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A Close Look at the PIMCO-Met Life
Retirement Strategy
A Marriage Made in Investment Heaven?
Michael Edesess
April 5, 2011


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Is PIMCO’s and Met Life’s collaboration on a retirement strategy a perfect May-December marriage? That’s the question an article in the March 1st Retirement Income Journal asks. The article even shows a photo of a very fetching young woman dancing rapturously with a not-so-fetching much older man.

So who is the hot chick and who is the geezer?

The looker is PIMCO’s Real Income Funds, which use a portfolio of TIPS (Treasury Inflation-Protected Securities) to provide inflation-protected income up to a 10-year or 20-year horizon. The geezer is MetLife’s Longevity Income Guarantee.

The two products are being co-marketed by PIMCO and MetLife. When you’re relatively young (we’re talking about 65 here) you use PIMCO’s Real Income Funds for stable income in the near term. When you’re older (let’s say 85, 20 years later) the Longevity Income Guarantee kicks in and takes it from there. You’re set with secure income for life.

Let’s examine these products more closely and analyze whether they are good deals, either separately or together.

PIMCO Real Income Funds

As of now there are two PIMCO Real Income funds, a 2019 fund and a 2029 fund. Their fees are 0.39% annually for the institutional share classes, which I assume are what fee-only advisors would use. PIMCO’s two funds were originally designed to last ten years and 20 years, respectively. Each is intended to produce an roughly level stream of real, inflation-adjusted income from now until the fund’s termination date. For example, according to a PIMCO representative quoted in the Retirement Income Journal article, $100,000 invested in the 2029 fund will produce real income of roughly an estimated $6,200 a year until 2029, when the fund will close. The 2019 fund will produce real income of about $11,200 until 2019.

The holdings in the portfolios can be readily downloaded, showing that the portfolio is a simple TIPS ladder, as the Real Income brochure states. I ran my own TIPS laddering program to fit a level income stream and got almost exactly the same result as the PIMCO portfolio. This means that they are using standard methodology to ladder their TIPS.

The assets in these funds are modest so far. If all the TIPS income – interest and principal payments – were distributed as they occur from PIMCO’s Real Income Fund 2029’s assets of $6,381,000 (as of 12/31/2010) the distributions would look like this:

Year

Income

2011

$328,473

2012

$207,239

2013

$369,601

2014

$453,235

2015

$461,227

2016

$456,945

2017

$445,462

2018

$367,243

2019

$516,521

2020

$536,026

2021

$66,483

2022

$66,483

2023

$66,483

2024

$66,483

2025

$507,374

2026

$428,454

2027

$443,317

2028

$693,845

2029

$672,989


(There are also $328,473 in cash equivalents in their portfolio – including T-bills – that mature in 2011.)

The drop-off from 2021-2024 is because no TIPS that were available on 12/31/2010 matured in those years, so the only income in those years is from interest.

What PIMCO must plan to do with this fund in the future is not to distribute all of the early years’ income, but to hold some in reserve, reinvesting it in shorter-term TIPS or Treasuries, then distributing in 2021-2024 what has been held back in order to produce a steadily increasing stream of payouts – as shown in the exhibit in their brochure.

I made some additional assumptions (that real distributions increase gradually at a rate of roughly 2.5%/year; that reinvestments realize a real return of 1.11%, same as the real yield-to-maturity of the TIPS portfolio; etc.) in order to calculate approximately what fees would be if they were all paid at the front end. (This is essentially the present value of fees, or how much less it would cost you to buy the same stream of distributions with a TIPS ladder if you didn’t have to pay any fees.) The number came out to 3.9% of the portfolio. This has a certain reasonableness to it, since the annual expense ratio is 0.39% and the portfolio winds down to zero by 2029; so it might have about 50% of its starting assets on average.

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