1. Designing annuity products for consumers needsPresented by
Mike WadsworthPartner, Watson Wyatt
mike.wadsworth@eu.watsonwyatt.com
May 2003
2. AgendaOptions for generating lifetime income
Consumer needs
Investing for life
Managing survival
A new model
3. "I don't want to achieve immortality through my work - I want to achieve it by not dying"
Woody Allen
4. "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
5. 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
Times, 2 October 1999
6. Scale of opportunitiesPeople over 65Source: US Bureau of the Census
7. Annuity versus bond yieldIncome taken monthly in advance; interest rate 5% pa
Annuity income broken down into capital element and the balance (ie interest element)
9. Traditional annuitiesSome important questionsHow 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?
10. Key issues for designThe PensionerChoice (investment)
Flexibility (income)
Protection (survival)
Communication (trade offs)
Fail safe
34. Fail safeDefault investment strategies, egequities bonds over lifetime
Programmed switching to guarantee at high age
Programmed switching to guarantee on sustained market fall, eg Japan scenario
Voluntary switching
NB: More features better systems
36. Effect 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 benefit is chosen by the insured.CLAIMIncome supportable with no LTC rider(normal income)LTC income = 50% of income pre-claimIncome = ~96.5% of normalLTC income = 100% of income pre-claimIncome = ~92.5% of normal
37. Advantages of lifetime income modelPensioners
natural extension to DC pension vehicle
choose and vary asset allocation
flexibility of income
optimise income relative to risk
Insurers/fund managers
longevity risk manageable
potential segmentation of risks
not restricted by available bond (or other) investments
global multi market application
Also financial planners/bond suppliers
38. Designing annuity products for consumer needsPresented by
Mike WadsworthPartner, Watson Wyatt
mike.wadsworth@eu.watsonwyatt.com
May 2002