- 1. Designing annuity products for consumers needsPresented by
Mike WadsworthPartner, Watson Wyatt
mike.wadsworth@eu.watsonwyatt.com
May 2003
- 2. AgendaOptions for generating lifetime income
Consumer needs
Investing for life
Managing survival
A new model
- 3. "I don't want to achieve immortality through my work - I want to achieve it by not dying"
Woody Allen
- 4. "People will soon live twice as long as today, and have the potential to live for 1200 years"
John Harris, Scientist
Member of UK Human Genetics Commission
as reported Sunday Times, 25 June 2000
- 5. Funeral firm hit by 29% profit fall
Not enough people are dying in the US, according to Service Corporation International, the world's largest funeral services company
Times, 2 October 1999
- 6. Scale of opportunitiesPeople over 65Source: US Bureau of the Census
- 7. Annuity versus bond yieldIncome taken monthly in advance; interest rate 5% pa
Annuity income broken down into capital element and the balance (ie interest element)
- 8. Options for retirement income100%Pensioner Investment Guarantees PensionerSurvivalGuaranteesTraditional AnnuityLumpSum?© Watson Wyatt Partners 20000%0%
- 9. Traditional annuitiesSome important questionsHow much do the guarantees cost?
How valuable are they to customers?
early in retirement/later in retirement?
according to other assets?
How will lifestyles and needs change in retirement?
Will customers change their minds over time?
- 10. Key issues for designThe PensionerChoice (investment)
Flexibility (income)
Protection (survival)
Communication (trade offs)
Fail safe
- 11. A lifetime asset allocation modelTraditionalEither lump sumOr annuityRetireRetireOptimum return(equities?)Optimum return(equities?)CashBondsBonds© Watson Wyatt Partners 2000
- 12. A lifetime asset allocation modelProposedOptimum return(equities?)Optimum return(equities?)BondsRetire© Watson Wyatt Partners 2000
- 13. Effect of investment growth onsupportable income - malesBase income supportable calculated at 5%.Income multiple = income supportable assuming extra investment return resulting from equity investment of 1, 2, 3, 4 or 5% pa after charges, divided by base income. Mortality as previously© Watson Wyatt Partners 2000
- 14. Planning retirement incomeThe consumer problem is .....
How long will I live?
Lifespan is a distribution not an expectation
- 15. Distribution of deathsRetirement at age 60Mortality: PMA92/PFA92 Year of use 2001© Watson Wyatt Partners 2000
- 16. Distribution of deaths by age nowAge 75 now© Watson Wyatt Partners 2000Mortality: PMA92/PFA92 Year of use 2001
- 17. Distribution of deaths by age nowAge 90 now© Watson Wyatt Partners 2000Mortality: PMA92/PFA92 Year of use 2001
- 18. Standard deviation of deaths, asa proportion of life expectancyMortality: PMA92/PFA92 Year of use 2001© Watson Wyatt Partners 2000
- 19. Method of calculation
Non-annuitised fund
Income each year defined as:Fund value / annuity factor
Annuity factor calculated at assumed investment return of 0% or 7% pa (excluding expenses)
Investment return achieved equal to 7% pa (excluding expenses)Investment return assumed:(excl expenses)Investment return achieved: 7% pa (excl expenses)Mortality: PMA92 Year of use 2001Initial fund £100,000 Male aged 60 at outset© Watson Wyatt Partners 2000Progression of income:spreading fund over future life expectation
- 20. Progression of income - annuitised fund versusnon-annuitised fund Mortality: PMA92 Year of use 2001Male aged 60 at outset© Watson Wyatt Partners 2000
- 21. Supplier view of mortality guaranteesMortality improving
How fast
1% pa? 2% pa? 3% pa?
In future?
Scope to review?
Guarantees are (too) expensive?
- 22. Mortality drift -uncertain future improvementsBoth charts show expected distribution of deaths for male aged 60 in 1992, allowing for future improvements. PMA92 represents the more recent estimateCross-subsidy operates across either distribution, and longevity protection is largely retained even if mortality is reviewed Drift in anticipated distribution allowing for newer evidence© Watson Wyatt Partners 2000
- 23. Excess survivors -PMA92 compared with PMA80Cost to annuity provider of not reviewing mortality relates to payments made to those survivors who were not expected to live so long - the red zone© Watson Wyatt Partners 2000
- 24. New model
Investment fund
+
Insurance against survival
- 25. Lifetime income model -benefit statement
Units Unit Price Value £ £
Start of Year 10,000 10.00 100,000
Annuity Payments (975) (10,000)
Survival Bonus 295 3,000
Effect of Changes in Unit Price 4,860
End of Year 9,320 10.50 97,860
Target Incomefor Next Year 10,000© Watson Wyatt Partners 2000
- 26. Equivalent additional fundgrowth resulting from mortalitycross-subsidyMortality: PMA92/PFA92 Calendar Year 2001© Watson Wyatt Partners 2000
- 27. Equivalent additional fund growth M F % pa % pa
75 4.1 2.8
85 13.1 8.4
95 33.2 21.2
NB: Partial survival protection possible
- 28. Flexible annuity review cycleInitial max/min income calc'dAnnuitant selects income between max and min to next reviewPayments deducted according to annuitant requirements/survival credits/investment returns addedFund balance determined at reviewMax/min income to next review calc'd© Watson Wyatt Partners 2000
- 29. Flexible incomeThe corridorIncome levelchosen by the annuitantannual maximum annual minimum © Watson Wyatt Partners 2001
- 30. Communication of benefitsIncome projections - income takeninitially = income supportable at 7% pa© Watson Wyatt Partners 2000
- 31. Income projections - income takeninitially = 1.1 x income supportableat 7% pa© Watson Wyatt Partners 2000
- 32. Income projections - income takeninitially = 0.9 x income supportableat 7% pa© Watson Wyatt Partners 2000
- 33. Income projections - variable investment model© Watson Wyatt Partners 2000
- 34. Fail safeDefault investment strategies, egequities bonds over lifetime
Programmed switching to guarantee at high age
Programmed switching to guarantee on sustained market fall, eg Japan scenario
Voluntary switching
NB: More features better systems
- 35. Annuity developments - unbundling dynamicMore impaired life/enhanced annuitiesOther g'teed annuities more expensive/less profitableMore equity based annuitiesWeaker longevity guarantees© Watson Wyatt Partners 2002
- 36. Effect of LTC rider on incomeBefore LTC claimAfter LTC claimThe product is a variable annuity prior to claim, then a fixed LTC annuity after claim, plus a continuing variable annuity (which could convert to a conventional annuity). The level of benefit is chosen by the insured.CLAIMIncome supportable with no LTC rider(normal income)LTC income = 50% of income pre-claimIncome = ~96.5% of normalLTC income = 100% of income pre-claimIncome = ~92.5% of normal
- 37. Advantages of lifetime income modelPensioners
natural extension to DC pension vehicle
choose and vary asset allocation
flexibility of income
optimise income relative to risk
Insurers/fund managers
longevity risk manageable
potential segmentation of risks
not restricted by available bond (or other) investments
global multi market application
Also financial planners/bond suppliers
- 38. Designing annuity products for consumer needsPresented by
Mike WadsworthPartner, Watson Wyatt
mike.wadsworth@eu.watsonwyatt.com
May 2002