1、Designing annuity products for consumers needsPresented byMike WadsworthPartner,Watson WMay 2003AgendalOptions for generating lifetime incomelConsumer needslInvesting for lifelManaging survivallA new modelI dont want to achieve immortality through my work-I want to achieve it by not dyingWoody Allen
2、People will soon live twice as long as today,and have the potential to live for 1200 yearsJohn Harris,ScientistMember of UK Human Genetics Commissionas reported Sunday Times,25 June 2000 Funeral firm hit by 29%profit fallNot enough people are dying in the US,according to Service Corporation Internat
3、ional,the worlds largest funeral services companyTimes,2 October 1999Scale of opportunitiesPeople over 6505,000,00010,000,00015,000,00020,000,00025,000,00030,000,00035,000,00040,000,00045,000,000AustraliaFranceGermanySingaporeSpainUKUSA20002010Source:US Bureau of the CensusAnnuity versus bond yield0
4、510152050556065707580InterestCapitalBond yieldIncome taken monthly in advance;interest rate 5%paAnnuity income broken down into capital element and the balance(ie interest element)Options for retirement income100%Pensioner Investment Guarantees PensionerSurvivalGuaranteesTraditional AnnuityLumpSum?W
5、atson Wyatt Partners 20000%0%Traditional annuitiesSome important questionslHow much do the guarantees cost?lHow valuable are they to customers?early in retirement/later in retirement?according to other assets?lHow will lifestyles and needs change in retirement?lWill customers change their minds over
6、 time?Key issues for designThe PensionerlChoice(investment)lFlexibility(income)lProtection(survival)lCommunication(trade offs)lFail safe A lifetime asset allocation modelTraditionalEither lump sumOr annuityRetireRetireOptimum return(equities?)Optimum return(equities?)CashBondsBonds Watson Wyatt Part
7、ners 2000A lifetime asset allocation modelProposedOptimum return(equities?)Optimum return(equities?)BondsRetire Watson Wyatt Partners 2000Effect of investment growth onsupportable income-males11.11.21.31.41.560657075808590Entry ageIncome multiple1%2%3%4%5%Base income supportable calculated at 5%.Inc
8、ome 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 2000Planning retirement incomelThe consumer problem is.How long will I live?lLifespan is a distribut
9、ion not an expectationDistribution of deathsRetirement at age 600.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%6065707580859095100 105 110 115 120MaleFemaleMortality:PMA92/PFA92 Year of use 2001 Watson Wyatt Partners 2000Distribution of deaths by age now0.0%1.0%2.0%3.0%4.0%5.0%6.0%75 8085 9095 100 105
10、110 115 120MaleFemaleAge 75 now Watson Wyatt Partners 2000Mortality:PMA92/PFA92 Year of use 2001Distribution of deaths by age nowAge 90 now0.0%5.0%10.0%15.0%20.0%9095100105110115120MaleFemale Watson Wyatt Partners 2000Mortality:PMA92/PFA92 Year of use 2001Standard deviation of deaths,asa proportion
11、of life expectancy0%20%40%60%80%100%6065707580859095100Age at outsetMaleFemaleMortality:PMA92/PFA92 Year of use 2001 Watson Wyatt Partners 200002,0004,0006,0008,00010,00012,0006065707580859095100105110115120AgeAnnual income()7%pa0%paMethod of calculationNon-annuitised fundIncome each year defined as
12、:Fund value/annuity factorAnnuity 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
13、 fund 100,000 Male aged 60 at outset Watson Wyatt Partners 2000Progression of income:spreading fund over future life expectationProgression of income-annuitised fund versusnon-annuitised fund01,0002,0003,0004,0005,0006,0007,0008,0009,0006065707580859095100105110115120AgeAnnual income()AnnuitisedNon-
14、annuitisedMortality:PMA92 Year of use 2001Male aged 60 at outset Watson Wyatt Partners 2000Supplier view of mortality guaranteeslMortality improvinglHow fast1%pa?2%pa?3%pa?lIn future?lScope to review?lGuarantees are(too)expensive?Mortality drift-uncertain future improvements0.0%1.0%2.0%3.0%4.0%5.0%6
15、065707580859095100PMA80PMA92Both 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
16、 Drift in anticipated distribution allowing for newer evidence Watson Wyatt Partners 2000Excess survivors-PMA92 compared with PMA800204060801006065707580859095100%surviving to stated age0%+5%+10%+15%+20%+25%+30%+35%+40%increase in survivors%surviving:PMA80%surviving:PMA92%increase in survivorsCost t
17、o 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 2000New modelInvestment fund+Insurance against survivalLifetime income model-benefit statement UnitsUnit PriceValue Start of Year10,00010
18、.00100,000Annuity Payments(975)(10,000)Survival Bonus2953,000Effect of Changes in Unit Price4,860End of Year9,32010.5097,860Target Incomefor Next Year10,000 Watson Wyatt Partners 2000Equivalent additional fundgrowth resulting from mortalitycross-subsidy02468101214606570758085AgeEquivalent additional
19、 growth(%)MaleFemaleMortality:PMA92/PFA92 Calendar Year 2001 Watson Wyatt Partners 2000Equivalent additional fund growth M F%pa%pa754.12.88513.1 8.49533.2 21.2NB:Partial survival protection possibleFlexible annuity review cycleInitial max/min income calcdAnnuitant selects income between max and min
20、to next reviewPayments deducted according to annuitant requirements/survival credits/investment returns addedFund balance determined at reviewMax/min income to next review calcd Watson Wyatt Partners 2000Flexible incomeThe corridor020406080100120140160051015Income levelchosen by the annuitantannual
21、maximum annual minimum Watson Wyatt Partners 200102,0004,0006,0008,00010,00012,00014,00016,00018,000051015202530Duration(years)Annual income()5%7%9%Communication of benefitsIncome projections-income takeninitially=income supportable at 7%pa Watson Wyatt Partners 200002,0004,0006,0008,00010,00012,000
22、14,000051015202530Duration(years)Annual income()5%7%9%Initial income supportableIncome projections-income takeninitially=1.1 x income supportableat 7%pa Watson Wyatt Partners 200005,00010,00015,00020,00025,000051015202530Duration(years)Annual income()5%7%9%Initial income supportableIncome projection
23、s-income takeninitially=0.9 x income supportableat 7%pa Watson Wyatt Partners 2000010,00020,00030,00040,00050,00060,000051015202530Duration(years)Annual income()median95th percentile5th percentileIncome projections-variable investment model Watson Wyatt Partners 2000Fail safelDefault investment stra
24、tegies,egequities bonds over lifetimelProgrammed switching to guarantee at high agelProgrammed switching to guarantee on sustained market fall,eg Japan scenariolVoluntary switching NB:More features better systems Annuity developments-unbundling dynamicMore impaired life/enhanced annuitiesOther gteed
25、 annuities more expensive/less profitableMore equity based annuitiesWeaker longevity guarantees Watson Wyatt Partners 2002Effect of LTC rider on income020406080100120140160180200Income as%of incomesupportable with no LTC riderBefore LTC claimAfter LTC claimThe product is a variable annuity prior to
26、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 i
27、ncome pre-claimIncome=92.5%of normalAdvantages of lifetime income modellPensionersnatural extension to DC pension vehiclechoose and vary asset allocationflexibility of incomeoptimise income relative to risklInsurers/fund managerslongevity risk manageablepotential segmentation of risksnot restricted by available bond(or other)investmentsglobal multi market applicationlAlso financial planners/bond suppliersDesigning annuity products for consumer needsPresented byMike WadsworthPartner,Watson WMay 2002
