevity risk should not be ignored and can be managed, it is small relative to the market risks embedded in a typical plan’s assets and liability.
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Contribution Relief with a Catch

At first blush, MAP-21 would appear to make pension plan contributions less likely in the near term. However, it also makes pension deficits more expensive by hiking the PBGC’s underfunding charge (the variable rate premium). The rise to nearly 2% on each dollar of deficit may encourage sponsors to voluntarily fund their plan even if not required to do so under MAP-21‘s higher discount rates. By comparison, the rise in the per-head charge (the fixed rate premium) is of less concern.
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Defining the Pension De-Risking Spectrum

Pension de-risking need not be an all-or-nothing decision. In fact, plan fiduciaries may be surprised by the degree to which pension risk profiles can be changed – marginally or materially – through asset allocation decisions and liability-driven investment (LDI) techniques. While annuity buyouts define the end point of the so-called de-risking spectrum, fiduciaries should compare them to other “hibernation” approaches that do not require paying insurance provider premiums, terminating the plan or relinquishing the flexibility to adjust the plan risk profile in the future.
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The Credit Rating Impact of Pension De-Risking

By simply de-risking their pension plan, companies can realize most of the benefits of annuity purchases without incurring the upfront liquidity costs or committing to an irreversible decision. Along with the reduction in pension volatility, de-risking should improve credit ratings for some companies with large pension plans relative to their core businesses. The desire to de-risk pension plans is understandable given this implied credit rating “cost.”
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Efficient Tax Management in Taxable VEBA Portfolios

Reducing tax consequences in equity portfolios offers tangible benefits in the current tax environment. Three key decisions that directly influence the after-tax performance of such portfolios include 1) portfolio dividend tilt, 2) portfolio turnover, and 3) capital gain/loss realization. Each of these decisions should be evaluated in the context of tracking error versus the desired benchmark and could ultimately affect the benchmark selection.
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Funding Relief and Implications for Pension Investing

The recently-passed Moving Ahead for Progress in the 21st Century Act (“MAP-21”) provides temporary funding relief for corporate defined benefit plans. In this piece, we explain how the legislation effects regulatory discount rates and review the impact of MAP-21 on a hypothetical plan’s PPA reported funded status and required contributions. We further investigate what, if any, impact the legislation has on interest rate risk management strategies.
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PSRX Overview

NISA’s proprietary Pension Surplus Risk Index (PSRX®) and supplemental data offer plan fiduciaries a means of monitoring plan funded status volatility and the ability to compare the levels of risk in their plan to the overall defined benefit universe.
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Prospective Funded Status Volatility

Negative performance of risk assets, coupled with lower interest rates, has had the obvious effect of reducing funded status for most corporate defined benefit pension plans. Though perhaps less obvious, higher prospective volatilities have implications for both asset allocation and interest rate hedging strategies. 
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Break-even Yield Curve

Like any market, timing interest rates is challenging.  This brief addresses one key, and often overlooked, aspect of interest rate levels – specifically, rate changes that are currently priced into the market. 
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Dynamic Liability Driven Investing

Pension plans have used Liability Driven Investment (LDI) strategies for years. In this brief we introduce a more comprehensive platform: Dynamic LDI. The improvement Dynamic LDI offers stems from the relationship between funded status and asset allocation. The central tenet of the strategy is the “dynamic” reduction in risk as funded status improves.
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Interest Rate Hedges

Interest rate markets have experienced pronounced volatility in recent years. Many pension liability hedge strategies that relied heavily on derivatives and Treasury bonds outperformed changes in reported liabilities. The question that arises is: Are strategies that utilize interest rate swaps still effective at reducing the Plan’s funded status risk? 
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Considerations Surrounding Corporate Bonds in Pensions

Widening credit spreads increases focus on the suitability and attractiveness of corporate bonds as pension plan investments. This paper examines one aspect of these issues – reducing funded status volatility by better matching the sensitivity of the liability’s discount rate to credit spreads using corporate bonds.  
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