Designing annuity products for consumers needs,Presented by Mike Wadsworth Partner, Watson Wyatt mike.wadswortheu.watsonwyatt.com,Agenda,Options for generating lifetime income Consumer needs Investing for life Managing survival A new model,“I dont want to achieve immortality through my work - I want to achieve it by not dying“ 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,Funeral firm hit by 29% profit fall Not enough people are dying in the US, according to Service Corporation International, the worlds largest funeral services company Times, 2 October 1999,Scale of opportunities People over 65,Source: US Bureau of the Census,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),Options for retirement income,100%,Pensioner Investment Guarantees,Pensioner Survival Guarantees,Traditional Annuity,Lump Sum,?, Watson Wyatt Partners 2000,0%,0%,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? 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,A lifetime asset allocation model Traditional,Either lump sum,Or annuity,Retire,Retire,Optimum return (equities?),Optimum return (equities?),Cash,Bonds,Bonds, Watson Wyatt Partners 2000,A lifetime asset allocation model Proposed,Optimum return (equities?),Optimum return (equities?),Bonds,Retire, Watson Wyatt Partners 2000,Effect of investment growth on supportable income - males,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, Watson Wyatt Partners 2000,Planning retirement income,The consumer problem is . How long will I live? Lifespan is a distribution not an expectation,Distribution of deaths Retirement at age 60,Mortality: PMA92/PFA92 Year of use 2001, Watson Wyatt Partners 2000,Distribution of deaths by age now,Age 75 now, Watson Wyatt Partners 2000,Mortality: PMA92/PFA92 Year of use 2001,Distribution of deaths by age now,Age 90 now, Watson Wyatt Partners 2000,Mortality: PMA92/PFA92 Year of use 2001,Standard deviation of deaths, as a proportion of life expectancy,Mortality: PMA92/PFA92 Year of use 2001, Watson Wyatt Partners 2000,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), Watson Wyatt Partners 2000,Progression of income: spreading fund over future life expectation,Progression of income - annuitised fund versus non-annuitised fund, Watson Wyatt Partners 2000,Supplier view of mortality guarantees,Mortality improving How fast 1% pa? 2% pa? 3% pa? In future? Scope to review? Guarantees are (too) expensive?,Mortality drift - uncertain future improvements,Both charts show expected distribution of deaths for male aged 60 in 1992, allowing for future improvements. PMA92 represents the more recent estimate,Cross-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,Excess survivors - PMA92 compared with PMA80,Cost 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,New model,Investment fund + Insurance against survival,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 Income for Next Year 10,000, Watson Wyatt Partners 2000,Equivalent additional fund growth resulting from mortality cross-subsidy,Mortality: PMA92/PFA92 Calendar Year 2001, Watson Wyatt Partners 2000,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,Flexible annuity review cycle,Initial max/min income calcd,Annuitant selects income between max and min to next review,Payments deducted according to annuitant requirements/survival credits/investment retu