Prudential Retirement in the U.S. is marketing a novel guaranteed-income structure to defined-contribution pension plan participants. The group, part of Prudential Financial with over USD586 billion under management, structured the Prudential IncomeFlex to guarantee investors 5% of their investment each year, after the age of 65, even in the case of market downturns. Withdrawals of 4% can also be made from age 55 and if the underlying investments--equity funds managed by a variety of firms--increase in value, the investor's return may even be above 5% after age 65.
Investors can choose between five different styles of investment management, ranging from aggressive to conservative, and they can also decide how much of their plan to invest in the Pru structure. Mark Foley, product engineer in the income strategic group in Hartford, Conn., explained the firm's research with pension plans and investors showed they were looking for both guaranteed returns and flexibility over investment amounts and styles.
Foley declined to comment on details of the hedging. He noted, however, "There's a fair amount of hedging that's involved for the equity exposure over time." He said Prudential will be hedging in the capital markets and will be working with its annuities group which has experience using equity derivatives to manage similar risks.