Just lately, the Massachusetts Mutual Life Insurance coverage Co. (MassMutual) introduced it had finalized the consolidation of Barings’ mutual funds with MassMutual funds onto the MassMutual investments platform. To mark the event, PLANSPONSOR sat down with Keith McDonagh, the pinnacle of MassMutual’s institutional options enterprise, to speak about this and different developments, together with the state of competitors within the institutional providers house and the challenges he’s listening to about from brokers, consultants and their institutional investor shoppers.
At a excessive stage, McDonagh says, the previous two years have been difficult for institutional traders, however they’ve additionally caused alternatives to handle some long-term monetary challenges, particularly amongst employers with energetic and/or frozen pension plans. Although they’ve needed to deal with substantial volatility, the present funded standing of many pensions is larger than it has been for a while, McDonagh says, with many plans within the ballpark of 95% funded. As the tip of the fiscal 12 months approaches, for a lot of plan sponsors, this improve in funded standing has spurred extra discussions on de-risking and end-state targets.
Echoing feedback made by different specialists, McDonagh says the early a part of 2022 could also be outlined by inflation statistics and the at-times counterintuitive influence larger inflation can have on company pensions.
In easy phrases, inflation could be good for pension funded standing in the identical manner inflation can profit particular person debt holders: If wages (or company revenue) improve with inflation, and if the borrower (or pension) already owed cash earlier than the inflation occurred, the inflation advantages the borrower. After all, if rates of interest go up an excessive amount of in response to rampant inflation, that may in flip influence the worth of fairness portfolios, which may itself injury pensions’ funded statuses and the holdings of particular person traders.
McDonagh says his outlook stays cautiously optimistic, as equities nonetheless have room to develop and there are causes to imagine that inflation will reasonable as the brand new 12 months unfolds. Amongst different implications, this outlook means the pension threat switch (PRT) market ought to doubtless stay sturdy in 2022, with 2021 clearing near $40 billion in whole PRT transaction quantity.
McDonagh’s perspective matches that of Authorized & Common Retirement America (LGRA)’s third quarter Pension Danger Switch Monitor, which estimated that greater than $16 billion in gross sales occurred within the third quarter. Fueled by sturdy fairness returns and rising rates of interest, third quarter transaction quantity was almost twice the mixed $8.8 billion recorded throughout the first two quarters of 2021.
LGRA additionally reported that the third quarter was the second highest single quarter so far, behind solely the fourth quarter of 2012, when Common Motors accomplished a transaction of $26 billion. With This autumn 2021 transactions projected to be between $10 billion to $15 billion, whole annual market quantity might be between $35 billion to $40 billion, doubtlessly surpassing its earlier excessive set in 2012 at $36 billion.
“Take into account, there may be nonetheless over $7 trillion invested in U.S. pension plans,” McDonagh observes. “Even with all of the payouts and the PRT exercise that has taken place so far, total pension liabilities are persevering with to extend, and there’s a lot of room there for firms to discover de-risking and PRT alternatives.”
Past the subject of pension threat transfers, McDonagh expects to spend vital time in 2022 engaged on the query of how to make sure outlined contribution (DC) plan traders can get entry to in-plan retirement revenue options. In reality, he says creating efficient, scalable and moveable DC plan revenue options is the “subsequent holy grail for our trade.”
“I do assume we’re nonetheless within the early days when it comes to answer improvement,” he says. “We at MassMutual, together with our friends within the institutional investor market, are asking ourselves, ‘What’s the proper design and method?’ We’re questioning, for instance, if DC plan traders will favor approaches that permit them to annuitize over time, or if they need an answer that strikes a portion of their property into annuities proper at their retirement date.”
McDonagh says he expects DC plan annuities to change into a extra essential a part of the broader and ongoing dialogue about diversification.
He additionally says institutional traders ought to take time in 2022 to revisit their secure worth property, figuring out the essential however often-understated function capital preservation choices proceed to play in retirement plan portfolios.
“It’s possible you’ll recall that 2020 was a banner 12 months for secure worth inflows, and the market elevated roughly 15% in asset volumes relative to 2019,” McDonagh says. “Steady worth stays a terrific stabilizer that also comes with a return. Cash market funds are paying nil proper now, principally, whereas secure worth might need a 1% return flooring and could be paying considerably greater than that.”
When deciding on a secure worth possibility, he says, it will be important for sponsors to evaluate a fund’s efficiency, threat mitigation, crew and course of. They need to additionally assess things like the underlying credit score high quality of the bonds, noting that some secure worth merchandise might generate larger returns however tackle larger threat. McDonagh recommends institutional traders search for an skilled crew that has been doing this for fairly a while and makes use of a sturdy course of—as a result of not each secure worth fund is similar.