Annuities: The Missing Asset Class for Sustainable Drawdown Solutions
Discover how annuities are reinvented as a crucial asset class for sustainable drawdown solutions in retirement planning. Explore the potential benefits of replacing bonds with annuities and the impact on income sustainability and death benefits. Gain insights into innovative retirement products and strategies, as well as actuarial perspectives on longevity and investment strategies for insurers.
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Presentation Transcript
Annuities Reinvented Are annuities the missing asset class for sustainable drawdown solutions? Marie-Lise Tassoni & Kyle Audley 15 January 2019
Milliman Actuarial insight into longevity and insurers Investment strategy expertise Stochastic retirement planning platforms Retirement research and market entry support 2
Retirement Landscape 2015 2016/2017 June 2018 March 2014 Range of new hybrid retirement products launched Many insurers withdraw hybrid retirement products FCA s retirement outcome review highlights lack of innovation Pensions freedom is announced 3
Drawdowns and Annuities Drawdown Annuity 4
Can replacing bonds with annuities increase income sustainability and offer competitive death benefits? Bond-Equity Strategy Annuity- Equity Strategy Drawdown investing in equities Drawdown investing in equities and bonds + + Underwritten level annuity Cash account + Cash account These strategies were modelled over retirement under 1,000 different economic scenarios. 5
Our approach Robin 65 year old female in good health with a 100,000 pension pot Initial income of 4,000 a year increasing with inflation Underlying investment: 5% cash for flexibility, 55% equity and 40% in either annuity or bonds In each year of retirement, we calculated: Likelihood of meeting target income Average shortfall Average death benefit: (size of drawdown fund and cash account plus any payment in the guaranteed period from annuity strategy) 6
Likelihood of meeting target income LIKELIHOOD OF A HEALTHY 65YR OLD MEETING TARGET INCOME OF 4,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY 100% 0.2 Likelihood of meeting target income 0.18 Likelihood of survival Likelihood of survival 0.16 0.14 80% 0.12 0.1 0.08 60% 0.06 0.04 0.02 75% 50% 25% 40% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) Bond Annuity 7
Flat income requirement LIKELIHOOD OF A HEALTHY 65YR OLD MEETING TARGET INCOME OF 4,000 A YEAR (FIXED). FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY 100% 0.2 Likelihood of meeting target income 0.18 0.16 Likelihood of survival 0.14 90% 0.12 0.1 0.08 80% 0.06 0.04 0.02 75% 50% 25% 70% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) Bond Annuity 8
Increasing target income LIKELIHOOD OF A HEALTHY 65YR OLD MEETING TARGET INCOME OF 8,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY 100% 0.2 Likelihood of meeting target income 0.18 0.16 Likelihood of survival 80% 0.14 60% 0.12 0.1 40% 0.08 0.06 20% 0.04 0.02 25% 75% 50% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) Bond Annuity 9
Decreasing target income LIKELIHOOD OF A HEALTHY 65YR OLD MEETING TARGET INCOME OF 3,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY 100% 0.2 Likelihood of meeting target income 0.18 Likelihood of survival 0.16 0.14 80% 0.12 0.1 0.08 60% 0.06 0.04 0.02 75% 50% 25% 40% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) Bond Annuity 10
Health statuses LIKELIHOOD OF A 65YR OLD MEETING TARGET INCOME OF 4,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY 100% Likelihood of meeting target income 80% 60% 40% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) Bond Healthy Annuity Reasonable Health Annuity Challenging Health Annuity Critical Health Annuity 11
Health statuses Age at which annuity- equity strategy outperforms bond- equity strategy Average life expectancy Healthy 90 94 Reasonable 88 90 Challenging 82 83 Critical 81 70 12
Average shortfall AVERAGE SHORTFALL IN MEETING TARGET INCOME OF 4,000 A YEAR (INCREASING WITH INFLATION) FOR A HEALTHY 65YR OLD FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY 50% 40% Average shortfall in income 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) Bond Annuity 13
Death Benefit AVERAGE DEATH BENEFIT FOR HEALTHY 65YR OLD TARGET INCOME OF 4,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY 120,000 0.2 0.18 100,000 0.16 Likelihood of survival Average Death Benefit 0.14 (in real terms) 80,000 0.12 60,000 0.1 0.08 40,000 0.06 0.04 20,000 0.02 75% 50% 25% 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) Bond Annuity 14
Death benefit variance DEATH BENEFIT VARIANCE FOR HEALTHY 65YR OLD, TARGET INCOME OF 4,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND 200,000 75th percentile: 75% chance of results being lower or 25% change of results being higher Death Benefit (in real terms) 150,000 100,000 50,000 10th percentile: 10% chance of results being lower or 90% change of results being higher 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Retirement term (in years) 25th to 50th percentile Average 10th to 25th percentile 75th to 90th percentile 50th to 75th percentile 15
Death benefit variance FUND: 55% EQUITY, 5 % CASH, 40% BOND FUND: 55% EQUITY, 5 % CASH, 40% ANNUITY 200,000 200,000 Death Benefit (in real terms) 150,000 150,000 100,000 100,000 50,000 50,000 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Retirement term (in years) Retirement term (in years) 10th to 25th percentile 50th to 75th percentile Average 25th to 50th percentile 75th to 90th percentile 10th to 25th percentile 50th to 75th percentile Average 25th to 50th percentile 75th to 90th percentile 16
Conclusions Combining annuity with equity drawdown can lead to higher death benefits and higher likelihood of meeting target income levels 1 2 Not suitable for everyone Annuities shouldn t be discounted when considering retirement options 3 Our white paper: www.milliman.com/annuities-reinvented 17
Next Steps Other sources of retirement wealth and income Further annuity purchases Complex customer behaviour Consumer friendly metrics
Next Steps Age-based Fund-based Annuity rates Further annuity purchases 55 60 65 70 75 80 85 Annuitant Age Deferred annuity strategy
Next Steps Property and Equity release Defined Benefit pensions Other sources of retirement wealth and income Private pension provision Supplementary income Each source of income has its own characteristics, and interacts differently with a given retirement strategy
Next Steps Spending patterns Performance-based spending Long term care Complex customer behaviour Unknown events
Next Steps Retirement Goal Income requirements Inflation matching Death benefit Flexibility Grade B A+ C C Consumer friendly metrics 875
Thank you Marie-Lise Tassoni and Kyle Audley marie-lise.tassoni@milliman.com and kyle.audley@milliman.com This presentation has been prepared for illustrative purposes. The information herein shall not constitute advice and shall not be relied on. All of the assumptions are intended to be purely illustrative. All of the results presented throughout this presentation are based on simulated or hypothetical performance results that have certain inherent limitations Where the authors of this document have expressed views and opinions, these are views of their own and are not necessarily held by Milliman
Disclaimer The views expressed in this presentation are those of the authors, Marie-Lise Tassoni and Kyle Audley, of the paper and not necessarily of the Staple Inn Actuarial Society or Milliman
