managing longevity risk presenter(s): jennifer haid · page 5 institutional approaches to managing...
TRANSCRIPT
Page 2
Agenda
The Who? What? Where? Why? And How? of longevity risk
management:
► Part 1: The institutional market
► Part 2: The retail market
Presentation title1 January 2014
Page 4
NL
UK
Longevity’s global footprint
CAN
Growth market: Indexed benefits; mark-to-
market accounting and good saturation of
DB plans.
A limited number of transactions have
been executed; however, the first buy-in
transaction closed in 2013; and the first
longevity swap was executed in 2013
covering $150 million of liabilities.
Estimated size of CND DB market is $1.4
trillion USD (approx 45% private). 1
Existing market: significant deal flow of
buy-in, buy-out and longevity transactions.
Total value of private sector DB liability in
excess of 2.3 trillion USD (approx 90%
private) 1; current appetite from UK insurers
is only 10 billion GBP per annum.
US market highlights Canadian market highlights
► A prolonged low interest rate environment and a decade of poor
asset returns have lead to significant unfunded liabilities
► Plan sponsors are educated and know the issues; but do not
have the resources to sell off the risks
► Many US plan sponsors are considering implementing asset
focused solutions like LDI; a smaller subset are showing
increased interest in discussing risk transfer strategies.
► New accounting regime is in place effective Jan 1, 2013
► Update tables and mortality improvement scales have been
released that can be customized to the underlying population (i.e.,
by income band)
► Larger corporate plans and holders of closed DA blocks are
quantifying the true life expectancy of their participants and
evaluating risk mitigation techniques
USA
Growth market: Corporate sponsors are
developing de-risking strategies to manage
the financial and longevity risks associated
with DB plans.
Buy-in transaction executed in 2011; Buy-
out transactions continue to be executed:
there is sizeable deal flow at the mid-
market level and in the jumbo market.
Estimated size of US DB market is 7.9
trillion USD (approx 70% private). 1
Potential growth market: top 4 Dutch
pension funds showed significant
increases in liabilities following recent
improvements in life expectancy.
The Dutch market is the second largest in
the EU: Estimated size of DB market is
$1.3 trillion USD (approx 70% private). 1
Whilst a number of transactions have been
completed, the market still developing.
1 Source: Towers Watson, “Global Pensions Asset Study 2014”, January 2014
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Institutional approaches to managing the risk
Plan sponsor
Pension fund Insurer
Plan participants
Description
Str
uctu
re
Buy-out
Company and trustees transfer all risk to
a third-party insurer
Individual annuities are purchased for
members of the pension plans
Insurer is responsible for plan
administration
A group annuity to be held by the Pension
Trust as a plan investment is purchased
Plan sponsor may require collateral
against insurer default
Plan sponsor is responsible for plan
administration
Buy-in
Plan sponsor
Pension fund Insurer
Plan participants
May be implemented as part of a broader
LDI strategy
Actual longevity experience is swapped
for the counterparty’s expectations of
future longevity experience
Longevity insurance
Plan sponsor
Pension fundProvider / counter
party
Plan participants
Ris
k r
eta
ined b
y
corp
ora
te
None. Policyholder behavior risk (withdrawal,
early retirement, etc.)
Operational risk (plan administration)
Regulatory risk (financial reporting,
PBGC, etc.)
Fiduciary obligation
Interest rate and inflation risk
Market and credit risk
Policyholder behavior risk (withdrawal,
early retirement, etc.)
Operational risk (plan administration)
Regulatory risk (financial reporting,
PBGC, etc.)
Fiduciary obligation
Ris
k a
ssum
ed b
y
carr
ier
Interest rate / inflation risk
Market and credit risk
Policyholder behavior risk (withdrawal,
early retirement, etc.)
Operational risk (plan administration)
Regulatory risk (financial reporting,
PBGC, etc.)
Longevity risk
Interest rate / inflation risk
Market and credit risk
Longevity risk
Longevity risk
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Risk transfer in action
► Corporate sponsors in the US market are looking for innovative solutions to manage the risk in their plans and the market is developing quickly
► The table below highlights recent notable transactions in the US market.► The total annual volume for the US market of the regular ‘flow’ market (defined as transactions
under $1 billion) is estimated at $3-$5 billion in 2014.
Provider Description Pension liability
settled
Date
Motorola Annuity purchase, lump sums $3.1 billion 2014
Bristol-Myers Squibb Annuity purchase $1.4 billion 2014
GM Annuity purchase, lump sums $26 billion 2012
Verizon Annuity purchase $7.5 billion 2012
Hickory Springs Protected buy-in $75 million 2011
Total transactions USD $38.1 billion
In the past five years, corporate plan sponsors have upgraded their self assessment of their
awareness and effective management of the financial risks associated with their DB plans; however, longevity risk remains poorly understood.
Page 7
Evolution of solution development in the US and Canada
► There has been increased focus by UK plan sponsors on de-risking their plans This has led to more plans targeting buy-in and buy-out transactions as a long term strategy.
► The market has evolved from simple buy-out and buy-in arrangements to include “do-it-yourself” buy-ins and collateralized buy-ins
► The graphic below summarizes the most recent innovations in product design.
► Corporate sponsors are looking for innovative solutions to manage the risk in their plans and the market is developing quickly
► For Canadian companies, longevity risk has become a risk to be monitored
► In the US, individual lump-sum ‘buy-outs’ are gaining traction; Motorola, Ford, GM and Verizon have included lump sums as part of their de-risking strategies
► In the past five years, plan sponsors have upgraded their self assessment of their awareness and effective management of the financial risks associated with their DB plans; however, longevity risk remains a challenge. Large plan sponsors are engaging industry experts to help quantify the risk
► In both markets, buy-out and buy-in transactions have been executed within the past few years and deal flow is growing.
United States and CanadaUnited Kingdom
*Ernst & Young, “Insurance solutions for pension schemes, Insurance Provider Survey”, July 2014.
Page 9
► Four out of ten newly retired couples will outlive their financial assets if
they attempt to maintain their pre-retirement standard of living (9 out of
10 for those without DB income)
► Americans like these must plan to reduce their standard of living by an
average of 20% to minimize their likelihood of outliving their financial
assets (40% for those without DB income)
► Seven out of ten middle market households approaching retirement will outlive their financial assets if they attempt to maintain their pre-retirement standard of living (nearly 10 out of 10 for those without DB income)
► Americans like these must plan to reduce their standard of living by an average of 30% to minimize their likelihood of outliving their financial assets (50% for those without DB income)
The middle American retirement problem
Source: Americans for Secure Retirement and Ernst & Young as of February 2009
Page 10
Products to address the middle American retirement problem
► A starting allocation of insurance, investment, and annuity products that satisfy the desired outcomes of the individual
► Investment Products► Mutual funds
► Dividend solutions
► Bond and CD ladders
► Market-linked securities
► Separately managed accounts
► Income protection► Investment-linked or synthetics
► Annuities and variations
► Insurance products► Life insurance
► Long term care insurance
Investments
InsuranceIncome
Advice
Page 11
Sample case study
Susan Smith
► Demographics
► Current age: 65
► Retirement age: 65 (this year)
► Gender: female
► Marital status: single
► Net worth: $1 million
► Sources of guaranteed income
► Social Security: $26,000
► Pension: none
► Goals
► Income: maximize spending in retirement
with a high likelihood of not exhausting her
assets
► Bequest: none
Page 12
Sample case study (cont.)
Approach
► Simulation type: Monte Carlo
► Variable mortality
► Variable health care events
► Stochastic economic scenarios
► Interest rates
► Inflation
► Asset returns
► Asset volatility
Metrics
► Consumption = after-tax real income
► Real annual dollars Susan can consume while
succeeding in 90% of the tested scenarios
► Coverage ratio = severity of a shortfall
► Median percentage of Susan’s consumption target
which is covered by guaranteed income sources in
failed scenarios
On
On
On
Variable
Variable
Variable
Variable
Product Allocation
Equity 60%
Bond 40%
SPIA 0%
DIA 0%
VA with GLWB 0%
FIA with GLWB 0%
Benchmark portfolio
Measure Value
Success Rate 90%
Consumption $44,800
Coverage ratio 46%
Outcome
Source: EY Retirement Analytics™
Page 13
Sample case studyConsidering only mutual funds
Source: EY desk research, EY Retirement Analytics™
Page 14
Sample case studyConsidering mutual funds and annuities with GLWB riders
Source: EY desk research, EY Retirement Analytics™
Page 15
Sample case studyBringing it all together
Source: EY desk research, EY Retirement Analytics™
Page 16
Customer valueDo annuity products add value?
► The unique risks in retirement require different products/solutions/strategies
► Product allocation can incorporate investment, annuity and insurance solutions – and
evaluation through an outcome based framework allows for a direct comparison
40%
60%
Initial asset allocation
Bonds
Equity
12.5%
30.0%
45%
12.5%
Final asset allocation
SPIA
Bonds
Equity
DIA20
Demographics Single female, age 65
Portfolio value $1,000,000
Investment risk tolerance Moderate
After-tax, real income $44,800
Coverage ratio 46%
Income objective Maximize
Bequest objective None
Retirement risk tolerance Conservative
After-tax, real income $47,600
Coverage ratio 62%
Transactions
Life insurance None
Long term care None
For customers with income goals, portfolios that include annuity products can increase
consumption and provide downside protection in the event of failure.
Page 17
Key takeaways
► There is no silver bullet, but the US market continues to
evolve
► The understanding of longevity by the individuals and
institutions in the US market is the catalyst for effective
longevity management
Presentation title1 January 2014
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