1、Designing annuity products for consumers needsPresented byMike WadsworthPartner, Watson Wyattmike.May 2003AgendaOptions for generating lifetime incomeConsumer needsInvesting for lifeManaging survivalA new modelI dont want to achieve immortality through my work - I want to achieve it by not dyingWood

2、y AllenPeople 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 Corporat

3、ion International, the worlds largest funeral services companyTimes, 2 October 1999Scale of opportunitiesPeople over 65Source: US Bureau of the CensusAnnuity versus bond yieldIncome taken monthly in advance; interest rate 5% paAnnuity income broken down into capital element and the balance (ie inter

4、est element)Options for retirement income100%Pensioner Investment Guarantees PensionerSurvivalGuaranteesTraditional AnnuityLumpSum? Watson Wyatt Partners 20000%0%Traditional annuitiesSome important questionsHow much do the guarantees cost?How valuable are they to customers?early in retirement/later

5、in retirement?according to other assets?How will lifestyles and needs change in retirement?Will customers change their minds over time?Key issues for designThe PensionerChoice (investment)Flexibility (income)Protection (survival)Communication (trade offs)Fail safe A lifetime asset allocation modelTr

6、aditionalEither lump sumOr annuityRetireRetireOptimum return(equities?)Optimum return(equities?)CashBondsBonds Watson Wyatt Partners 2000A lifetime asset allocation modelProposedOptimum return(equities?)Optimum return(equities?)BondsRetire Watson Wyatt Partners 2000Effect of investment growth onsupp

7、ortable 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 2000Planning retirement in

8、comeThe consumer problem is .How long will I live?Lifespan is a distribution not an expectationDistribution of deathsRetirement at age 60Mortality: PMA92/PFA92 Year of use 2001 Watson Wyatt Partners 2000Distribution of deaths by age nowAge 75 now Watson Wyatt Partners 2000Mortality: PMA92/PFA92 Year

9、 of use 2001Distribution of deaths by age nowAge 90 now Watson Wyatt Partners 2000Mortality: PMA92/PFA92 Year of use 2001Standard deviation of deaths, asa proportion of life expectancyMortality: PMA92/PFA92 Year of use 2001 Watson Wyatt Partners 2000Method of calculationNon-annuitised fundIncome eac

10、h year defined as: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: PM

11、A92 Year of use 2001Initial 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 fundMortality: PMA92 Year of use 2001Male aged 60 at outset Watson Wyatt Partners 20

12、00Supplier view of mortality guaranteesMortality improvingHow fast1% pa? 2% pa? 3% pa?In future?Scope to review?Guarantees are (too) expensive?Mortality drift -uncertain future improvementsBoth charts show expected distribution of deaths for male aged 60 in 1992, allowing for future improvements. PM

13、A92 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 2000Excess survivors -PMA92 compared with PMA80Cost

14、 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 2000New modelInvestment fund+Insurance against survivalLifetime income model -benefit statement UnitsUnit PriceValue Start of Year10,

15、00010.00100,000Annuity 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-subsidyMortality: PMA92/PFA92 Calendar Year 2001

16、Watson Wyatt Partners 2000Equivalent additional fund growth M F % pa % pa754.12.88513.18.49533.221.2NB: Partial survival protection possibleFlexible annuity review cycleInitial max/min income calcdAnnuitant selects income between max and min to next reviewPayments deducted according to annuitant req

17、uirements/survival credits/investment returns addedFund balance determined at reviewMax/min income to next review calcd Watson Wyatt Partners 2000Flexible incomeThe corridorIncome levelchosen by the annuitantannual maximum annual minimum Watson Wyatt Partners 2001Communication of benefitsIncome proj

18、ections - income takeninitially = income supportable at 7% pa Watson Wyatt Partners 2000Income projections - income takeninitially = 1.1 x income supportableat 7% pa Watson Wyatt Partners 2000Income projections - income takeninitially = 0.9 x income supportableat 7% pa Watson Wyatt Partners 2000Inco

19、me projections - variable investment model Watson Wyatt Partners 2000Fail safeDefault investment strategies, egequities bonds over lifetimeProgrammed switching to guarantee at high ageProgrammed switching to guarantee on sustained market fall, eg Japan scenarioVoluntary switching NB: More features b

20、etter systems Annuity developments - unbundling dynamicMore impaired life/enhanced annuitiesOther gteed annuities more expensive/less profitableMore equity based annuitiesWeaker longevity guarantees Watson Wyatt Partners 2002Effect 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 b