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DesigningannuityproductsforconsumersneedsPresentedbyMikeWadsworth
Partner,WatsonWyattmike.wadsworth@May2003 DesigningannuityproductsforAgendaOptionsforgeneratinglifetimeincomeConsumerneedsInvestingforlifeManagingsurvivalAnewmodelAgendaOptionsforgeneratingl"Idon'twanttoachieveimmortalitythroughmywork-Iwanttoachieveitbynotdying"WoodyAllen"Idon'twanttoachieveimmor"Peoplewillsoonlivetwiceaslongastoday,andhavethepotentialtolivefor1200years"JohnHarris,ScientistMemberofUKHumanGeneticsCommissionasreportedSundayTimes,25June2000"PeoplewillsoonlivetwiceaFuneralfirmhitby29%profitfallNotenoughpeoplearedyingintheUS,accordingtoServiceCorporationInternational,theworld'slargestfuneralservicescompanyTimes,2October1999Funeralfirmhitby29%profitScaleofopportunities
Peopleover65Source:USBureauoftheCensusScaleofopportunities
PeopleAnnuityversusbondyieldIncometakenmonthlyinadvance;interestrate5%paAnnuityincomebrokendownintocapitalelementandthebalance(ieinterestelement)AnnuityversusbondyieldIncomOptionsforretirementincome100%PensionerInvestmentGuaranteesPensioner
Survival
GuaranteesTraditionalAnnuityLump
Sum?©WatsonWyattPartners2000
0%0%Optionsforretirementincome1Traditionalannuities
SomeimportantquestionsHowmuchdotheguaranteescost?Howvaluablearetheytocustomers?earlyinretirement/laterinretirement?accordingtootherassets?Howwilllifestylesandneedschangeinretirement?Willcustomerschangetheirmindsovertime?Traditionalannuities
SomeimpKeyissuesfordesign
ThePensionerChoice(investment)Flexibility(income)Protection(survival)Communication(tradeoffs)FailsafeKeyissuesfordesign
ThePensAlifetimeassetallocationmodel
TraditionalEitherlumpsumOrannuityRetireRetireOptimumreturn
(equities?)Optimumreturn
(equities?)CashBondsBonds©WatsonWyattPartners2000
AlifetimeassetallocationmoAlifetimeassetallocationmodel
ProposedOptimumreturn
(equities?)Optimumreturn
(equities?)BondsRetire©WatsonWyattPartners2000
AlifetimeassetallocationmoEffectofinvestmentgrowthon
supportableincome-malesBaseincomesupportablecalculatedat5%.
Incomemultiple=incomesupportableassumingextrainvestmentreturnresultingfromequityinvestmentof1,2,3,4or5%paaftercharges,dividedbybaseincome.Mortalityaspreviously©WatsonWyattPartners2000
EffectofinvestmentgrowthonPlanningretirementincomeTheconsumerproblemis..... HowlongwillIlive?LifespanisadistributionnotanexpectationPlanningretirementincomeTheDistributionofdeaths
Retirementatage60Mortality:PMA92/PFA92Yearofuse2001©WatsonWyattPartners2000
Distributionofdeaths
RetiremDistributionofdeathsbyagenowAge75now©WatsonWyattPartners2000
Mortality:PMA92/PFA92Yearofuse2001DistributionofdeathsbyageDistributionofdeathsbyagenowAge90now©WatsonWyattPartners2000
Mortality:PMA92/PFA92Yearofuse2001DistributionofdeathsbyageStandarddeviationofdeaths,as
aproportionoflifeexpectancyMortality:PMA92/PFA92Yearofuse2001©WatsonWyattPartners2000
Standarddeviationofdeaths,MethodofcalculationNon-annuitisedfundIncomeeachyeardefinedas:
Fundvalue/annuityfactorAnnuityfactorcalculatedatassumedinvestmentreturnof0%or7%pa(excludingexpenses)Investmentreturnachievedequalto7%pa(excludingexpenses)Investmentreturnassumed:(exclexpenses)Investmentreturnachieved:7%pa(exclexpenses)Mortality:PMA92Yearofuse2001Initialfund£100,000Maleaged60atoutset©WatsonWyattPartners2000Progressionofincome:
spreadingfundoverfuturelifeexpectationMethodofcalculationInvestmenProgressionofincome-annuitisedfundversus
non-annuitisedfund Mortality:PMA92Yearofuse2001Maleaged60atoutset©WatsonWyattPartners2000
Progressionofincome-annuitSupplierviewofmortalityguaranteesMortalityimprovingHowfast 1%pa?2%pa?3%pa?Infuture?Scopetoreview?Guaranteesare(too)expensive?SupplierviewofmortalityguaMortalitydrift-
uncertainfutureimprovementsBothchartsshowexpecteddistributionofdeathsformale
aged60in1992,allowingforfutureimprovements.PMA92representsthemorerecentestimateCross-subsidyoperatesacrosseitherdistribution,andlongevityprotectionislargelyretainedevenifmortalityisreviewedDriftinanticipateddistributionallowingfornewerevidence©WatsonWyattPartners2000
Mortalitydrift-
uncertainfuExcesssurvivors-
PMA92comparedwithPMA80Costtoannuityproviderofnotreviewingmortalityrelatestopaymentsmadetothosesurvivorswhowerenotexpectedtolivesolong-
theredzone©WatsonWyattPartners2000
Excesssurvivors-
PMA92compaNewmodelInvestmentfund+InsuranceagainstsurvivalNewmodelLifetimeincomemodel-
benefitstatement
Units UnitPrice Value
£ £StartofYear 10,000 10.00 100,000AnnuityPayments (975) (10,000)SurvivalBonus 295 3,000EffectofChangesinUnitPrice 4,860EndofYear 9,320 10.50 97,860TargetIncome
forNextYear 10,000©WatsonWyattPartners2000
Lifetimeincomemodel-
benefiEquivalentadditionalfund
growthresultingfrommortality
cross-subsidyMortality:PMA92/PFA92CalendarYear2001©WatsonWyattPartners2000
Equivalentadditionalfund
groEquivalentadditionalfundgrowth
MF
%pa%pa75 4.1 2.885 13.1 8.495 33.2 21.2NB:PartialsurvivalprotectionpossibleEquivalentadditionalfundgroFlexibleannuityreviewcycleInitialmax/minincomecalc'dAnnuitantselectsincomebetweenmaxandmintonextreviewPaymentsdeductedaccordingtoannuitantrequirements/survivalcredits/investment
returnsaddedFundbalancedeterminedatreviewMax/minincometonextreviewcalc'd©WatsonWyattPartners2000
FlexibleannuityreviewcycleIFlexibleincome
ThecorridorIncomelevel
chosenbytheannuitantannualmaximumannualminimum©WatsonWyattPartners2001
Flexibleincome
ThecorridorInCommunicationofbenefits
Incomeprojections-incometaken
initially=incomesupportableat7%pa©WatsonWyattPartners2000
Communicationofbenefits
IncoIncomeprojections-incometaken
initially=1.1xincomesupportable
at7%pa©WatsonWyattPartners2000
Incomeprojections-incometaIncomeprojections-incometaken
initially=0.9xincomesupportable
at7%pa©WatsonWyattPartners2000
Incomeprojections-incometaIncomeprojections-
variableinvestmentmodel©WatsonWyattPartners2000
Incomeprojections-
variableFailsafeDefaultinvestmentstrategies,eg
equitiesbondsoverlifetimeProgrammedswitchingtoguaranteeathighageProgrammedswitchingtoguaranteeonsustainedmarketfall,egJapanscenarioVoluntaryswitchingNB:MorefeaturesbettersystemsFailsafeDefaultinvestmentstAnnuitydevelopments-unbundlingdynamicMoreimpairedlife/
enhancedannuitiesOtherg'teedannuitiesmoreexpensive/lessprofitableMoreequity
basedannuitiesWeakerlongevityguarantees©WatsonWyattPartners2002
Annuitydevelopments-unbundlEffectofLTCrideronincomeBeforeLTCclaimAfterLTCclaimTheproductisavariableannuitypriortoclaim,thenafixedLTCannuityafterclaim,plusacontinuingvariableannuity(whichcouldconverttoaconventionalannuity).Thelevelofbenefitischosenbytheinsured.C
L
A
I
MIncomesupportablewithnoLTCrider
(normalincome)LTCincome=50%ofincomepre-claim
Income=~96.5%ofnormalLTCincome=100%ofincomepre-claim
Income=~92.5%ofnormalEffectofLTCrideronincomeBAdvantagesoflifetimeincomemodelPensionersnaturalextensiontoDCpensionvehiclechooseandvaryassetallocationflexibilityofincomeoptimiseincomerelativetoriskInsurers/fundmanagerslongevityriskmanageablepotentialsegmentationofrisksnotrestrictedbyavailablebond(orother)investmentsglobalmultimarketapplicationAlsofinancialplanners/bondsuppliersAdvantagesoflifetimeincomeDesigningannuityproductsforconsumerneedsPresentedbyMikeWadsworth
Partner,WatsonWyattmike.wadsworth@May2002DesigningannuityproductsforDesigningannuityproductsforconsumersneedsPresentedbyMikeWadsworth
Partner,WatsonWyattmike.wadsworth@May2003 DesigningannuityproductsforAgendaOptionsforgeneratinglifetimeincomeConsumerneedsInvestingforlifeManagingsurvivalAnewmodelAgendaOptionsforgeneratingl"Idon'twanttoachieveimmortalitythroughmywork-Iwanttoachieveitbynotdying"WoodyAllen"Idon'twanttoachieveimmor"Peoplewillsoonlivetwiceaslongastoday,andhavethepotentialtolivefor1200years"JohnHarris,ScientistMemberofUKHumanGeneticsCommissionasreportedSundayTimes,25June2000"PeoplewillsoonlivetwiceaFuneralfirmhitby29%profitfallNotenoughpeoplearedyingintheUS,accordingtoServiceCorporationInternational,theworld'slargestfuneralservicescompanyTimes,2October1999Funeralfirmhitby29%profitScaleofopportunities
Peopleover65Source:USBureauoftheCensusScaleofopportunities
PeopleAnnuityversusbondyieldIncometakenmonthlyinadvance;interestrate5%paAnnuityincomebrokendownintocapitalelementandthebalance(ieinterestelement)AnnuityversusbondyieldIncomOptionsforretirementincome100%PensionerInvestmentGuaranteesPensioner
Survival
GuaranteesTraditionalAnnuityLump
Sum?©WatsonWyattPartners2000
0%0%Optionsforretirementincome1Traditionalannuities
SomeimportantquestionsHowmuchdotheguaranteescost?Howvaluablearetheytocustomers?earlyinretirement/laterinretirement?accordingtootherassets?Howwilllifestylesandneedschangeinretirement?Willcustomerschangetheirmindsovertime?Traditionalannuities
SomeimpKeyissuesfordesign
ThePensionerChoice(investment)Flexibility(income)Protection(survival)Communication(tradeoffs)FailsafeKeyissuesfordesign
ThePensAlifetimeassetallocationmodel
TraditionalEitherlumpsumOrannuityRetireRetireOptimumreturn
(equities?)Optimumreturn
(equities?)CashBondsBonds©WatsonWyattPartners2000
AlifetimeassetallocationmoAlifetimeassetallocationmodel
ProposedOptimumreturn
(equities?)Optimumreturn
(equities?)BondsRetire©WatsonWyattPartners2000
AlifetimeassetallocationmoEffectofinvestmentgrowthon
supportableincome-malesBaseincomesupportablecalculatedat5%.
Incomemultiple=incomesupportableassumingextrainvestmentreturnresultingfromequityinvestmentof1,2,3,4or5%paaftercharges,dividedbybaseincome.Mortalityaspreviously©WatsonWyattPartners2000
EffectofinvestmentgrowthonPlanningretirementincomeTheconsumerproblemis..... HowlongwillIlive?LifespanisadistributionnotanexpectationPlanningretirementincomeTheDistributionofdeaths
Retirementatage60Mortality:PMA92/PFA92Yearofuse2001©WatsonWyattPartners2000
Distributionofdeaths
RetiremDistributionofdeathsbyagenowAge75now©WatsonWyattPartners2000
Mortality:PMA92/PFA92Yearofuse2001DistributionofdeathsbyageDistributionofdeathsbyagenowAge90now©WatsonWyattPartners2000
Mortality:PMA92/PFA92Yearofuse2001DistributionofdeathsbyageStandarddeviationofdeaths,as
aproportionoflifeexpectancyMortality:PMA92/PFA92Yearofuse2001©WatsonWyattPartners2000
Standarddeviationofdeaths,MethodofcalculationNon-annuitisedfundIncomeeachyeardefinedas:
Fundvalue/annuityfactorAnnuityfactorcalculatedatassumedinvestmentreturnof0%or7%pa(excludingexpenses)Investmentreturnachievedequalto7%pa(excludingexpenses)Investmentreturnassumed:(exclexpenses)Investmentreturnachieved:7%pa(exclexpenses)Mortality:PMA92Yearofuse2001Initialfund£100,000Maleaged60atoutset©WatsonWyattPartners2000Progressionofincome:
spreadingfundoverfuturelifeexpectationMethodofcalculationInvestmenProgressionofincome-annuitisedfundversus
non-annuitisedfund Mortality:PMA92Yearofuse2001Maleaged60atoutset©WatsonWyattPartners2000
Progressionofincome-annuitSupplierviewofmortalityguaranteesMortalityimprovingHowfast 1%pa?2%pa?3%pa?Infuture?Scopetoreview?Guaranteesare(too)expensive?SupplierviewofmortalityguaMortalitydrift-
uncertainfutureimprovementsBothchartsshowexpecteddistributionofdeathsformale
aged60in1992,allowingforfutureimprovements.PMA92representsthemorerecentestimateCross-subsidyoperatesacrosseitherdistribution,andlongevityprotectionislargelyretainedevenifmortalityisreviewedDriftinanticipateddistributionallowingfornewerevidence©WatsonWyattPartners2000
Mortalitydrift-
uncertainfuExcesssurvivors-
PMA92comparedwithPMA80Costtoannuityproviderofnotreviewingmortalityrelatestopaymentsmadetothosesurvivorswhowerenotexpectedtolivesolong-
theredzone©WatsonWyattPartners2000
Excesssurvivors-
PMA92compaNewmodelInvestmentfund+InsuranceagainstsurvivalNewmodelLifetimeincomemodel-
benefitstatement
Units UnitPrice Value
£ £StartofYear 10,000 10.00 100,000AnnuityPayments (975) (10,000)SurvivalBonus 295 3,000EffectofChangesinUnitPrice 4,860EndofYear 9,320 10.50 97,860TargetIncome
forNextYear 10,000©WatsonWyattPartners2000
Lifetimeincomemodel-
benefiEquivalentadditionalfund
growthresultingfrommortality
cross-subsidyMortality:PMA92/PFA92CalendarYear2001©WatsonWyattPartners2000
Equivalentadditionalfund
groEquivalentadditionalfundgrowth
MF
%pa%pa75 4.1 2.885 13.1 8.495 33.2 21.2NB:PartialsurvivalprotectionpossibleEquivalentadditionalfundgroFlexibleannuityreviewcycleInitialmax/minincomecalc'dAnnuitantselectsincomebetweenmaxandmintonextreviewPaymentsdeductedaccordingtoannuitantrequirements/survivalcredits/investment
returnsaddedFundbalancedeterminedatreviewMax/minincometonextreviewcalc'd©WatsonWyattPartners2000
FlexibleannuityreviewcycleIFlexibleincome
ThecorridorIncomelevel
chosenbytheannuitantannualmaximumannualminimum©WatsonWyattPartners2001
Flexibleincome
ThecorridorInCommunicationofbenefits
Incomeprojections-incometaken
initially=incomesupportableat7%pa©WatsonWyattPartners2000
Communicationofbenefits
IncoIncomeprojections-incometaken
initially=1.1xincomesupportable
at7%pa©WatsonWyattPartners2000
Incomeprojections-incometaIncomeprojections-incometaken
initially=0.9xincomesupportable
at7%pa©WatsonWyattPartners2000
Incomeprojections-incometaIncomeprojections-
variabl
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