Pacific Insured LDISM

Transcription

1 Pacific Insured LDISM Insured Liability Driven Investing Moving Forward Together 7/ A

2 Table of Contents Defined Benefit Trends...1 Managing Volatility...2 Traditional Liability Driven Investing...3 Pacific Insured LDI...4 Advantages of Pacific Insured LDI...5 Neutralize Risks with Pacific Insured LDI...6 Understanding the Economic Costs of Best Efforts LDI...7 An Innovative Solution for Plan Sponsors...8 iv

3 Why Pacific Life? It s essential for you to choose a strong and stable company that can help you achieve your future business needs. Since 1868, individuals and businesses have relied on the strength of Pacific Life to protect their financial security. Pacific Life 1 provides a wide range of life insurance products, annuities, and mutual funds, and offers a variety of investment products and services to individuals, businesses, and pension plans. Pacific Life counts more than half of the 100 largest U.S. companies as its clients. 2 Pacific Life Insurance Company is organized under a mutual holding company structure and operates for the benefit of its policyholders and contract owners. We have achieved ongoing recognition for high-quality service standards. We maintain strong financial strength ratings from major independent rating agencies. Ratings may change. For more information and current financial strength ratings, please visit our website at 1 Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. 2 Client count as of May 2013 is compiled by Pacific Life using the 2013 FORTUNE 500 list. Pacific Life, with more than 140 years of experience, remains committed to providing quality products and services today and into the future. Defined Benefit Trends Defined benefit plan sponsors are under increasing pressure to stabilize plan funded status to manage its impact on the financial statements of the company. This concern has led to an increase in the number of plans that have closed participation, frozen benefit accruals, or terminated. Sponsors of many closed or frozen plans ultimately desire to terminate the plan, but are currently challenged by an underfunded status. Many plan sponsors are searching for answers to questions based on the status of the plan: If the Plan Status Is: Underfunded How can the funded status be stabilized as the shortfall is funded? Frozen How can the risks be reduced or eliminated until the assets are distributed? Fully Funded What can be done to ensure the plan will remain fully funded? Active How can an ongoing plan reduce risks? 1

4 Managing Volatility Historically, companies have done a poor job of managing the volatility of the funded status for pension plans. The graph below shows the volatility of the funded status for the 100 largest U.S. corporate plans since The movement of discount rates and equity markets has resulted in significant swings in funding status due to the mismatch of assets and liabilities Funded Status ($ Billions) Funded Ratio (%) -450 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec Funded Status Funded Ratio Source: Milliman 100 Pension Funding Index, December Managing the funded status volatility for pension plans has become more important because of recent funding and accounting changes 3 that: Require disclosure of pension funded status on the balance sheet. Move companies toward mark-to-market asset and liability valuations. Reduce the ability to defer the recognition of losses. 2 3 Pension Protection Act of 2006 (PPA) and FASB Accounting Standards Codification Topic 715, Compensation-Retirement Benefits.

5 At the end of 2012, the average pension plan was less than 80% funded. At this funded ratio, a company may be willing to take more risk with its plan. However, the ability to do so may be constrained because of the consequences of potentially dropping below certain funded ratio thresholds, such as: Funded ratio under 80% prohibits amendments to increase benefits and requires that plan participants be notified of the funded ratio and possible limitations on benefits. Funded ratio under 60% prohibits future accruals and accelerated benefit distributions (such as lump-sum payouts). For these reasons, the company may be in a more advantageous position by reducing the risk of the pension plan and its impact on company financials. This reduction will free company resources to focus attention on the core business. With this in mind, many companies have turned to traditional Liability Driven Investing (LDI) strategies as a means to de-risk the pension plan. Traditional Liability Driven Investing (LDI) Traditional LDI strategies, which are non-insured or best efforts, are used to de-risk a pension plan by focusing not on total return, but rather on matching assets to liabilities to achieve better: Cash flow match to make benefit payments. Valuation match so that plan assets move with plan liabilities as interest rates change. Best efforts means that the investment manager will invest the assets so they will move with the pension benefit obligations as interest rates change, but does not offer any guarantee from potential losses or guarantee how close the match will be. Thus, traditional LDI may have significant tracking error relative to the liability discount curve. In addition, customized traditional LDI strategies are typically available only for plans with substantial assets and do not completely eliminate some key risks, such as credit-spread risk, credit-default risk, interest-rate risk, and liquidity risk. Pacific Life offers a guaranteed solution that eliminates these investment risks and tracking error. 3

6 Pacific Insured LDI Pacific Insured LDI, a guaranteed group annuity insurance contract, is an innovative solution that fills the risk gaps remaining under best efforts LDI strategies. Available for defined benefit pension plans, Pacific Insured LDI allows company executives to focus on operating a successful business rather than worrying about the status of the pension plan. Pacific Life Insurance Company (Pacific Life) assumes all investment risks and guarantees the contract value regardless of the performance of the underlying assets. The following graph illustrates the fluctuations of the funded status of a plan using a best efforts LDI strategy compared to Pacific Insured LDI. By guaranteeing the contract value based on the plan-provided cash flows and the selected liability discount curve, Pacific Insured LDI helps remove volatility for the plan sponsor. While a best efforts LDI manager cannot perfectly predict or hedge future market and interest-rate movements, Pacific Insured LDI ensures an asset/liability match under all market conditions. This graph illustrates mean expected results from a stochastic model of 1,000 real-world Monte Carlo simulations. Funded Status Time Pacific Insured LDI Traditional LDI Guarantees are backed by the financial strength and claims-paying ability of Pacific Life Insurance Company. 4

7 Advantages of Pacific Insured LDI Stability Plan assets and liabilities move in sync, resulting in reduced volatility for the balance sheet and income statement. Simplicity Pacific Insured LDI is a turn-key solution that mitigates market risks and avoids the need to explain complex asset and derivatives strategies to investment committees. Flexibility This product provides the ability to amend the benefit payment schedule stated in the contract. Liquidity Monthly scheduled payments provide liquidity for participant benefits and access to excess distributions beyond scheduled payments for cash and/or to purchase Pacific Life annuities. In addition, the plan sponsor may redeem all or a portion of the contract value subject to the terms of the contract. Transparency Pacific Insured LDI uses contract valuation based on an externally published discount curve. Pacific Life will charge a predetermined fee, assessed quarterly, on the average contract value to cover expenses for investment management, administrative fees, and guarantees. There are no additional fees or surrender charges under the contract. 5

8 Neutralize Risks with Pacific Insured LDI Pacific Insured LDI provides a unique guarantee that ensures the plan sponsor is no longer exposed to risks experienced under traditional best efforts LDI strategies. Credit- Spread Risk Under traditional LDI strategies, credit-spread risk exists because the credit-spread risk exposure of actual invested pension plan assets differs from the implied credit-spread risk exposure of the liability discount curve used to determine the pension benefit obligation. Actual pension plan investments cannot match the hypothetical investments in the liability discount curve. Changes in the liability discount curve due to credit downgrades will affect the value of the liability. The actual portfolio will change based on actual performance of the assets and will not necessarily match the change in the liability. Pacific Insured LDI guarantees the contract value based on the liability discount curve, and therefore the funded status remains stable. Credit-Default Risk If a bond held in the plan s investment portfolio defaults, it would cause an asset loss that is not reflected in the discount curve used to determine the plan liability because defaulted assets are removed from the composition of the discount curve. Pacific Insured LDI assumes all default risk. Interest-Rate Risk Ongoing shifts and twists in the liability discount curve are difficult for anyone to accurately predict and hedge, resulting in additional funded status volatility under best efforts LDI strategies. Pacific Insured LDI removes this risk from the plan sponsor because the contract value is guaranteed based on the liability discount curve. Liquidity Risk An illiquid capital market may create a significant loss if the plan sponsor needs to liquidate a security in the plan portfolio for purposes of making benefit payments or rebalancing the portfolio. Pacific Insured LDI removes liquidity risk by providing scheduled monthly benefit payments, and it can be liquidated at contract value with no additional fees or penalties at contact termination. 6

9 Understanding the Economic Costs of Best Efforts LDI The plan sponsor may be aware of only the explicit fees paid directly to the investment manager, which may vary based on the sophistication of the LDI approach being used. As the following graph illustrates, a more tailored best efforts approach comes with additional cost due to more active management. The graph also shows the economic costs of the investment risks discussed previously that the plan sponsor is implicitly paying through lower investment returns. When comparing various investment strategies, a plan sponsor should consider all explicit investment management costs as well as the implicit costs of retained investment risks. LDI Fees and Risk Premiums 150 Total = Basis Points Total = Less Tailored Institutional Funds Approach LDI Strategy More Tailored Cash Flow Approach LDI Best Efforts AUM Fee Average Liquidity Risk Premium Average Credit Downgrade Risk Premium Average Credit Default Risk Premium Excludes cost of retained interest-rate risk. 7

10 An Innovative Solution for Plan Sponsors If the Plan Status Is: Underfunded Pacific Insured LDI can: Enable implementation of a predictable and budgeted contribution strategy to fund the shortfall. Facilitate implementation of a dynamic asset allocation strategy for plans choosing to retain some equity risk exposure to help earn their way to full funding. Reduce the risk of dropping below certain target funding levels that could result in benefit limitations or employee notifications. Frozen Pacific Insured LDI can: Provide an interim de-risking solution until plan is ready to terminate and distribute assets. Fully Funded Pacific Insured LDI can: Ensure the plan remains fully funded under all market conditions. Active Pacific Insured LDI can: Offer an ongoing de-risking solution for plans not yet seeking to terminate. 8

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12 To move forward, contact Pacific Life to find out how Pacific Insured LDI can work for your plan. (877) This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor or attorney. Pacific Life, its distributors, and respective representatives do not provide administrative services for qualified plans and do not act in a fiduciary capacity. Pacific Life Insurance Company is licensed to issue life insurance and annuity products in all states except New York. Product availability and features may vary by state. Contract Form Series: , GA A 7/15