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1% pa? 2% pa? 3% pa? In future? Scope to review? Guarantees are (too) expensive?
Mortality drift -
uncertain future improvements
5.0% 4.0%
Drift in anticipated distribution allowing for newer evidence
How will lifestyles and needs change in retirement?
Will customers change their minds over time?
Key issues for design The Pensioner
Choice (investment) Flexibility (income) Protection (survival) Communication (trade offs) Fail safe
represents the more recent estimate
Excess survivors -
PMA92 compared with PMA80
% surviving to stated age % increase in survivors
100
+40%
+35%
80
+30%
20
15
10
5
0
50
55
60
65
70
75
80
Interest Capital Bond yield
Options for retirement income
0%
Pensioner Survival Guarantees
Lump Sum
?
Traditional Annuity
100%
0%
Pensioner Investment Guarantees
Effect of investment growth on supportable income - males
1.5
Income multiple
1.4
1.3
1.2
1.1
1
60
65
70
75
80
85
90
Entry age
1% 2% 3% 4% 5%
Base 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
Designing annuity products for consumers needs
Presented by
Mike Wadsworth Partner, Watson Wyatt
mike.wadsworth@eu.watsonwyatt.com
WWW.WATSONWYATT.COM
Agenda
0%
© Watson Wyatt Partners 2000
20%
40%
60%
80%
Male Female
Mortality: PMA92/PFA92 Year of use 2001
100%
Progression of income:
spreading fund over future life expectation
百度文库
3.0%
2.0%
1.0%
0.0% 60
Cross-subsidy operates across either distribution, and longevity protection is largely retained even if mortality is reviewed
65 70 75 80 85 90 95 100
12,000 10,000 8,000 6,000 4,000
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)
Options for generating lifetime income Consumer needs Investing for life Managing survival A new model
"I don't want to achieve immortality through my work - I want to achieve it by not dying"
A lifetime asset allocation model Traditional
Either lump sum
Optimum return (equities?)
Cash
Retire
Or annuity
Optimum return (equities?)
© Watson Wyatt Partners 2000
Annuitised Non-annuitised
© Watson Wyatt Partners 2000
Male aged 60 at outset Mortality: PMA92 Year of use 2001
Supplier view of mortality guarantees
Mortality improving How fast
Investment return achieved: 7% pa
(excl expenses)
Initial fund £ 100,000 Male aged 60 at outset
© Watson Wyatt Partners 2000
Mortality: PMA92 Year of use 2001
Mortality: PMA92/PFA92 Year of use 2001
© Watson Wyatt Partners 2000
Distribution of deaths by age now
20.0%
Age 90 now
15.0% 10.0%
5.0%
Male Female
0.0%
90 95 100 105 110 115 120
Distribution of deaths Retirement at age 60
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
60 65 70 75 80 85 90 95 100 105 110 115 120
Mortality: PMA92/PFA92 Year of use 2001
PMA80 PMA92
Both charts show expected distribution of deaths for male
aged 60 in 1992, allowing for future improvements. PMA92
© Watson Wyatt Partners 2000
© Watson Wyatt Partners 2000
Planning retirement income
The consumer problem is ..... How long will I live?
Lifespan is a distribution not an expectation
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
Progression of income annuitised fund versus non-annuitised fund
Annual income (£)
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
0 60 65 70 75 80 85 90 95 100 105 110 115 120 Age
Bonds
Retire
Bonds
A lifetime asset allocation model Proposed
Optimum return (equities?)
Optimum return Bonds (equities?)
Retire
© Watson Wyatt Partners 2000
Investment return achieved equal to 7% pa (excluding expenses)
2,000
Annual income (£)
0 60 65 70 75 80 85 90 95 100 105 110 115 120 Age
Investment return assumed: 7% pa 0% pa (excl expenses)
© Watson Wyatt Partners 2000
Male Female
Distribution of deaths by age now
6.0%
Age 75 now
5.0%
4.0% 3.0% 2.0%
Male Female
1.0%
0.0%
75 80 85 90 95 100 105 110 115 120
© Watson Wyatt Partners 2000
Traditional annuities Some important questions
How much do the guarantees cost?
How valuable are they to customers? – early in retirement/later in retirement? – according to other assets?
Times, 2 October 1999
Scale of opportunities People over 65
45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000
5,000,000 0
Mortality: PMA92/PFA92 Year of use 2001
© Watson Wyatt Partners 2000
Standard deviation of deaths, as a proportion of life expectancy
Age at outset
100 95 90 85 80 75 70 65 60
Woody Allen
"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
Australia France GermanySingapore Spain
Source: US Bureau of the Census
UK USA
2000 2010
Annuity versus bond yield
Income taken monthly in advance; interest rate 5% pa Annuity income broken down into capital element and the balance (ie interest element)
Mortality drift -
uncertain future improvements
5.0% 4.0%
Drift in anticipated distribution allowing for newer evidence
How will lifestyles and needs change in retirement?
Will customers change their minds over time?
Key issues for design The Pensioner
Choice (investment) Flexibility (income) Protection (survival) Communication (trade offs) Fail safe
represents the more recent estimate
Excess survivors -
PMA92 compared with PMA80
% surviving to stated age % increase in survivors
100
+40%
+35%
80
+30%
20
15
10
5
0
50
55
60
65
70
75
80
Interest Capital Bond yield
Options for retirement income
0%
Pensioner Survival Guarantees
Lump Sum
?
Traditional Annuity
100%
0%
Pensioner Investment Guarantees
Effect of investment growth on supportable income - males
1.5
Income multiple
1.4
1.3
1.2
1.1
1
60
65
70
75
80
85
90
Entry age
1% 2% 3% 4% 5%
Base 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
Designing annuity products for consumers needs
Presented by
Mike Wadsworth Partner, Watson Wyatt
mike.wadsworth@eu.watsonwyatt.com
WWW.WATSONWYATT.COM
Agenda
0%
© Watson Wyatt Partners 2000
20%
40%
60%
80%
Male Female
Mortality: PMA92/PFA92 Year of use 2001
100%
Progression of income:
spreading fund over future life expectation
百度文库
3.0%
2.0%
1.0%
0.0% 60
Cross-subsidy operates across either distribution, and longevity protection is largely retained even if mortality is reviewed
65 70 75 80 85 90 95 100
12,000 10,000 8,000 6,000 4,000
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)
Options for generating lifetime income Consumer needs Investing for life Managing survival A new model
"I don't want to achieve immortality through my work - I want to achieve it by not dying"
A lifetime asset allocation model Traditional
Either lump sum
Optimum return (equities?)
Cash
Retire
Or annuity
Optimum return (equities?)
© Watson Wyatt Partners 2000
Annuitised Non-annuitised
© Watson Wyatt Partners 2000
Male aged 60 at outset Mortality: PMA92 Year of use 2001
Supplier view of mortality guarantees
Mortality improving How fast
Investment return achieved: 7% pa
(excl expenses)
Initial fund £ 100,000 Male aged 60 at outset
© Watson Wyatt Partners 2000
Mortality: PMA92 Year of use 2001
Mortality: PMA92/PFA92 Year of use 2001
© Watson Wyatt Partners 2000
Distribution of deaths by age now
20.0%
Age 90 now
15.0% 10.0%
5.0%
Male Female
0.0%
90 95 100 105 110 115 120
Distribution of deaths Retirement at age 60
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
60 65 70 75 80 85 90 95 100 105 110 115 120
Mortality: PMA92/PFA92 Year of use 2001
PMA80 PMA92
Both charts show expected distribution of deaths for male
aged 60 in 1992, allowing for future improvements. PMA92
© Watson Wyatt Partners 2000
© Watson Wyatt Partners 2000
Planning retirement income
The consumer problem is ..... How long will I live?
Lifespan is a distribution not an expectation
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
Progression of income annuitised fund versus non-annuitised fund
Annual income (£)
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
0 60 65 70 75 80 85 90 95 100 105 110 115 120 Age
Bonds
Retire
Bonds
A lifetime asset allocation model Proposed
Optimum return (equities?)
Optimum return Bonds (equities?)
Retire
© Watson Wyatt Partners 2000
Investment return achieved equal to 7% pa (excluding expenses)
2,000
Annual income (£)
0 60 65 70 75 80 85 90 95 100 105 110 115 120 Age
Investment return assumed: 7% pa 0% pa (excl expenses)
© Watson Wyatt Partners 2000
Male Female
Distribution of deaths by age now
6.0%
Age 75 now
5.0%
4.0% 3.0% 2.0%
Male Female
1.0%
0.0%
75 80 85 90 95 100 105 110 115 120
© Watson Wyatt Partners 2000
Traditional annuities Some important questions
How much do the guarantees cost?
How valuable are they to customers? – early in retirement/later in retirement? – according to other assets?
Times, 2 October 1999
Scale of opportunities People over 65
45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000
5,000,000 0
Mortality: PMA92/PFA92 Year of use 2001
© Watson Wyatt Partners 2000
Standard deviation of deaths, as a proportion of life expectancy
Age at outset
100 95 90 85 80 75 70 65 60
Woody Allen
"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
Australia France GermanySingapore Spain
Source: US Bureau of the Census
UK USA
2000 2010
Annuity versus bond yield
Income taken monthly in advance; interest rate 5% pa Annuity income broken down into capital element and the balance (ie interest element)