by John Darer CLU ChFC CSSC RSP
A senior investment strategist at BNY Mellon Asset Management proposing the creation of a new investment vehicle to address what he perceives to be the shortcomings of life annuities. His letter to Secretary of Treasury, Tim Geithner, " A Good TIp For Better TIPS" was published in Barrons on November 27, 2010.
The idea? 30-year Amortizing Treasury Inflation-Protected Securities, or "A-TIPS".
- Similar to existing TIPS in that they are issued by the Treasury
- Provide an inflation-adjusted rate of return. But rather than just paying interest until maturity, the A-TIPS would make regular payments of both income and a portion of the principal, adjusted for inflation. On a 30-year A-TIP, Ralph Goldsticker suggests that payments might be twice the size of those of a regular TIP.
- The A-TIPS, if structured properly, like annuities, would let retirees know exactly how much they will have each year, in inflation-adjusted terms, over the 30-year life of the security.
- After 30 years, the investment wouldn't provide more income because its value would be fully exhausted. Goldsticker suggests that retirees (and by implication accident victims) could purchase longevity insurance, a deferred payout annuity that starts paying in at the end of the bond term, to mitigate the risk of outliving savings.
- Unlike annuities, payments would be guaranteed by the government
- True inflation adjustments, unlike the "UNCOLA" currently offered by many insurers
- Secondary market spread would be less severe than annuities and the market would be highly liquid.
TIPS are already being used in recovery managenent solutions for plaintiffs. It's not hard to see how the proposed new vehicle could have application and, in my opinion could be a game changer for the primary and secondary structured annuity market.
I strongly suggest that all stakeholders in the structured settlement industry read the Barron's article and gain an understanding of the implications.