Over the last decade the dreadful state of defined benefit pension funding ratios was a slow moving car crash: as rates halved the actuarial valuations of liabilities rose.
But all is saved, rates are up, funding ratios are for many over 100%.
Pension funding position changes
Source: Milliman 2024
So why aren’t sponsors of pension funds signing record breaking contracts for pension risk transfer (or bulk annuities in the UK)?
Assets. There aren’t enough assets of a long duration.
Why does this matter?
The US institutional investor is obsessed with rates and spreads. They don’t factor in inflation at all - which is the primary reason the investment side of pension investing has struggled to match the liabilities - they aren’t being matched.
Miami’s Fountainbleu resort recently hosted ABS East - a massive circus of fund managers, asset originators and ‘asset allocators’ - people that work to invest the money of pension funds and insurance balance sheets.
Rates had recently gone up and so asset origination was massively done - who is going to refinance at a higher rate? The answer is not a lot of people.
But this wasn’t the real problem in the room. Everything on offer was short duration: mostly 1-3 year, some 5-7 year.
If a pension funds’ liabilities are 15+ years, then these assets pose a systemic asset-liability matching risk.
For the Pension Risk Transfer business to take on these liabilities (and not lose money) there needs to be assets to originate that match these long liabilities.
So what happens is a lot of large PRT businesses compete for the few pension funds with short-dated liabilities, because those are the assets they can originate.
The majority of pension fund sponsors - seeking pension risk transfer - receive a price that just doesn’t seem economical. It’ll cost them too much, because the insurer taking on the risk can’t attractively price longer dated liabilities, because they cannot source long-duration assets.
The likes of Brookfield do this very well - with a strong track record of super long duration asset origination. Macquarie, which has a strong global footprint, is well placed to offer asset origination at longer durations to a large and growing number of Pension Risk Transfer businesses.
And of course, this is why Graceful has been pushing on an open door with its Home Pension range of products - allowing institutional investors to create an ideal biometric hedge between Graceful’s Home Pension customers and the age of pension fund members/insurance policy holders.
This ideal longevity hedge comes with the natural characteristics of single family residential: a great long-term inflation hedge and inflation-linked income.
But the Graceful advantage is these homes are occupied by older Americans who love their homes and intend on living there for the rest of their lives - delivering zero vacancy risk and the ability to invest in homes in prime areas across the US (vs the $200k-$300k lower value homes bought by traditional Single Family Rental investors).
There’s $11 trillion of home wealth owned by people over the age of 62 in the US - the vast majority who would like to age in place and meaningfully supplement their retirement income.